CRR expects 20,620 stores to be closed this year and a total 235,704 jobs will be lost.
Question: I hope this blog won’t be about how terrible it is to be stuck at home and the dangers of mental illness you are running etc etc.
No. I love being at home.
Forecast 2020 for Store Closures and Jobs. In 2020 we expect, 20,620 stores to be closed (+27.1% more than were closed in 2019 [=16,073]). The job losses caused by a combination of store closures and businesses slimming down their workforce should total 235,704 (+61.5% higher than 2019 [=143,128]).
The cost to the retail industry in terms of lost and unsaleable stock if shops are shut for the three months to June would be about £20.9bn.
Prospects in April 2020. The outlook for retailers on the 1st day of March looked promising. A stable government meant that businesses and households could plan better, whatever one’s views about Brexit. House prices and house sales were rising, consumer confidence was higher than it had been for some years, whilst better weather augured well for sales of fashion, gardening, DIY, and home furnishings in the weeks before Easter. This was not to be. Shopping in the first weeks of March was mainly about panic buying of essential goods, primarily foodstuffs, hygiene and medical supplies. This diverted spending from other mostly non-food products.
The Effects of the Lockdown
Whatever it does for our health and wellbeing in a time of pandemic, the sharp fall in consumer demand seen in March 2020, followed by the ‘temporary’ closure of the majority of stores, pubs, theatres, picture houses, art galleries and libraries is a hammer blow for the retail sector. Although grocers and pharmacists became very busy, trade elsewhere dropped by between 30% and 65%. On Day One of the lockdown footfall was down 75.4% (cp same day last year: Springboard). Shopping centres and malls became ghost towns. Households were restricted to buying essentials only and making no more than one visit per day. If the lockdown continues for three months we would expect retail sales to drop by 25% or more (all types of retailers) and drop by as much as -31.2% for bricks-and-mortar stores during this period. We expect some recovery after the lockdown is ended, but overall in 2020 this might mean retail spending falls by at least 4%-5%, and possibly more - a loss of sales of £17.281bn. See our webpage Retail Forecast (https://www.retailresearch.org/retail-forecast.html) for more about this
The Crisis in Retail. Many retailers were already in trouble. This followed: several years of cut-throat competition and reduced profits; the increasing costs of business rates, rents and wages; weak consumer demand; and increasing pressure from online competitors.
We feel that many stores affected by the lockdown may not reopen and others may face a cull later on as increasingly-distressed retail businesses review their operations and cut costs in order to survive.
Online will gain. Online businesses are expected to benefit considerably from the lockdown, as they are still permitted to operate. This effect will occur during the lockdown, but may well be sustained when things ‘get back to normal’ (whatever that may mean in a post-covid-19 world). Online retailers’ share of UK retail trade could be as high as 23% by the end of 2020 and should certainly rise at least to an average of 20% for the year.
Seasonal and Perishable Goods. If the lockdown on most non-food shops lasts for three months until June, the cost in terms of lost sales and unsaleable stock would be in the region of £31.173bn.
There is a seasonal pattern to most retail operations. Goods after the season has passed are often virtually unsaleable. As well as the food and pumped beer thrown away by restaurants, cafes and pubs after they were closed, the wasted flowers, plants, bushes and seeds grown for Mother’s Day, Easter and spring planting also have become valueless. The longer the lockdown of retail, services and households continues, the more likely it is that seasonal stock loses its value. Clothing and footwear ordered to be ready for Spring will be practically worthless by late May. Standard items that are stocked all through the year, normally have a use-by date, even such items as cement. What is the cost of all this to retailers? Massive. It all depends on how long is the period that their stores are shuttered.
Panic Buying. The pattern of shopping since the mid-2000s has moved away from the ‘big shop’ three or four times a month towards keeping a relatively small stock in the house and buying food supplies frequently. During February and March the media were full of information and comment about deaths measured in hundreds of thousands, news from China and Italy of a population kept at home to inhibit the spread of the virus; pictures of people dead or dying in the streets, and warning of the apparent need for self-isolation for vulnerable people and those in contact with the disease. The closure of restaurants, pubs and then schools also meant that millions more meals now had to be made in the home. It is not irrational to stock up pantries, fridges, and freezers in this sort of situation. Grocery and alcohol spending in March 2020 increased by £1.9bn to a new record-beating total of £10.8bn. I hope that all this gets eaten.
Phase one of panic buying involved shortages of meat, canned food (particularly canned meat), lavatory paper, kitchen towels, hygiene products, hand sanitiser, and pain relief. Phase two focused on ensuring household food supplies were sufficient for a siege: buying new freezers, minced meat and other meats, frozen foods, flour (for bread), canned meat and other foods, bread, pain relief and hygiene items. Phase three (end March) is about surviving at home – alcohol, gardening products, computers, TVs, books, videos, games. Things have quietened down now, because larders and freezers are full and the controls on people entering grocery stores has squeezed out the pacnic-buying opportunists. Because shopping is now such hard work (queuing to enter the shop, reduced hours of opening, stockouts if you shop at the wrong time, etc) consumers are shopping slightly more often and buying about twice as much. Grocery sales are still doing well - after all, households have to cook at home all those meals from restaurants, pubs, cafes and take-aways that are no longer being sold.
