DISTRESSED SECTORS

The new normal: how COVID-19 has impacted retail

It is safe to assume that for the majority of retail businesses, 2020 has offered some unique challenges. Lockdowns resulting from the COVID-19 pandemic have affected parts of the retail industry differently, with some owners having to close temporarily and some thriving in the new environment.

With people living in lockdown and working from home, the first half of 2020 saw a virtual halt to all non-essential trading. Unlike industries such as aviation and hospitality which have seen a fairly uniform drop in revenue, retail’s fortunes have been decidedly more mixed. While many discretionary stores have been forced to shut their doors, the grocery sector has seen unpredictable spikes in demand and an increased preference among consumers for delivery services. What is certain though, is that nearly every retail business has been affected in some way, and that the global landscape may remain challenging for some time.

Liquidity

A major theme throughout the crisis has been the need for retail businesses to preserve cash and attempt to increase liquidity. All over the world governments have implemented measures allowing businesses to temporarily reduce their operating costs, particularly staff salaries and tax payments. However, these measures will not go on forever. Those retailers with an established online presence have been better able to weather the storm, but with lower profitability per individual sale this may not be a feasible strategy for many businesses.

Cost management

It is common for retailers to carry little cash and have high-fixed costs, which is not a problem in times of regular consumer levels. The pandemic has created a serious strategic imperative to address cost management, with lease, infrastructure and physical footprint emerging as key areas of focus. But stock, property and labour are likely to remain the three largest costs, especially when employee furlough schemes end. Apparel retailers in particular could be sitting on large amounts of unsold seasonal stock, and subsequently, we are already seeing heavily discounted prices among some businesses.

Debt and restructuring

While many landlords and banks are granting payment holidays, there is still a lot of uncertainty about how long many businesses can operate if demand remains low. Any appetite among lenders to reschedule debt payments will depend on what shape they think the business in question is likely to emerge from the crisis in. For many, this has meant putting together funding proposals for shareholders and using insolvency tools to restructure quickly.

Building resiliency

The disruption caused by the COVID-19 pandemic has most likely given a boost to the shift towards online retail, but that doesn’t mean physical stores will disappear overnight. They will have to adapt quickly though, particularly with regards to social distancing and increased cleaning. Most of all, retailers need to make sure their businesses are as resilient and flexible as possible, and reducing physical footprints, growing online, creating a multichannel presence and restructuring are all likely to be important strategies.
The pandemic has provided further demonstration that retailers across the globe need to focus on creating a core group of loyal customers. This is always going to be the best way of dealing with disruption, and we can help you protect your business and restore value.

Our experienced experts support your trading company in these challenging times. If you would like to discuss any of the topics raised, please contact our experts Andrew Dickson and Martin Schmidt.