With the approach of Black Friday, Aon’s Daniel Fox, Retail Practice Leader and Mike Jacobs, Client Director look at the challenges of handling peak demand in a retail environment that is drastically different from 2019
As the global incidence of Covid-19 continues to rise in the long forecasted second wave, several European countries have re-introduced some form of lockdown. In the UK, England has moved into a month-long full lockdown just as Wales exited its own ‘firebreak’, and Scotland continues to implement restrictions on a regional basis. The ongoing pandemic disruption is likely to hit retailers hard as the industry moves into its peak season.
This year, Black Friday falls on the 27 November, and a large proportion of European ‘bricks and mortar’ retailers are likely to be caught up in some form of trading restrictions. In England, Black Friday will be during full lockdown, damaging the hopes of non-essential retailers (especially those with little or no online presence) of salvaging something from 2020, whilst conversely, essential retail and ecommerce are likely to see a significant uptick in trade.
Litmus test for confidence
Traditionally ushering in the beginning of peak season for retailers – which lasts through the Christmas period and the January sales – Black Friday would normally be seen as a litmus test for consumer confidence and their appetite to shake off the economic gloom and spend. But, in a year turned upside down by Covid-19, and with Brexit adding further uncertainty, it’s a peak that will be unlike any other before.
The division of retail into ‘essential’ and ‘non-essential’ has been tightened by Government mandated closure of instore concessions and the isolation of, for example, standalone clothing, toys and books areas within essential retailers. However, some retailers are taking the opportunity to diversify their offering and the waters are muddied by the allowing of ‘click & collect’, with a number of retailers permitting customers to collect a wide variety of items – including the new Xbox series X launched on the 10 November.
The initial lockdown in March 2020 (and associated reduction in store footfall) highlighted that investment in IT infrastructure, fulfilment capabilities, social selling and the ability to offer a diverse product range at speed is now the key to successful trading – and, in some organisations, the only thing that means they will still be trading in 2021. ‘Lockdown 2.0’ will highlight how well organisations have adapted to manage the rapidly changing risk profile of their business.
Even before the English lockdown, consumer research by Emarsys reported in Retail Times, suggested that 100 days ahead of Black Friday only 13% of consumers were planning to take to the high street, with the overwhelming majority (58%) planning to shop solely online. The BRC figures for October show a 39% increase in online non-food sales, with a 39.2% three-month trend increase. For those retailers with the right website, app and back end technology it’s an opportunity to strengthen their brand and collect customer data that can help them develop personalised targeting over Christmas, moving people from ‘customer’ to ‘brand advocate’.
As seen over the summer, the end of a lockdown may well result in a bounce back in physical store visits, although the planned end to tax free shopping will impact some retailers more than others. Some sectors reported significantly higher conversion rates when they re-opened as they moved to an appointment system; a move that encouraged serious buyers rather than browsers. Reports of an effective vaccine will no doubt ease some shoppers’ fears, and the Christmas experience will be an important draw for footfall. Whilst some retailers, such as John Lewis, will be emphasising virtual events, there will still be the traditional Christmas promotions such as the Selfridges window. Many retailers – e.g. Frasers Group and Next – are moving to ‘shopping as an experience’, incorporating complementary concessions or brands. And some are utilising cutting edge technology, showing their offerings with augmented and virtual reality.
With this opportunity also comes risk however. Recent attacks in Europe have shown that the threat of terrorism hasn’t gone away. Every year, gatherings of Christmas shoppers and revellers present an attractive target. This year, restrictions on capacity within shops, restaurants and bars mean that there will inevitably be queues spilling out onto pavements and roads. The London Bridge attack of 2017 showed the havoc that can be wrought in a short time period by relatively low tech terrorism.
Pressure grows on fulfilment
If retailers can capitalise on their online presence getting orders in is only half the battle. With the volume of sales traffic shifting online, the already disproportionate unseasonal pressure on distribution centres (DC) and time critical order fulfilment is increased. For 2020, the arrival of Black Friday is effectively putting the volume of peak on top of order volumes already near capacity levels.
Customer facing websites and apps, warehouse management systems and back end infrastructure – sometimes only recently installed – can be consistently operating at or near their designed limits; often when they haven’t had the opportunity to be tested at maximum capacity (certainly not for this length of time). And when online traffic remains consistently high, finding a window to patch vulnerabilities in systems – let alone having time to test the impact of updates on other integrated applications – becomes increasingly problematic. And that’s without factoring in how small IT departments have had to pivot to facilitate and support homeworking.
