Coronavirus Is Killing Retail, But Opportunities Remain In Some Sectors

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Posted: Apr 20, 2020 10:16 AM
Coronavirus Is Killing Retail, But Opportunities Remain In Some Sectors

Source: AP Photo/John Minchillo

Even before the COVID-19 crisis arrived on US soil, many in the retail sector were already facing significant challenges. The shift to online shopping was starting to force brick-and-mortar stores out of business, with a peak of over 9,000 closures in 2019. Now, the spread of the coronavirus means that many retailers are facing the kind of profit squeeze they’d have previously thought unimaginable. 

The impact is looking grim. Researchers predict 15,000 store closures this year alone, up more than 50% from pre-pandemic forecasts, which never incorporated “zero revenue” scenarios. Capri Holdings CEO John Idol told the New York Times that he’s predicting job losses of up to 10 million nationwide, in the retail industry alone.

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But we don’t need to look at any projections to understand what’s already happening – empirical data published by employee shift scheduling app Deputy demonstrates that across the US, working shifts in the retail sector are down by around 50%

But what are investors to make of all the reports that Costco is raking it in as people hoard toilet paper, or that local grocers are struggling to keep shelves stocked? What subsets of brick-and-mortar retail are still viable opportunities?

Drilling Down into Sectors

Among the various segments of retail, some are feeling the pinch far worse than others. 

Apparel, luxury goods, cosmetics and product categories that people typically buy in-store, are suffering particularly severely due to closures of “non-essential” stores. In many cases, online sales are falling too, because people simply aren’t going out, and many are likely to be reigning in spending due to concerns about the economy and their personal financial situations. 

This is evident in the empirical numbers as well. Online sales of apparel are down 13%, and in the case of luxury goods, only around 4% of sales are online anyway, meaning the impact of store closures and residential lockdowns are even more profound here. Industry leaders have warned of the effects on related sectors such as textile and cosmetic manufacturing, logistics and advertising.

Source: Statista

However, although some segments are feeling the pressure, it’s not all doom and gloom for the retail sector. Of course, there are some obvious winners - groceries, for example. Walmart posted sales figures for March that were up 20% compared with the same month in 2019. In the same comparison period, sales of some types of cleaning products surged 385%

Furthermore, online ordering and home deliveries are predicted to become more common even after the crisis, potentially changing the shape of retail forever. 

Beware the Short-Term View

The headlines tend to focus on the hardest-hit segments of the retail sector. However, this picture fails to recognize the sectors that are receiving a boost from the fact that people are confined to their homes. 

Some product lines may even prove to thrive in the longer-term, although others are likely to be temporary beneficiaries of panic buying. 

For example, in the latter category, gun sales are unlikely to see any long-term boosts as a result of the coronavirus. In mid-March, USA Today reported long lines outside gun stores as buyers sought extra protection from the threat of looting. As these fears don’t appear to be panning out, it seems safe to assume that gun sales will fall back to their pre-coronavirus levels.  

In a similar category, furniture sales – in particular, home office furniture – are seeing an increase of 100%, according to some retailers, as office workers try to create a space to work at home. However, this is also unlikely to last. Even if home working continues for the coming months, furniture isn’t a frequent buy for many people. Once someone is set up for the “new reality” of working from home, they’re likely all set for at least a few years.

Finding Viable Medium-Term Opportunities

In contrast to the flash peaks in sales of guns and home office furniture, products that help kill time and keep people busy in their homes are likely to see a more sustained increase in revenues. Toy sales have increased by over 25% as housebound parents attempt to occupy the attention of their kids. In the UK, the press has reported a spike in sales of board games and jigsaw puzzles, while sales of video game consoles have risen by 155% worldwide. 

Some people are choosing to stay active during their time at home. As gyms and sports clubs remain closed, home fitness retail is seeing a surge, with one seller saying that demand was up 50% for equipment such as exercise bikes, elliptical trainers, and strength machines. 

Although this category could be compared to home office furniture, fitness enthusiasts are more likely to continue investing in their routines if the lockdown persists. 

Garden retail is seeing a massive surge in interest, with one retailer telling the Washington Post that online orders were up 40%. Similarly, home improvement sales have gone up by as much as 30%. As long as travel and stay-at-home restrictions are in place, it’s likely that these trends will continue, particularly as the US moves into the summer season. 

Long-Term Transformation

Taking a long-range view, if customers do cement the shift to online shopping even after the coronavirus spread subsides, there will be lasting impact on the retail sector. If there are more store closures and businesses shift the majority of their sales online, then demand for commercial premises will subside, but warehousing will be needed. The logistics industry, including delivery companies, is likely to see further growth as a result of this. 

Other sectors tied to online retailing will also stand to benefit. Web advertising, already big business, will potentially outpace its already-impressive growth predictions of 40% by 2025. Similarly, demand for online payment gateways and cybersecurity will be needed to manage the payment volumes and keep customers' credit card details safe from hackers. 

As the crisis pans out, it starts to become evident that the repercussions of coronavirus stretch far and wide across the retail sector. However, despite the grim headlines, there are still opportunities for prudent investment in the short and long term alike.