What’s now in demand? Consumer buying patterns have changed to focus much more upon surviving isolation. High demand for grocery is assessed above. Demand has also been incredible for medical supplies, pharmacy products, pain killers, hand sterilisers, and hygiene items.
Demand for games, electronic games consoles, jigsaws, gym equipment, plants and gardening supplies, computers and printers to help people work at homes, craft/sewing/hobby kits and products, and of course books and DVDs. Subscriptions to video streaming services such as Netflix and Amazon Prime jumped dramatically.
What demand has not included is fashion, clothing and footwear, a category that was already in difficulties long before anyone had learned to spell coronavirus. You do not need a new suit or dress when you are confined to home.
Dixons reported that its online sales in the first three weeks of March 2020 rose by 72% compared to the same period in 2019: sales of electrical and electronic items for the whole business rose by 35%. For specialist retailers demand for gym equipment rose by 85%. Paracetamol sales possibly rose by 450% and are now out of stock everywhere. Further supplies (which primarily come from France) are understood to have been stopped.
Retailers where demand has rocketed. Supermarkets, pharmacies and other food- (and health/hygiene-focused) stores have benefited from the atmosphere of panic and crisis. And their stores remain open. In mid-March additional panic buying increased supermarket sales by £1 billion – up by more than 40% in a week. But this rate of increase has not continued. Overall in March grocery sales may have risen by only 13%, although of course this is still a big increase. Retailers have managed to keep most of the shelves stocked except for categories where there has been intense panic buying. It has varied, area by area.
Ensuring everyone can get supplies. Retailers have had to deal with adverse publicity relating to shift workers, NHS staff, elderly people or vulnerable ones unable to get food supplies because delivery slots for home delivery are no longer available, or the fresh food and vegetables aisles in their stores are empty. Retailers brought in rationing (no more than two or three items per product) early on to prevent shoppers exhausting supplies, but in high-demand categories this is probably not enough. Some supermarkets are using the first hour or 90 minutes of trading to prioritise older customers and NHS staff. Waitrose allocated one quarter of its delivery slots to elderly shoppers and the industry together has said that it will ensure that every vulnerable or elderly person will get food if the government will provide their addresses.
Restaurants become takeaways. A proportion of restaurants (closed by government) now offer food on a takeaway basis or for home delivery and a minority of people are making use of it. JustEat has cut its fees for new restaurants wanting to join their network. Deliveroo has started delivering orders in 30-minute timeslots from M&S and the Co-op in some urban areas: other towns will be included as demand justifies it.
Civic action. Many streets, areas and villages have set up their own systems to ensure that vulnerable people or those required to self-isolate get supplies of food. Naturally if each scheme deals with more than three or four households, retailers will need to liaise with the organisers to ensure that it is not ‘panic buying’ in a different guise. Ironically, the streets that are most likely to produce willing volunteers may well be those that need volunteering least. Problems for the poor and the newly unemployed have created even more demand for foodbanks, which seems to be a volunteering or donating focus currently (mid-April).
Not Rationing? Although there has been some discussion about introducing systems of rationing, this seems highly unlikely. People who call for rationing have no idea what it means, how cumbersome it is or how it is done. It sounds fair, but there are so many special cases (food intolerance, special diets, vegetarian/vegan, more food for larger families etc) that a standard system would be very difficult to introduce. By the time a fair rationing system had been set up, the lockdown would be over. And because of the fear of transmitting coronavirus, retail staff would probably be reluctant to handle the vouchers proving eligibility for the goods the customer wants to buy. No rationing, then.
Competition and cooperation. The additional demand seen in pharmacies and food stores is naturally welcomed, but it has pushed up costs. However it is now a seller’s market so there is less need for retailers to continue with heavy price competition. It has been agreed that retailers may work together to ensure essential supplies are maintained and that food deliveries to vulnerable customers, included the elderly, will be prioritised. Curbs on deliveries have been relaxed. To deal with anxious or difficult customers, prevent trouble if shelves are empty, as well as ensuring social distancing, additional staff have been recruited to ensure in-store operations are consistet with government guidelines. Supermarkets have installed security screens to protect staff, often moved to card-only payment, taken out a number of their checkouts to protect staff and ensure that customers do not queue near one another, and now marshal shoppers outside the store to control the number of shoppers allowed into the store at any one time. Surfaces likely to be touched by customers like rails, trolleys, shopping baskets and self-checkout equipment have been be frequently cleaned to reduce the chance of passing coronavirus on to another shopper or staff member.
