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Actionable recommendations on how retailers can manage and recover from COVID-19

Stefan Eikelmann Partner, Strategy& Germany
March 27, 2020

Learning from China

The COVID-19 crisis has become a global pandemic. Governments throughout the world are taking extensive measures to handle the outbreak. Factories in China are affected by lockdowns, and shipping times of goods increased significantly due to more rigorous border checks or even closed borders. Both aspects are causing disruptions in global supply chains. In Europe, curfews and store closures are already threatening the liquidity and existence of retailers, even though the European retail sector is only right at the start of the COVID-19 crisis. In order to understand and quantify the potential impact of COVID-19 on the European retail industry, an analysis of the Chinese market offers some valuable insights.

As of February 2020, total retail sales in China had plummeted across a number of categories: apparel & footwear (down by 33%), home & furniture (-34%) and electronics (-20%) were among those categories hit the hardest. At the same time, grocery trade experienced significant growth (up by 10%), while the online food and grocery channel fared particularly well (+26%). It remains to be seen whether the pandemic will hit European retailers, especially in the fashion, furniture and electronics sector, equally hard and cause unprecedented disruption.

Category focus and store footprint determine the extent of the impact

The severity of the COVID-19 impact depends on two primary factors: the category focus and the sales footprint of the retailer. While non-food retailers are experiencing store lockdowns with severe revenue losses of between 70% and 100% during this period. At the other end of the spectrum, food and grocery retailers are trying to deal with panic buying. Consumers are hoarding daily essentials such as toilet paper, while supply chains are disrupted and grocers are struggling to stabilize their operations.

Brick and mortar retailers have been severely affected. They are facing a sharp decline in sales due to lockdown restrictions. Those pursuing an omnichannel strategy are struggling with the rapid acceleration of online growth and are placing their E-commerce operations in crisis mode.

Although pure E-commerce players, such as Amazon, are capturing some of the lost brick and mortar sales, they are also struggling to cope with sudden changes in the pattern of consumer demand, such as a sharp spike in demand for health products.

The question arises: How will traditional bricks and mortar retailers with less developed omnichannel capabilities in the fashion, furniture or electronics industries, emerge from the COVID-19 crisis?

Implications for German retailers

We believe that E-commerce will continue to grow for the majority of online retailers in Germany even in the aftermath of COVID-19, since consumers will stay with the online channel after the crisis.

In particular, home & furniture, electronics and health & beauty retailers will experience a continued increase in the online share of their revenues as a result of the switch from offline to online consumption during the COVID-19 crisis.

Actionable recommendations for a recovery in three phases

In our view, the COVID-19 crisis should be approached in two ways: first, retailers need to decide how to manage the crisis; second, they must work out how to leverage opportunities emanating from the crisis.

  • For the first challenge, which was the focus for companies over the last weeks, we have developed a holistic perspective on how to support companies in the immediate phase of crisis management, dealing with issues such as employee protection, liquidity safeguarding and scenario planning. Details can be found here.
  • For the second challenge – how to leverage subsequent opportunities – we recommend that retailers look at four key action areas: rebalance supply chain and category management, boost online presence, ensure organizational fitness and prepare for tomorrow

For each of these four key areas, we have put together a number of levers that ensure a quick recovery while capturing emerging opportunities. It is important to understand that these levers represent a toolbox. Not all levers will be applicable to all retailers. Only by evaluating the specific situation of every retailer, the right mix of levers can be identified.

We recommend starting by mitigating supply chain and category management risks through rebalancing supply chain and category management strategies:

  • Adjust your assortment to become recession-proof
    Cancel holiday and seasonal orders (such as swimwear and suitcases), but keep home products (such as barbecue equipment and furniture). Introduce low-price variants. Make packaging resistant to contamination. By way of example, Amazon has prioritized baby, health and household, beauty and personal care, and grocery and pet supplies categories with regard to inbound shipments, stocking and fulfilment.
  • Broaden your supplier base
    Apply multi-sourcing for all critical supplies, including EU suppliers where possible, as backup in case the supply chain breaks (this approach also boosts sustainability). Integrate proactive risk management across the supply chain, such as by identifying liquidity risks to your suppliers and taking corrective actions.
  • Increase E2E supply chain visibility and resilience
    Assess your supply chain and logistical footprint to increase flexibility, resilience and capabilities in the long run and accelerate the role of automation in the supply chain and in stores to increase resilience.

Marketing and sales should prioritize E-commerce activities and boost online presence:

  • Use markdowns and write-offs to salvage revenue
    Promote and use markdowns now, instead of later on, in order to avoid excessive revenue decline. Donate proceeds to relief efforts if affordable. For example, Nuun & Co. delivers free care packages to medical professionals to help them to keep healthy.
  • Leverage store resources for the online channel
    Ship from stores. Reassign store staff as online sales assistants (for example through social media channels) or for E-commerce fulfilment.
  • Integrate remote marketing tactics
    Offer social interaction and gamification. Embed shopping with content and communities. Partner with influencers.
  • Scale your online shop
    Adapt budgets to handle a sustained increased demand for E-commerce, including flexible fulfillment capacities. For example, Walmart captured more than half of the online orders among newcomers to online groceries. Amazon and its Whole Foods store garnered just 14%.
    8. Harvest data of newly won customer segments
    Revitalize customer excellence and review customer data to nurture the customer base after crisis, including the expanded online-converted, silver-ager segment.

Ensure organizational fitness by pulling two pivotal levers:

  • Accelerate restructuring programs
    Consolidate efforts to achieve a leaner organization after the crisis. Assess the location and profitability of your store network and bring forward consideration of store closures.
  • Implement continuous cost improvement
    Carry out processes to ensure a strong focus on controlling costs and expenditure across the organization, thereby maintaining organizational fitness.

Finally, maintain a forward-looking perspective and prepare for tomorrow:

  • Assess the market for M&A or verticalization opportunities
    Identify small players as potential M&A candidates, while examining opportunities to verticalize your supply chain.
  • Digitize your business processes
    Ensure flexibility for future crisis situations, for example by strengthening the infrastructure for homeworking.
  • Go asset-light
    Convert your business model to an asset-light variant where possible (for example, by incorporating short-term rent obligations and outsourcing).

COVID-19 is the ultimate dynamic challenge because the situation changes on a daily basis. We are tracking the situation continually while maintaining a close dialogue with our clients, assisting them in balancing short-term, medium-term and long-term strategies to overcome this challenge.

David Tramontana of Strategy& Austria, and Carlo Meyer-Miethke, Yannik Knipprath of Strategy& Germany, also contributed to this article.

Contact us

Stefan Eikelmann

Stefan Eikelmann

Partner, Strategy& Germany

Reinhard Vocke

Reinhard Vocke

Partner, Strategy& Germany

Willibald Kofler

Willibald Kofler

Partner, Strategy& Austria

Tim Pagels

Tim Pagels

Director, Fit for Growth Marketing, Strategy& Germany