The retail brands that will make it through this economic crisis brought on by the COVID-19 (coronavirus) pandemic will be ones that have sufficient cash in the bank to float them through this period of time, says retail expert Doug Stephens, Founder and CEO of Retail Prophet based out of Toronto.
“The second thing will be brands that had a sufficient footing in the marketplace both from a brand awareness standpoint but also from a brand equity standpoint. Brands that already had a strong place in the hearts and minds of consumers are more fit to undergo this kind of a stress test,” he said.
“And brands that find themselves either by fortune or by design in categories that consumers are interested in. So if you’re lucky enough to be in the essential category – pharmacy, food, transportation, etc. – you are likely to be alright. However, if you’re a department store I think the future is very uncertain.
“Department stores being a channel that I don’t think ever really sorted out who they were and what their value to consumers is in a post-digital age. So we’re going to see the HBCs and the J.C. Penneys and the Macys of the world struggling significantly during this period of time.”
Retail Prophet began in March 2009 in the midst of a different crisis – the financial crisis that gripped the world at that time.
Before establishing Retail Prophet, Stephens spent a little more than 20 years in the retail industry working in both Canada and the U.S. across a number of different disciplines - human resources, marketing, store operations, franchise sales, distribution, manufacturing.
“I’ve seen the industry from virtually all sides and in 2009 founded Retail Prophet with the aim of trying to bring context to the sorts of changes we were seeing happening around us whether they were demographic, economic, technological or media shifts that were taking place and to help retailers build coherent strategies in a very, very rapidly changing retail landscape,” said Stephens, who works with brands such as IKEA, Walmart, Microsoft - large brands on a global basis.
Stephens said a significant portion of the retail industry only needs one bad quarter and “it’s lights out.”
“I think we’re going to find out just how deep that divide goes in the marketplace when this whole thing plays out,” he added.
“What’s most perplexing perhaps in this situation is we’re dealing with two things here whether we know it now or not. We’re dealing first of all with the reality and the fallout of a pandemic the likes of which we as a society, most of us anyway, have never lived through before. So we really don’t know what the other side of this looks like. But the significantly complicating factor here is once we emerge from this we could also then fall into a knock on recession which by some estimates could be deeper and more painful than the 2007-2008 recession. In fact, some are saying that it could make it look like a speed bump.”
Stephens said we are going to see a lot of dynamic behaviour from consumers as we move forward. From previous incidents in history like 9-11 and the financial market crisis, instinctively when consumers fear for their economic certainty, or they feel uneasy about the economy, there is usually a flight to frugality that accompanies that.
“So don’t be surprised if we see consumers really keeping their powder dry so to speak in terms of keeping cash in the bank, not making extravagant purchases. Count on the luxury vehicle market suffering. Count on the jewellery industry suffering. The luxury goods category in general at least in the near term is going to suffer,” he said. “Not only because the average person on the street is feeling insecure about their job but even high net worth individuals right now are watching their stock holdings decreasing by upwards of 30 to 40 percent. That’s going to put a significant dent in discretionary spending.”
But the past has also taught us that there are two phases of psychology that consumers go through which will be particularly prevalent in this situation. We saw after 9-11 that there’s a bit of phenomenon that psychologists refer to as mortality salience. It’s this recognition all of a sudden that you are either having or have had a brush with mortality. After 9-11 for example, we saw consumers nesting, spending more time in their home, spending more time with their family. And spending money on things that give them comfort and a sense of security. Even food choices during that time were comfort food such as meatloaf and macaroni and cheese.
“The next phase though is that once consumers return to a feeling of security, there’s also a correlating effect that’s called secular mortality and what happens there is consumers say ‘you know this has shown me that I could die tomorrow. Life isn’t forever and I’ve only got one life to live so hell maybe I should go buy that Mercedes I’ve always had my eye on’. There’s this return to not only consumer behaviour but in some cases there’s a return to significant spending as consumers sort of want to prove their existence by accumulating material goods,” said Stephens.
“We saw that after the financial crisis. There was a significant return to consumerism and people went out and spent loads of money. I think we’re going to see all of those behaviours as we move forward. We just don’t know what order they’re going to fall in because we’re dealing with these sort of multi-dimensional problems right now.”
"Secular mortality" As opposed to what other kind of mortality?
Spare me the senseless jargon.
Yes, "secular mortality" is an odd term, but so is a lot of industry jargon whether in retail or any other field. I interpret it here to mean a sort of live-for-today-because-who-knows-what-tomorrow-will-bring mentality. If you can afford it, why delay gratification if you’re not certain you’ll have the time to enjoy it in the future? You can’t take it with you, etc. As a layman, I anticipate an unsettled period of over a year where we will see a great winnowing in the retail sector. There are still too many stores that are too much alike competing for not enough dollars. I’m interested in whether people will once again congregate in major urban spaces such as public transportation and shopping districts. The return of such behaviour will make a big difference for shop owners no matter what happens on line. The more upmarket and middlemarket brands will face the harshest reckoning. I’m watching what happens to Holt Renfrew and HBC as a barometer of that situation. Holt Renfrew wisely initiated its own winnowing process starting a few years ago, and it would seem to be on the right track to concentrate in key markets, but even that is a still a big, expensive risk. For example, it was supposed to open its largest flagship April 10 in Montreal at Holt Renfrew Ogilvy, but the COVID-19 virus shutdown cancelled that. An investment that was already chancy in the best of times now faces an even greater threat from a worldwide pandemic that could permanently alter consumer practices disadvantageously for luxury retailers. Also, HBC, which finds itself squarely in the diminishing middle of an increasingly bifurcated market, is in an even more precarious state. It is further behind in its process of reinvention and has yet to make critical decisions about where to make its investments and how to define its image. It seems to have too many locations to adequately maintain (too bad more Bay stores don’t look like the one in downtown Toronto on Queen Street). Reworking its inventory of brands and leveraging its genuine, historical significance in Canadian history are good steps, but only a beginning. I predict there will be a new normal, until the next big jolt comes around.