Part 2
(of a Tri-Part Series)
Welcome to the second feature in our tri-part series. We sincerely hope that the previous issue was fun and exciting to read and that you were able to gain vital insight. Today, in this issue we would be looking at the impacts of the pandemic on the retail industry. This industry has been one of the most affected by the pandemic and here we will be analysing these blows and disruptions faced by the industry. So, read it up until the end to understand the impacts of the pandemic on the retail industry.
With the advent of the new millennium, the world was being introduced to the convenience and practicality of online shopping like never before. The onset of online retail marked the death knell of physical retail giants and stalwarts who hadn't kept up pace with the onslaught of changing technologies. The survival of physical retailing has since been at risk and in efforts to stay afloat, many companies have taken large amounts of debt. Corona has seen many-storied retailers file for Chapter-11 bankruptcy protection in face of the virus, online retailing and insurmountable debt. Online retailing too faced disruptions due to the lockdowns imposed in many countries but the impacts were short-term as the industry is bracing to bounce back in the coming months.
The biggest threat to offline retailing is the fear, paranoia and distrust caused by the virus in consumers towards going out to stores, malls and other retail outposts for goods and services. The virus has done little to help the struggling physical retail industry and instead, by speeding the transition of countless consumers towards online retailing, it has made things worse. Also, with consumer confidence at record lows, retailers are finding it hard to attract consumers and establish trust in them.
Another major blow to retail is a change in the spending habits of consumers. With the virus causing mass unemployment and cash shortages, consumers have started spending conservatively while focusing heavily on saving. This has certainly boosted the balance sheets of banks as more and more deposits have been made during the pandemic. While this has strengthened banks, retailers are facing the brunt of crippling demand and supply chain disruptions due to the stringent lockdowns and social distancing guidelines. This shift has primarily hurt luxury retailers as consumers have stopped spending on unnecessary luxuries that are not going to be of use or relevance in their daily household routines.
All this is forcing the retail industry to rethink their strategies as, due to the virus, retailers will have to look towards contactless shopping experiences if they want to win consumer confidence. In this direction, the digitisation of the retail industry seems plausible as people will feel more confident in having a completely safe and contactless shopping experience online. While online sales were disrupted during the lockdown there is a credible foresight that demand will gain momentum in the coming months. On the contrary, grocery sales had shot to all-time highs as people had resorted to stress buying essentials due to the pandemic. This stress buying had played to the benefit of major big-name supermarkets and online retailers like Amazon, D-Mart, Walmart and Alibaba.
While things are looking good for a select group of physical retailers there are others like Neiman Marcus which have been forced to shut shop as the virus has made it impossible to do business and generate revenue which is needed to service debt. The Kishore Biyani backed Future Group has also run into financial woes due to a collapse in prices of shares that were pledged as collateral on loans undertaken by the group companies. These are just a few of many retailers who have gone into bankruptcy or are on the brink of collapse due to the pandemic. Highly leveraged retailers like them have had to file for bankruptcy to be able to rework their debt.
The key to solving the troubles of the physical retail industry lies deep inside JioMart's business model. JioMart is an online platform for physical retailers, like the kiryana storefronts, that provides them with the necessary infrastructure and the technology to do business online. It does not directly engage in retailing and instead plays host to physical retailers and connects them to consumers. This is going to be a saviour for offline players as it will help them do business and generate revenues even in the most adverse circumstances. This also highlights the hard truth that the retail industry will have to migrate towards online retail in the foreseeable future.
The retail industry makes a rare case for itself as we see two very distinct outcomes for the sector. While online retailers will bounce back stronger and much more resilient the pure physical retailers have an uncertain future ahead of them. The pandemic is going to fast track the shift of the offline retailers to an online business model due to changing consumer preferences of contactless shopping experience. Trust and consumer confidence are the two things without which surviving in the industry would be a rather uphill task. Making things easier is the digital medium which can help provide dual-sources of revenue while also providing paranoid consumers with an avenue to engage with one’s business. Digitisation was seen as the future of the retail industry and the pandemic has brought it much closer to us than we had ever imagined.
Understanding the Markets:
The retail industry is undergoing a paradigm shift with consumers transitioning to online retail. This has made physical retailers weak with poor revenues and the onset of the virus hasn't helped either. Thus, it is advisable to stay clear of the stocks of physical retail due to high volatility and risk. On the other hand retailers in the online or hybrid (offline cum online) verticals will fare well due to greater consumer market and low operating cost. The key is to invest in companies with low debt, stable management, a loyal consumer base and a moderate price/equity ratio.
*These are the author's beliefs and not directions for investing. The author is not responsible or accountable for any discrepancy arising out of this material.