Supermarkets are all about a frictionless no-problem shopping trip and transaction. The coronavirus pandemic puts up their costs, makes them inefficient, loss making and could not be sustained for more than a few weeks.
Online retailers. Online retailers selling food have struggled, and failed, to meet massively-higher demand for deliveries, thus increasing the pressure on shoppers to get supplies from bricks-and-mortar stores. Domestic online food sales are around 7.5% of total food sales and the ability to ramp up additional online deliveries by another 7.5% of food sales (which would double online sales and click and collect) has been very limited.
In non-food of course the bricks-and-mortar competition has all been closed, so online retailers have benefited considerably from increased demand. By the end of March shoppers were confined to their homes and hence could only use online suppliers for non-food.
However online is not without its own problems. Next, the clothing retailer whose online business last year outsold the turnover of its bricks-and-mortar stores, closed its online operations at first, because of safety concerns expressed by warehouse staff. However, with the agreement of staff and USDAW Next reopened the online business on 14 April, but only for: essential categories (initally homewares and childrenswear); agreed levels of warehouse social distancing; and limiting daily orders only to the max that can be picked safely. Companies such as River Island, Game and T K Maxx made similar decisions to Next, but their online operations have not yet been restarted. Other online warehouses may be closed, particularly as the media focus on ‘non-essential’ work or travel making employees who are still working doubt the integrity of their employers.
Government Policy to Support Business. The government has announced a rash of initiatives to prevent a recession and to avoid otherwise-sound businesses failing. They involve:
- Improving liquidity: deferring VAT payments, programme of 12-month interest-free loans
- Lowering costs: 12-month business rate holiday, 80% of wages of furloughed staff paid by government
- Help for smaller businesses: 80% of normal profits of self-employed people reimbursed by the state.
We were mostly very enthusiastic when the government announced these schemes in March. It showed that the government was taking positive action to prevent good companies going out of business. However the difficulties faced by companies trying to access the schemes and the non-availability of programmes for gig economy workers and many self-employed mean that the aims of the schemes will probably not be achieved. This recession shows every sign of being of long duration, one that will kill of many shops and stores, restaurants, cafes, travel, hospitality and entertainment businesses.
What of the future? The Centre for Research anticipates that the lockdown will either last at least three months or it will become a series of shorter lockdowns covering an even longer period. We now see the recession the lockdown has produced as being shaped like a bath (U) rather than a wide V which means that the economy and consumer spending would be nagative for the rest of this pyear and part of next year.
The costs for retailers of the pandemic are already very high. Primark for example has said that the shutdown costs it £650m per month. It has no online operation. Intu, the major shopping centre owner, has reported that only 29% of its retailers had paid the rent due on Lady Day (25 March 2020) compared with 77% last year. Obviously the stores of most of Intu’s clients have been closed. Retailers are also putting pressure on their suppliers, extending payment terms and (in the case of Primark) even halting all production. Although this might seem counter-intuitive, given the government’s pledges of support for business, every company has to make its own decisions about ensuring its survival and carrying on as though we can just pick up where we were before is probably fantasy.
- Location costs will fall, both rents and rates as retailers put increasing pressure on landlords and the crisis in bricks-and-mortar retailing becomes impossible to ignore
- Increased rate of company administrations and liquidations: we forecast that the number of stores closed following administration will increase by 25% compared to 2019 and amongst multiples by as much as 163%.
- Supplies of goods: although supplies for retailers are fine at present (with a few exceptions) there will be increasing shortages caused by lower output abroad and gaps in UK production caused by labour shortages (either ill or self-isolating).
- Retailers are expected to rationalise their businesses, both because of the cost-pressures of coronavirus as well as the fact that they know that they need to slim down their network of stores and might well start programmes previously due in 2021-22 in 2020. We see the fall in employees as being mainly driven by restructuring and retailers’ need for lower costs than by closing stores.
State involvement in supplies and distribution. Although contingency planning for epidemics in the UK has a long history, in 2020 we found ourselves in a situation where vital medical equipment bought nine years previously as backup in case of an epidemic had passed its use-by date in 2015 or 2016. Retailers and manufacturers have such sleek distribution systems that they could not cope with a sudden increase in demand. Globalisation had meant that urgent supplies of medical equipment and drugs were no longer made in this country and that the manufacturers were rationing supplies based their own criteria or national diktat. Logically, the state will have to provide funding to create some redundancy in the system for medical supplies and food essentials, guiding or 'nudging'both retailers and suppliers to ensure that future epidemics are handled better. In previous epidemics there has usually been a vaccine, but we do not know that future epidemics and pandemics will be easily controlled. Retailers and distribution companies will have to play a part in future planning. I am sure they will.
(20 April 2020)