Podcast

Retailers scramble for innovation in the face of COVID-19

Luke Ritchie Luke Ritchie

In just one week, an estimated 60,000 employees were stood down.

While many retailers have opted to close their doors and wait out the storm, there are those that have pivoted and innovated to emerging customer demands – with sales for camping gear, exercise equipment, home entertainment and arts and crafts going through the roof. It’s clear that mandated social distancing and physical isolation will have a significant effect on the retail sector for months and years to come.

Hear from Grant Thornton’s National Head of Retail and Consumer Products Luke Ritchie as he discusses the carnage being wrought through the retail sector, and how businesses are innovating not only what they sell but how they sell, and what we can expect the future of retail to look like after the world re-emerges after COVID-19.

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Podcast transcript

Velvet-Belle Templeman

Welcome to Boardroom.Media.  My name is Velvet-Belle Templeman and I'm here talking to Luke Richie, National Head of Retail and Consumer Products at Grant Thornton.  Luke brings 25 years’ experience in retail.  Today we'll be talking about how Covid-19 is affecting the discretionary retail industry like fashion and homewares and how retailers are responding.  Luke, thanks so much for joining us.

Luke Ritchie

Hi, Velvet-Belle.

Velvet-Belle Templeman

Hi, Luke.  Now Luke, the retail landscape has been difficult for a while and it's even more difficult during this time.  Understandably, people are a little confused by government policies around social isolation while trying to keep retailers open.  There's falling foot traffic and I'm sure we've all seen sharp increases in deals for online shopping in our inbox.  Clearly now is the time to look at doing things differently.  So Luke, let's start with what's happening on the ground.  Are we shopping and how are your clients in this sector feeling?

Luke Ritchie

Well, it's carnage out there in the retail sector, particularly in those more discretionary categories like clothing and footwear.  Whilst shopping centres do remain open, many retailers have chosen to temporarily close their doors and stand down their workforces.  You know, there are some retailers in patches that are trading, okay.  Obviously, supermarkets are struggling to keep up with demand, but that's not the topic for today.  Outside of grocery though, businesses like Bunning’s have seen surging demand as customers prepare for long stints at home working on those DIY projects they've probably been putting off.  And some of our clients are seeing strong demand for outdoor and camping products.  Things like exercise wear, arts and crafts, so products within categories that are oriented towards extended periods in isolation or at home.  But broadly speaking, if you take a broader view, it's absolutely Armageddon for the retail sector.

Well, I have a 60,000 employees had been stood down just in the last week.  Myers stood down 10,000 people, Flight Centre, 6,000, Noni B's company, 7,000; Kathmandu, Cotton On, Peter Alexander, the list goes on.  Small format retailers in particular, find it almost impossible to operate effectively while adhering to the social distancing rules and businesses that need that close customer contact as part of their customer service proposition, they just can't operate.  So businesses like Michael Hill Jewellers, many fashion retailers have chosen to close their doors. So across the board, sales are down by as much as 80%.  So we can certainly expect, I think more closures soon.  Retailers I've spoken to are talking this week about being in a bit of a stay of execution while they wait for sword to fall, so to speak.  Businesses though like Kmart, Target, Reject Shop, David Jones, they're all determined to press on, for now.

Obviously, we've all been told to stay home unless we're shopping for food or essentials.  Last night when pressed on exactly what he meant by essential services or essential, the Prime Minister was reluctant to have government mandated store closures.  I think he's wanting to leave those decisions to the retailers themselves.  He did, however, acknowledge that it's hard to see how fashion, clothing, and footwear could be deemed by customers as being essential.  So that doesn't bode well for those categories if they're not closed already. 

There has been some really positive behaviour in the face of all of this.  Retailers are cooperating in places to help displaced workers find new employment within the broader retail sector.  So I know Coles and Woolworths particularly, have overtly reached out to many of the brands that have stood down workforces as they hired between them probably 20,000 or more additional staff just to keep up with demand in supermarkets.  And so where better to find people that are already trained in retail customer service than from other brands.  So it's good to see some community minded spirit out there.  But the overall message is horrific for retail.

Velvet-Belle Templeman

Luke, with the Prime Minister flagging rent relief on Sunday, what will this mean for retailers?

Luke Ritchie

Stores are trading at levels that don't even cover labour costs and so one of the other big issues to be resolved is rent.   All these retailers in shopping centres and on high streets, have got often very long leases with their landlords and with people being told to stay home.  Foot traffic is almost nil.  So in this environment, normal rent is just untenable.  We should expect to see banks and landlords with retailers hopefully find reasonable compromises in this area.  The PM was certainly encouraging that type of behaviour last night with everyone being asked to wear a bit in the name of remaining viable when we come out the other side of this crisis.  So I'd expect that we should see lengthy rent holidays and certainly rent reductions.

