- A select group of brick and mortar retailers was defying the retail apocalypse before the pandemic hit and reporting quarter after quarter of strong sales growth despite having a limited or nonexistent online offering.
- These stores found a way to circumvent the threat of Amazon and e-commerce in general by offering an experience that couldn’t easily be replicated online.
- Analysts say that the narrative has changed now and the pandemic could lead to a permanent shift in customers’ shopping habits, putting any retailer without a strong ecommerce offering at greater risk.
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Before the COVID-19 pandemic hit the US, a select group of brick and mortar retailers was defying the retail apocalypse and reporting quarter after quarter of strong sales growth, proving that stores still had a place in an increasingly digital world.
While other brick and mortar chains crumbled as Amazon and e-commerce, in general, became more dominant forces, these select stores found a way around to compete by offering an experience that couldn’t easily be replicated online. This meant that many of them either didn’t need to have an online store at all or at best, only needed to offer a very minimal e-commerce experience for their customers.
TJ Maxx, Ross Stores, Primark, Dollar General, and Dollar Tree are among the retailers who fit into this category. These stores are using deals and discounts and the thrill of a treasure hunt shopping experience to keep customers coming back.
As soon as the pandemic hit, their situation drastically changed, however. Many of these retailers, which had relied almost entirely on in-store sales, saw business dry up almost overnight thanks to enforced store closings and having a limited online offering, or none at all, to fall back on.
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In the short term, this has meant an immediate hit on sales but analysts say even as stores begin to reopen, it is the long-term impact of the pandemic that these retailers should be concerned about as it could result in a permanent change in how consumers shop.
Some shoppers might be too scared to go back to stores and will switch to digital options for good, and the lack of any vaccine for COVID-19 means that there is a high chance of a second wave of infection, putting any store without a strong online presence at greater risk in the future.
In the past, off-price stores and dollar chains had defended their lack of a strong online presence by highlighting the simplicity of their business model.
“There was some justification in this because online selling adds complexity and cost and can erode margins. The continuous positive results from players like Primark and TJX [the parent company of TJ Maxx] justified their positions,” Neil Saunders, managing director of GlobalData Retail, said in an email to Business Insider.
But “the coronavirus crisis has changed much of this narrative,” he said. “In the short term, not being able to transact online has severely damaged brands without an online presence. Their sales have simply faded away and there is no means by which they can capture some of the demand that still exists. Potential customers have also diverted to competitors,” and “given the risk of a second wave or even a future pandemic, many of them will likely review their e-commerce needs.”
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Photos of lines outside TJ Maxx stores as they reopened in the US this week indicate that some shoppers are more than happy to resume their old shopping ways. But analysts say this won’t be true of everyone, and while there might be a short-term burst after weeks of lockdown, many customers will continue to be cautious and avoid stores. If a second wave of infection was to hit later on, and stores were closed again, these retailers are back to square one.
A recent survey conducted by investment bank Jefferies of 500 female shoppers, who had previously shopped at a TJ Maxx or Marshalls store, found that 60% said they would make some change to the percentage of their spending done in stores once stay-at-home restrictions are lifted; 28% said they would spend more on apparel online initially after stores reopened, and around 60% said they would avoid trying on clothes in stores after COVID-19.
Doug Stephens, retail industry expert and founder of website Retail Prophet, said that until we find a vaccine for coronavirus or achieve some level of herd immunity that is long-lasting, we should not expect to return to “the normal retail landscape” anytime soon.
“Let’s think about the people that are 45-50 and over,” he said in a recent conversation with Business Insider. “They are the highest risk group, and if nothing else they are going to be saying to themselves every time they have a need to go to a store: ‘Do I really need to go to a store where I am potentially going to have to wear face coverings, be socially distanced, wait in line to get in, wear gloves, use hand sanitizer, or could I just order this online?’
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“I really think it is going to come down to that,” he said.
The pandemic has meant that many more shoppers are testing online services than otherwise would have, becoming more comfortable with this option and possibly more loyal to it. This, in turn, puts extra pressure on those retailers that don’t offer e-commerce services and makes them more at risk of becoming “irrelevant,” experts say.
“It’s certainly possible they will survive,” Calvin Carter CEO and founder of digital consultancy agency Bottle Rocket, said in an email to Business Insider, referring to these chains with no online stores or with significantly scaled back e-commerce services. “But they will be irrelevant, which is the beginning of the end for any company in any industry. When you no longer meet your customers where they are and center your offerings around their needs, you immediately become both irrelevant and at risk of disruption from competitors.”
Not all of the e-commerce free or e-commerce light chains are so vulnerable, however, he said. While consumers might look to avoid busy malls and high traffic areas, Carter said that stores in rural areas, for example, are likely to suffer less. This could put a chain such as Dollar General, which mostly has stores in suburban and rural areas, in a stronger position. Dollar General has operated an online store since 2011.
Dollar General predominantly has stores in rural areas.
Photo by James Leynse/Corbis via Getty Images
For many of these stores, part of the appeal and the reason that they have been able to stave off the threat of Amazon and other e-commerce players for so long is that they offer a shopping experience that is hard to replicate online, which means their business model simply doesn’t lend itself well to e-commerce.
In the case of off-price stores and dollar chains, it’s the treasure hunt shopping experience and the idea that you won’t know what kind of bargains you’ll find until you get to the store that keeps customers coming back. Once in the store, these retailers bank on customers spending more than they might have planned; the margins on each item are slim but they make money from customers buying in large quantities.
Meanwhile, as online consumers “tend to behave substantially more rationally, it is hard to fully replicate the essence of the shopping trip” online,” UNC Kenan-Flagler Business School Professor Katrijn Gielens told Business Insider.
There are ways around this, however. Carter suggests that TJ Maxx, or an off-price store of that kind, could consider having digital personal shoppers that help customers to discover items in new ways online, thereby replicating the treasure hunt experience.
Off-price stores also face a separate challenge: the designer brands that they stock generally don’t want customers to be able to find deals and discounts on their products online as it devalues the brand.
TJ Maxx, which launched its online store in 2013, circumvents this issue by making it impossible for its customers to search by a brand on its site. But while this might keep vendors happy, it doesn’t necessarily make for a slick online shopping experience. Both TJ Maxx and Marshalls reopened their websites this week with a cap on the number of daily orders, provoking a backlash among customers.
Gielens said that rather than use their websites for transactions, these stores could also look at how they could become digital versions of showrooms to give customers a better idea of what they might expect to see in stores to encourage any reticent shoppers that it is well worth their while to make a visit to that store.
“The opposite of showrooming, webrooming, is occurring more and more. Even when you do not necessarily want to push your consumers online, by offering insight into what you have to offer you can persuade them to visit the store,” she said.
The cost of offering e-commerce services is a major factor for most of these retailers and in some cases, adding this option may “destroy the very essence of their business model,” Gielens said. If not carefully implemented, it could completely undermine their reason for their existence, she added.
At some low-cost chains, the cost of shipping and fulfilling the order of an individual item might even exceed the price of that item, making it near impossible to make money from this.
Gielens said these retailers really have two options: to double down on their competitive differentiation, i.e. not having an online store and work hard to keep giving customers a reason to visit (which would also mean making changes to make the shopping experience safer), or to invest in digital options and “reluctantly admit that they must approach it [retail] in a new and different way.”
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