The cyclical nature of retail means that many retailers approach maximum stock holding in preparation for Black Friday and the Christmas season. However, for many retailers, unsold stock from stores that were closed in the initial lockdown, and the inevitable increase in returns (in some cases allowed up to a year after purchase) associated with increased online sales, has put pressure on DC capacity, as they process and restock these items. For other retailers – particularly food and drink – the huge spike in demand in anticipation of and during lockdown will have tested new systems and caused the rapid expansion in others e.g. recruitment and training of grocery delivery drivers.
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Another challenge is cyber-crime. There was a clear spike during the first lockdown, as organisations adjusted to working from home – in March 2020, the Action Fraud service recorded a 72% increase in reported cyber related losses over the previous month. When we talk about ‘cyber vulnerability’ in retail, we automatically think of customer facing websites. However, for many retailers their biggest vulnerabilities will be the interfaces between their own systems or between their systems and third parties. Whether it is the link between the website and the finance system that takes payment, or the warehouse system that knows where stock is located, or the courier system that prints off the customer address labels, the failure of any link in the chain results in a disruption and a potential lost sale. And this failure can be from something as simple as a change in compatibility following an update, or an issue on a legacy system that is no longer supported, as much as it might be from something nefarious.
Once the product is out of the DC, the problems aren’t over either – ecommerce retains a critical human element. Courier companies are competing with supermarkets for a limited pool of drivers, trying to boost capacity at short notice, and the person who appears at the customer’s door is their interface with the brand and reputation of the retailer. To boost capacity to a level where delivery promises can be met, training programmes are often trimmed, while quality standards for recruitment or due diligence are sometimes relaxed. Social media’s instant commentary, the constant drive for organisational feedback and a national trait of accepting good service without comment and criticising poor service means that damage to brands can happen almost instantaneously and escalate unless well managed.
Outdated recovery plans
Managing these new and existing risks successfully is paramount for the many retailers who count on shifting enough product at peak to safeguard their ongoing profitability. A challenge, however, is that retailers’ business models have changed so quickly in 12 months with rapidly accelerated digital transformation projects, that those in risk and insurance might no longer know what the most critical parts of the business are. If a business is still working with business continuity plans based on a pre-Covid business model, then there’s a good chance that they are out of date. When a ‘traditional’ disruption happens – for example, a warehouse fire – and an organisation implements its plans to recover ‘business as usual’, it could end up recovering a service that is significantly out of date and not relevant to how they are operating today.
In addition to the (hopefully) one-off challenges faced in 2020 – Covid-19 and Brexit – the C-Suite, senior directors and audit committee for retailers are also being confronted with the increased demands of the hardening general insurance market. As insurance premiums rise – and we are seeing some significant increases in the retail sector – insurance spend will become more visible to a Board and they will want to understand any significant changes.
It’s also not just about increased and additional retained cost; the management time, resource and detail now needed to effectively demonstrate ongoing development of risk management controls is no longer an agenda item that can be rolled forward. Failure to position the business appropriately and educate insurers will result in added pressure across a spectrum of covers from D&O, cyber, liability and property damage / business interruption. All of this gives more weight to risk and insurance having a seat at the top table. Where the C-suite is discussing changes to the operating model or direction of the business, risk professionals need to get ahead of those decisions to understand the risk and insurance implications.
Retail, of course, has always been about trying to successfully predict consumer demand, and never more so than at peak season. The more businesses can invest in understanding their consumer base – particularly in the face of new and extreme challenges – and the associated trends, then the better the chance they have of sourcing the right products and making them available to consumers quickly and efficiently. Those retailers who get their business model right and can manage the associated risks will be the ones who profit and keep their reputation intact. For many it could come down to a reset of expectations with their customers and a strategy of open and honest communications of what and when they can deliver.
To get the best from their risk and insurance programme, retailers need to be aware that:
- Good data is key. It needs to be part of the holistic story that shows how they have dealt with disruption, and how they have adapted to reposition themselves in the new market.
- The risk and insurance programme doesn’t stand alone. It now needs to be an integral part of the business strategy, with clarity as to how it helps the business respond to traditional damage and 21st century non-damage disruption.
- It is not a once a year process. There should be ongoing, year-round engagement with the broker and insurers to create understanding, identify and mitigate risk, and to build an effective relationship.