I have been doing a lot of online shopping over the last couple of months. I like to call it research.
The disparity in service provided by retailers has been enormous. I purchased some items from Zara, owned by Madrid-listed Inditex (BME:ITX), and received a delivery the following day. Most of my online shopping experiences have been similar. In contrast, if you visit the Instagram page of Australian retailer, Cotton On, you’ll see hundreds of comments from angry consumers wondering where their month-old orders are.
They deserve some forgiveness. It has been a tumultuous time for retailers. And things will eventually go back to some version of normal. But some of the damage won’t be undone. Some of the advantage gained won’t be returned. And some of the winners will keep on winning.
People have been shopping online for decades. No one knows where we will end up in terms of online penetration. You would be hard pressed to find someone who thinks we’ll shop less online in the future than we do today though. COVID-19 and the resulting lockdown orders didn’t create this trend. But it has certainly moved things along. Recent measures have resulted in years’ worth of online penetration occurring in just a few weeks.
Accent Group (AX1) released a trading update in late April. The company’s digital sales have increased four-fold. Prior to store closures in March, Accent’s digital channels were generating $250k worth of sales per day. By the last two weeks of April, daily online sales were between $800k and $1.1m. Management think this shift will be permanent, so they’re re-evaluating the entire store network. Adairs (ADH) is another example. The company already had an impressive online offering, with more than 15% of sales generated online. Over the five week store closure period, Adairs’ online sales increased 221%.
Such a significant shift in a short period of time has put retailers to the test. The results have been polarising.
Retailers that already had an online focus have continued to provide a great service to consumers over the lockdown period. Hallenstein Glasson Holdings (NZSE:HLG) experienced a significant increase in online orders while stores were closed. It was fortuitous that the company had recently built new fulfillment centres in Sydney and Christchurch. Management were able to increase capacity to meet demand, despite additional social distancing requirements.
Based on the Instagram response, Cotton On was not as prepared. We haven’t got data on how the business is faring over the last couple of months, but consumers won’t forget the negative experiences they’ve had.
Fast fashion and flexibility
A lot of people are confused about the term ‘fast fashion’. They think it means you buy something dirt cheap, wear it once and then throw it out. There are people who do that. But it’s not how the term was meant to be used. Fast fashion refers to the ability to respond to trends and changing consumer demands quickly. Brands that do this well, and in small quantities to start with, should have low stock wastage. A flexible inventory method has been important through the current crisis.
While many retailers were taking COVID-related inventory write-downs, Boohoo Plc (AIM:BOO), a UK-listed online retailer, didn’t need to. It goes back to the company’s test and repeat model. The company’s buyers purchase only small quantities of a design up front. They then analyse sales and decide whether to buy more of the design, or discontinue it and move on. So they’re nimble. The company has a four to six week lead time for stock purchases to be ready for sale, while traditional retailers plan their ranges six months in advance. The benefits are two-fold. Companies like Boohoo can shift into in-demand categories likeloungewear, and continue generating sales. They also shouldn’t be hit as hard by the significant mark downs we’re all expecting once stores reopen.
Small brands need to adapt to remain competitive
Fulfillment and distribution are capital intensive functions for brands. They also involve significant fixed costs, which exacerbate the burden when revenue falls. The current crisis has shown just how bad it can get for retailers, with minimal warning.
Enter the platform model. Brands have been using platforms like Amazon (Nasdaq:AMZN) and Zalando (XTRA:ZAL) for years. Mostly for eyeballs. Recently, some platforms have started expanding their offering. UK-listed retailer Next Plc (LSE:NEXT) has introduced the Total Platform concept. Next will take care of the website, customer service, online marketing, warehousing and distribution for its clients. Leaving them with only the fun stuff—design, buying, photography and brand image. Next charges a commission rate on sales for the service, leaving clients with an almost entirely variable cost base. Which means small brands can trade through a period of significant sales declines without burning through cash that they don’t have. Offerings like this will enable smaller brands to offer online services that are competitive with their well-established counterparts.
The future of retail
COVID-19 has been tough for retailers. It has exacerbated change in an industry that was already changing rapidly. Some brands won’t survive. Debenhams, Neiman Marcus and G-Star Raw have already fallen victim. And they won’t be the last. But many will thrive out the other side. We have backed a few to do just that.
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