Velvet-Belle Templeman

It's not a good time for the sector, that's for sure.  Now Australia has had a little bit of reprieve from the impacts of the virus compared to many other parts of the world.  Many other countries have entered into complete lockdowns.  Is this where we're heading and what will this mean for retailers?

Luke Ritchie

I think it's hard to know where we're heading.  It's obviously changing day by day.  Even just in the last couple of days we've had differing messages, so without buying into whether we're going into a complete lockdown or not, certainly we're in a slightly less restrictive state than what's, you know, like environments such as New Zealand, the USA, the UK, parts of Europe are in.  In those jurisdictions basically everything is closed except for grocery and medicine or pharmacy. 

In New Zealand, Australian operations like Kmart, Harvey Norman, Nick Scali and JB Hi-Fi all closed their New Zealand stores.  Bunning’s New Zealand is still operating but only as a trade business.  So no retail operations.  If you look at what's happening in the UK and the US there are strong measures being taken to limit the numbers of people inside those shops that are remaining open.  So out the front you've got people handing out deli tickets, a certain number of tickets based on the number of people who are allowed to be in the shop, including the staff with one person per four square metres as it is here.

In fact, that type of ticket arrangement is all is already happening here in Bunning’s, in Australia.  They've got very robust two metre marshals strictly enforcing social distancing rules in the UK.  There's no shopping with little hand baskets.  Everyone must have a trolley because that also helps in social distancing.  And I think we should expect to see that happening here if it's not already in the last couple of days.  There's a lot of contactless shopping, so scanning and dropping shopping off to people rather than any changing of hands or people being in close proximity.  There are things like essentials boxes being prepared, pre-prepared boxes of 30 pounds or 40 pounds a box with pasta, bread, toilet paper, et cetera that people can go in with a minimum of time or exposure into those environments. 

Online shopping surged 2-300 per cent in some of these overseas jurisdictions where the store closures are more comprehensive than what they are here in Australia.  However, in the UK, interestingly, there's been something of a backlash against retailers which continue to trade online from the point of view of the workers.  So the workers in these fulfilment warehouses expressed concern about working in close proximity to hundreds of others in this climate.  So some brands like a Next and Net-a-Porter have chosen to close even their online operations. 

So look, obviously there's a large social impact which can differ by different parts of the world.  We are in this part of the world, not quite as deep in the mire as perhaps what they are in Europe and the US now.  So I think, look, it's a day by day proposition, I think, is the real answer.

Velvet-Belle Templeman

So looking back to Australia, you mentioned online shopping, but if people can't shop in person, particularly those that rely on heavy footfall, how can the retailers survive?

Luke Ritchie

Yeah, that is the question, isn't it?  So I know that department stores like Myer and David Jones are running daily online deals, heavily discounted products and services.  They're targeting their loyalty customers to try to drive online traffic.  They're moving to free delivery on most orders.  I mentioned Myer there, they're not obviously not trading in their bricks and mortar stores, but certainly they're driving online very, very hard.  Businesses like Target and the Reject Shop are pivoting heavily towards essentials, lining up with, you know, what is an essential service.  Target is focusing on being the place to purchase your family essentials.  The Reject Shop has pivoted heavily towards things like packaged food, cleaning, health, pet care products.  They're picking up a lot of discounted stock that was previously destined for cafes, restaurants, and airlines that are obviously no longer receiving that stock. 

So if you look at those two retailers Target and the Reject Shop on their websites, you'll get a sense for how retailers are positioning themselves as being vital to customers in the provision of essentials.

Velvet-Belle Templeman

So you mentioned discounts and we are seeing a lot of discounted deals and targeted email marketing and different ways of reaching core audiences.  Is this a sustainable business model for retailers?

Luke Ritchie

Well look, prior to this whole coronavirus scenario, the retail sector was already under pressure, significant pressure as customers moved more and more towards online shopping as a more convenient alternative than going to the shops.  So retailers were already innovating with new ways of servicing customers online through all kinds of interactive means in terms of subscription based models and what have you. 

So now that we're dealing with what was really unimaginable only a couple of weeks ago, really with bricks and mortar sales are down by nearly 90% in many retailers, the ability for retailers to innovate and respond quickly is crucial.  If they don't do that, they will maybe not even come out of the other side of this.  So we're seeing most retailers reduce thresholds for online delivery, free online delivery.  You know, rather than having a, you know, for spend over a certain amount, it's generally going straight to free delivery and they're being very clear about non-contact delivery and click and collect options.  So look, the shift to online is sustainable, but it means that retailers have to change the way that they operate.

Velvet-Belle Templeman

Now, Luke, I'd really like to talk to you about our restaurants and cafes.  We’re a country that loves to brunch but can't with strict social distancing rules.  So how are you seeing this segment respond?

