COVID-19 has accelerated change in the retail sector; the businesses that survive and prosper will be those that react quickest and understand the changing nature of the risks they face and the changing profile of the consumer.
Retail has never been a homogenous sector. If anyone thought otherwise, they would only have to look at the experience of the food retailers versus non-food, and the online specialists versus the bricks and mortar operations during the COVID-19 crisis. A slick digital offering and a strong brand has got a lot of organisations through this disruption, while weaker organisations have been picked off or badly damaged.
What’s evident is that there will be a rapid acceleration of the structural changes that were already underway in the sector such as the demand for grocery deliveries and direct wholesale delivery; the introduction of efficient ecommerce platforms and prompt fulfilment; and, product diversification. The question is then, how much of this increased ecommerce traffic will revert to bricks and mortar?
Given these seismic shifts together with the new needs and behaviours of consumers, there is no going back to the pre-pandemic normal, which means retail businesses are facing an urgent need to reassess their changing risk profiles and ways of mitigating those risks.
A pandemic Black Swan
In 2019, Aon took part in a podcast with the British Retail Consortium (BRC) covering ‘Black Swan’ non-damage business interruption events – so-called because of their rarity and the potential for catastrophic impact. At the time, the evolving nature of terrorism events, extreme weather (the ‘beast from the east’ was still fresh in the minds), the likelihood of a further volcanic ash incident, airport drone strikes, and long term strike action impacting transport links at key seasonal peaks were seen as the most likely causes of a Black Swan.
While a pandemic event sat on the long list of triggers – in Aon’s 2019 Global Risk Management Survey, the risk managers surveyed rated pandemic risk as low as 60th amongst the top risks that concerned them – the scope and speed of shut down, and restriction of movement following the outbreak of COVID-19 are beyond anything that was envisaged.
Shift to online
As a direct consequence, April’s retail figures reflect how the pandemic has driven the shift to online purchasing with KPMG’s Head of Retail quoted as saying that online sales were up by 60%. Of course, non-essential bricks and mortar retail had no other option than to close but vast numbers of people – a recent report suggests that one in five UK consumers will not shop for clothes in the high street again – particularly those amongst the older generation who may have resisted the use of technology, have turned to shopping online for the first time and may well not go back when shops reopen in the high street. Initiatives like priority slots for the vulnerable and elderly would have helped drive this trend but as the boss of M&S recently said, customers "may never shop the same way again". In the US, the Centre for Retail Research predicts that, “rapid online growth will continue for at least another eight to ten years, thus eventually between one-in-ten and one-in five stores will no longer be needed.”
It is inevitable that the pandemic will accelerate the change in the role of bricks and mortar retail such as an increase in the blended showroom and leisure experience. There could also be a long-term resurgence in local retail. According to Deloitte, spending with local retail was up by 40% in April. And don’t rule out the ecommerce giants looking for opportunities to expand their physical footprint. Recent reports of Amazon picking up a retail store portfolio suggest that bricks and mortar won’t disappear but will be reinvented for the digital age.
New demands on retailers
What does all this upheaval mean from an operational risk perspective? Social distancing restrictions may continue to put increased pressure on retailers, particularly with additional staff demands such as security, ad hoc cleaning, and dealing with returns, while transport issues such as flexing start times to allow travel on public transport, the storage of bikes and provision of showers may ultimately add to the cost base of a physical store.
With margins already trimmed to the bone, where does the additional cost sit? The lack of cash to ride out a disruption of a few months has already demonstrated the hand-to-mouth existence of retail, and these new pressures could make the situation even more tenuous. And the way the accounting value of physical stores is calculated could also change in order to make them financially viable. This may lead to an accelerated consolidation and streamlining of brands, through takeover, administration and mergers.
Many front-line shop staff find themselves in high risk/low reward roles, increasingly with the risk or expectation of abuse from a frustrated consumer base. Pressure on employers to get their guidance right – despite limited government help and support – as well as changes to working conditions, and insufficient protection could result in a wave of negligence claims from both employees and the public. Regardless of the outcome, this could have long-lasting impacts on brand and reputation.
Brands may need to focus on adapting hiring processes, attracting talent in key areas to support growth strategies and ensure their existing work force has access to much-needed wellbeing advice and support.
Supply chain challenges
The supply chain may continue to be vulnerable to disruption whether from recurring virus outbreaks or from financial pressure in countries with a less comprehensive support infrastructure. At the start of the lockdown, the shortage of essentials and panic buying hit the headlines, but these trends were related to the inability of replenishment to keep pace with demand, rather than a shortage of the actual goods.
As the lockdown progressed, some retailers not involved in food were looking to cancel future orders and were forced to seek additional space for stock that couldn’t be sold due to the closure of bricks and mortar retail. Should a second Covid-19 spike occur as we head into Q4 – the peak period for many brands – the impact for some retailers could be even greater. As brands focus on resetting post lockdown, how much resilience planning can be established?
Get the basics right
As Aon’s recently published Decision Making In Complex & Volatile Times: Keys to Managing COVID-19 report warns, the “Protection of people and assets will become a major imperative…organizations must analyse risk as it relates to real estate, business continuity, and their supply chain, cyber risk and operational resilience.” This means getting the basics right by identifying critical activities and resources (people as well as technology and sites) and then working closely with both their broking partner and Insurers to ensure an appropriate, cost effective and sustainable solution is provided.
Could the insurance market look at more innovative coverages such as policies that cover gross profit for traditional physical all risk and non-damage risks, or a parametric based product – already available but not generally purchased by retailers – which, dependant on the policy wording, may pay out on a pre-agreed measurable trigger like a reduction in customer footfall, rather than waiting for a specific loss?
Retailers should continue to develop a better understanding of the emerging risks the sector is exposed to and prepare to deliver a greater level of analysis and insight around potential cost of disruption with underwriters. They can also be selective in the level and scope of risk they retain (e.g. higher deductibles) and transfer to Insurers at the optimal level in line with the market cycle.
Time to reshape
Most retailers will have now moved from the react and respond phases of the COVID-19 crisis to the recover and reshape phases where, says Aon’s Decision Making report, “leaders will need to rebuild their vision, strategy and priorities for the future.” That means reshaping to account for the move online as well as allowing for surprise trends such as the move back to ‘local’ shopping. Expect also to see a change in the function of ‘brand’ stores; becoming more of a multi-purpose experience destination, integrated into a digital and online offering with rapid, local fulfilment.
As waves of infection and associated restrictions come and go, demand curves may also ebb and flow at short notice and may inevitably drive a change in buying patterns. There is likely to be a decrease in disposable income, and perhaps a change in the way that people treat debt in the longer term i.e. steering away from it, so they can cope with a sudden reduction in income, or perhaps loading up on debt, so that they can enjoy the good times when possible!
Understanding this shifting consumer behaviour and building a brand strategy that responds to it, while accounting for a new risk environment, could be key to longer-term retail success.
For help and advice for retailers on how to respond to the COVID-19 crisis, download Aon’s Decision Making In Complex & Volatile Times: Keys to Managing COVID-19 – a comprehensive framework to help organisations make the right decisions at the right time.
Disclaimer
The information contained in this document is intended to assist readers understand COVID 19 issues and is for general guidance only.
This document is neither intended to address the specifics of your situation nor is it intended to provide medical, legal or specific risk advice. You should review the information in the context of your own circumstances (including further safety or medical information from credible sources) and develop an appropriate response. Each insurance policy must be specifically reviewed to determine the extent, if any, of coverage for COVID-19 noting that coverage may vary depending on jurisdiction and circumstances.
Whilst care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.