INDUSTRY PROFILE: Retail

Retail has been under threat for some time with the growth of online shopping, second hand or “vintage” stores, online marketplaces like eBay and the threat of offshore competition (Amazon, Temu, etc.).

The impact of the pandemic sped up the downfall of several retailers who either didn’t have the capital reserves to survive lockdown or where demand fell significantly (such as in tourism). This also accelerated consumer behavior to buy online, diverting traffic and revenue.

The decline in our economy over the last few years has shortened what was supposed to inevitably occur in the long term, which was a shift to online purchasing, online payments and trusting the supply chain to get what you need, when you need it. Though supply chains were brittle initially, deliveries of products around the U.S. are largely back to normal levels (with some delays from offshore still).

The positive is that retail development has continued, shopping malls are being renovated and new housing has created the need for retail infrastructure. New business models, such as drop shipping (where the retailer doesn’t need to hold the inventory), are enabling retailers to offer wider selections online without holding the product.

Success Characteristics

For retailers to succeed it’s important they adapt to today’s highly fluid social, economic and health environments. While some retailers are seeing demand fall away and customers shift channels, others are facing unprecedented spikes in demand (such as grocery retailers).

Retailers must also have a plan that ensures the safety of their employees while maintaining business as usual activities and talk to their key suppliers to assess any risks of being unable to supply. Successful retailers will refocus on the customer relationship and loyalty to their brand, people and community in order to stay relevant.

Other success criteria include:

• Strong online presence to complement the physical store

• Building credibility and excellent customer service

• Customer loyalty programs and reasons for customers to return

• Placing resources into positive online reviews and social media

• Maximizing the number of customers through the door each day and their average spend

• For physical stores, being in high foot traffic locations or having a high marketing budget to drive traffic

• Addressing a real unmet need by adding value and creating customer loyalty

• Continue asking customers what they like and dislike

• Depending on the product and market, strong unique selling points like “Made in the U.S.A.” or “eco-friendly”

• Competing on something other than just price, as large chains and online stores will always win a price war

Challenges

A key challenge has been the disrupted supply of imported products (which many retailers rely on), the increased cost in shipping (often health and safety compliance) and the increase in purchase price (due to lower numbers of items being produced).

Other challenges include:

• Integrating the physical and online presence to give the consumer a seamless brand experience, while juggling the increased price pressure (as consumers can almost always find an item cheaper online)

• Larger retailers leveraging their buying power to maximize economies of scale, which smaller owner-operators find hard to match

• The staffing, stock management and cash flow implications of seasonality where there are huge fluctuations in demand

• Managing cash flow to avoid overtrading or overstocking at peak times to prevent holding obsolete inventory

• Working closely with suppliers to ensure they can maintain optimal stock levels and be able to order in time

• The increase in online shopping and online share of wallet

Retail Trends

Consumers are shifting their behavior to online shopping and no longer distinguish between online and offline shopping. Older demographics are becoming savvier and are purchasing goods online. Private labels are growing, and more artificial intelligence is being integrated into the retail experience. This includes the development of a C2M (customer to manufacturing) business model, where companies use big data and AI insight to personalize the products for the individual consumer.

Seasonality

Retail experiences the highs and lows of the business cycle often dictated by holidays, events and seasons. Christmas has traditionally been the highest, but other events such as Black Friday see spikes of activity across the year. Seasonality also makes it difficult to plan staff levels, with retailers often requiring part-time staff to fill in the gaps.

Impact of offshore retailers

Larger retailers (H&M, Zara, Ikea) have worldwide appeal and resources to impact local retailers, though we’ve seen some of these retailers struggle. Shoppers prioritize exceptional customer experience, and they’re willing to provide their data to companies but expect a higher quality experience in return. For local retailers and their brands, this means delivering the same promise from overseas companies of personalization, expert service, always-available inventory and seamless cross-channel shopping.

Rise of online behavior

One of the most obvious trends is the impact of online shopping and researching product features online. At times shoppers may know more about a product being sold than the retail staff and will most likely have compared prices. Online is the biggest threat and opportunity for retailers. The option to buy online and pick up in-store will continue to bridge the gap between online and offline retailing.

Sensitivity to wider economic conditions

Retail is one of the more sensitive industry sectors. Sales are driven by consumer sentiment, interest rates, employment levels and disposable income. Often retail is the first sector to feel an immediate effect of concern—from a falling U.S. dollar (retail imported products are more expensive) to lower-than-expected agricultural prices (farmers have less to spend) to any general unease over the decision to spend or save disposable income in the event of an economic downturn.

High percentage of owner-operators

Retail has a very high proportion of self-employed owners who provide small, individualized store experiences, especially in smaller population areas that can’t sustain larger stores. This is increasingly under threat as owner-operators find it difficult to compete on price against the big box competitors and wider product choices online.

Technology is a key driver

The store of the future will be heavily influenced by technology with in-store navigation capabilities. More shoppers will pay for items via their smartphones and then linking them to automatic loyalty programs (which signals the end of points based or physical loyalty cards).

Other technology trends include:

• Promotions will be triggered by a shopper’s physical presence, personalized and tailored to them

• Shelf tags will have ratings that change as shoppers review and purchase as well as usage suggestions derived from social media groups providing product information at the store

• Packaging will actively show products in use or communicate directly to smart devices

Retailers will sell experiences not just products

By curating interactions, retailers can pull customers into delightful, memorable experiences that make much more of an emotional impact than buying a product. Stores will also increasingly have smaller footprints (to both lower the footprint cost, and to supplement with online shopping).

Resources

The National Retail Federation nrf.com

U.S. Department of Commerce commerce.gov

U.S. Small Business Administration sba.gov

CONTRIBUTOR: BRETT WILLIS

Brett has been with Heritage Bank since 2016 and has been in banking for over 30 years. He has broad experience in commercial lending and business banking, with a focus on commercial and industrial (C&I) industries, commercial real estate, contractors, manufacturers, healthcare, nonprofits and distributors.