Luke Ritchie

Well, I think we've seen restaurants and cafes responding by pivoting toward takeaway and delivery services, new online menus and free home delivery operations are popping up and I think it's really important.  You're, so right.  It's important that we, as consumers, adjust our behaviour where we can to help this decimated sector survive.  It's such an important part of our lives.  So whilst we must continue to maintain social distancing, if we can order an additional takeaway from our local favourite more frequently, slightly more frequently, then maybe we'll help them at least scrape through so that they can survive on the other side of this.

I saw a great social media piece just on the weekend about a person saying that they have taken to perusing Uber Eats to look at menus, but then rather than using Uber Eats they then come out of the app and dial the restaurant directly to place their order so that they can have the restaurant avoid that 25% commission that Uber Eats charges them.  So I think we all want to do our bit, but restaurants and cafes are certainly adjusting and hopefully we can come out the other side with them all still in play.

Velvet-Belle Templeman

So innovation is clearly important, and I understand you've got a few examples of innovation that you've seen by Australian retailers in response to this shift in the economy.

Luke Ritchie

Yeah.  Look, retailers well they have to embrace online channels, social media, interactive design solutions, even some we've seen Face-Timing consumers directly to help demonstrate different items of merchandise.  There, there's a real sift to contactless shopping; customer's able to place click and collect orders online and then drive right up to the retail outlet and have the person come out and scan their order through the driver's window and then pop the boot and they drop the delivery into the boot of the car and they drive off.  So it truly is contactless. 

So that's obviously an innovation that they're embracing.  I saw a fitness, like a gym operation, Just Fitness.  They've been forced to close and they've written to all their customers in what I think is a great initiative.  They've said that all their direct debits have been reduced to just $3 50 for the month, for the duration of however long this trading embargo lasts whilst they've closed their gyms.  And that's designed to just keep enough revenue to the centre manager to keep them employed so that when they open they can quickly re-emerge for their customers and that $3 50 amount would be deducted from their ongoing subscription.  That's a way to share a little bit of pain to help customers maintain that relationship with the retailer, in this case, the gym.  It's people focused and customer centric.  I think we all acknowledge that we're happy to share a little bit of pain if it means that these retailers can survive.

Velvet-Belle Templeman

Absolutely.  What a great initiative.  Now we've been talking a lot about the service delivery side of retail, but many retailers are also manufacturers.  How are they responding to the Covid-19 crisis?

Luke Ritchie

Well, particularly overseas, we've seen a lot of these businesses like Tesla, Ford, Dyson, and others are using their plants to make things like respirators.  They're partnering with healthcare companies to produce medical equipment in the UK.  Marks and Spencer has asked some of their suppliers to redirect their clothing or what was clothing manufacturing operations to production of surgical gowns and masks.  Cosmetics companies like Louis Vuitton and Estee Lauder are diverting what were perfume and makeup factories to producing hand sanitizer and face masks and the like, even alcohol distillers around the world.  Shane Warne's gin production company, if you can believe it, is one.  They're shifting production of gin, to alcohol heavy hand sanitizer.  So there's all kinds of pivots going on as as businesses respond to, you know, what is essential to keep people alive and equipment in face masks and of course, hand sanitizer.

Velvet-Belle Templeman

So it really is a time of innovation there across the sector.  Now, looking forward, what does the future of retail look like in the next six to 12 months?

Luke Ritchie

Well, I think we can clearly expect more upheaval in the sector.  I said before that it’s Armageddon out there and that's not an exaggeration.  Some businesses will clearly close and may not reopen.  What we need is for governments to help retailers build a bridge, a bridge to help them manage their workforces, their landlords and their suppliers through to the other side of the crisis.  I think it's likely that our supply chains may change toward having more in-country production and reducing reliance on overseas manufacturing over time in this highly globalised world, retailers have come to rely so heavily on overseas suppliers for so many of their products and it's not just in retail I should say.  I think we'll see a little of a rebalancing of our supply chain in a range of sectors towards more in-country production as a hedge for the provision of key products and services.

In terms of what the future retail environment beyond Covid-19 looks like, I think it's important to start with the fact that Australia is arguably over serviced already by bricks and mortar retail.  For example, there's more square metres of department store floor space per person here in Australia than what there is even in the US.  So I think this external shock will bring forward some sector restructuring that may well have happened anyway.  As I said, some retailers just probably won't recover. 

As we, as consumers remain home in isolation, I think we become more comfortable turning to online shopping for more of our goods and services.  So again, once we come out the other side and the lights get turned on, I think many newly educated online shoppers will continue to shop online when perhaps previously they may have walked into a shop.  So that again puts more pressure on bricks and mortar retailers. 

But I also think retail is resilient and people crave contact.  Retail stores are more than just transactional shopping.  They're about experience, they're about entertainment and physical shops are assets that just can’t be replicated through an online channel.  So those shops and their teams will be back.  Once we get through this, there'll be back serving customers on the other side of the crisis.  So let's just hope it's sooner, not later.

Velvet-Belle Templeman

Luke, thank you so much for your time.

Luke Ritchie

It's my pleasure.

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