The retail industry was already hugely disrupted and facing enormous transformational challenges at the start of 2020 - and then came the pandemic.
With store fronts shuttered as lockdowns kicked-in, shoppers headed online. The grocery sector found its supply-chain management capabilities put under enormous pressure as waiting lists for online ordering grew and grew.
Other parts of the industry were less successful, particularly those whose omni-channel balance between online and offline was out of kilter before the physical outlets had to close.
As 2020 draws to a welcome end, the question now is how retail transformation adapts to the new realities of shopping in the Vaccine Economy. There’s no going back for most of the industry.
The COVID Context
We believe our role serving customers and the community during this time is a critical one, and we want to make sure people can get the items they need, when they need them. As COVID-19 has spread, we've recently seen an increase in people shopping online. In the short term, this is having an impact on how we serve our customers.
There are some common trends - people are at home more, they're eating at home more and they've all been through a difficult year. So just emotionally, in my family, while it would be a smaller group, we're really looking forward to Thanksgiving and Christmas and New Year’s and some sense of joy and normalcy. And I think we'll see that play out as it relates to consumption patterns in the US and beyond.
From the beginning of time, retail was about pulling the consumer to our property. Now it's as much about pushing the brand to wherever the consumers are, not just for inspiration at the top of the funnel, but also embedding the buy button to break down that friction between inspiration and purchase. Whether that's Valentino introducing their fall line on Animal Crossing or Old Navy essentially trying on products that isn't happening in the dressing room but on TikTok, or providing Instagram shopping directly in the context of the social media platform, we're all hearing about live streaming. Really, that's the home shopping of our generation.
The pandemic economy provided all retailers with an unsparing digital scorecard. The grades weren't stellar. But as retailers press on, they run smack into hairy data problems. Beyond the obviousness of reducing BOPIS friction, and delivering a quality retail app - how do you sort your data architecture? What are the burning data issues retailers should be tackling? Can data inform a safer retail environment for workers and shoppers alike.
This ‘store as hub’ model is the foundational element of our strategic plan we announced at the beginning of 2017, just over three years ago. Our performance for the first three quarters of 2020, which includes digital sales growth of nearly $6.5 billion and a store sales increase of more than $3.5 billion, is the direct result of our ‘store as hub’ strategy, combined with the tireless work of our team to bring it to life.
With the outbreak of COVID-19, the retail world clicked to a fast-forward, and our ability to adapt quickly has been crucial. Changes in customer behavior have accelerated the shift to e-commerce and digital. We were well positioned to catch and ride these waves given our previous work and investments. Our e-commerce and omni-channel penetration continue to rise, accelerating trends by two to three years in some cases. We’re convinced that most of the behavior change will persist beyond the pandemic.
Kroger began investing in digital several years ago to build a seamless eco-system that would deliver anything, anytime, anywhere. As a result, we have over 2,000 pick-up locations and 2,400 delivery locations reaching 97% of our customers with a seamless customer experience that combines the best of our physical stores with digital. These investments were especially timely as customer adoption of pickup and delivery grew significantly during the pandemic. Because of our existing eco-system, we were able to respond quickly to further expand and enhance our e-commerce services.
We delivered a plan that was both inspired by and inspiring to existing and new customers alike. We created and communicated compelling value and made it easy with our 'omni-always' approach. By sharpening our focus on the key drivers of gross margin, product mix, pricing and promotion and channel mix, we were able to deliver growth in both comp sales and margin with the potential to unlock significant expansion going forward.
It is probably the biggest example to date in the UK of how failure to adapt to omni-channel realities carries an enormous price tag of failure. At one point, in the 1950s, Debenhams was the UK’s largest department store chain, but it failed to balance that real estate asset with online expansion. While embarked on a store closure program of late, the company left it too late to balance the omni-channel mix with digital assets.
It’s just a mess. Basic omni-channel retail concepts being caught up with and talked about in the vaguest of terms. The net positive that some analysts took away from the presentation last week was that of physical store rationalization, but even that’s very theoretical. There’s a target number, but no specifics as yet, so this strategy will be an evolving thing as the firm manages to get out of leases around the world.
The worst are the ones that are in our downtown locations. So when you look at Herald Square [New York], you look at 59th Street at Bloomingdales, State Street [Chicago], Union Square [San Francisco], they are most challenged. The two biggest factors on that are basically what has happened to the transient work population, the office workers, as well as tourists. When you look at the transient population in the tourist business, that's been most challenged.
Right across the main brands in the group, it’s a mixed story of swings and roundabouts. At Gap itself, there was a 55% decrease in store activity and a 75% increase online, so down 28% overall. For Old Navy, the sweet spot of the fleet up until now, there was a 5% overall decline, with 136% online growth countered by a 36% fall in store. As for Banana Republic, still the problem child, overall sales dropped a hefty 52%, a 71% decline in store business unable to be helped to any extent by a 26% rise in online.
We have been clear that we need to go further in a market increasingly driven by pureplay retailers. That's why I'm building on the investments we've made in the past few years in data digital and online capability to create a single team focused on step changing online growth called MS2.
COVID was less about change that no one saw coming [than] a massive acceleration of change that was already in place. Two things in particular. One, the shift to digital…The other piece is the business model. We have been evolving our business model and certainly one of the driving factors in that is not just the shift to digital, but the changing role of stores as we fill more orders out of stores and do more order pick-up, having those capabilities and really having to change the organizational model that we have in stores. COVID accelerated both those things in a big way. And yes, I would say, we would not be where we're at today if it wasn't for COVID. I mean that got us very focused on embracing the new world where we're a majority digital [retailer].
Until a couple of years ago, we did not have any apps. We came from the dot com site. The apps we had come out are fantastic, [but] were not commercial-driven. Right now we are seeing over-proportional growth from our adidas app landscape. We’ll continue to build more apps with more functionality and more advantages for key consumers, ie give them access to, what I call, restrictive launches or launches with very limited volume.
In the past few months, I have been redesigning the Armani Group’s business model based on a concept that is very dear to me: do less, but better. Mine is an invitation to consume more responsibly, focusing on authenticity and change. In Yoox Net-A-Porter I’ve found a partner that allows me to transform this principle in a new multi-channel shopping project where the relationship with the customer is increasingly personal and direct, while e-commerce and boutiques are integrated in a dynamic balance, which will have a positive effect, also on the environment”.
And into 2021…
Clearly the customer has gotten very comfortable [online]. When you look at our core customer, they’re very comfortable now whereas before [if] you started to map all of their behavior when they were a stores-only customer, those people have definitely shifted to omni-channel and many of them actually have not returned to stores. They’re just very comfortable transacting digitally, so [it's about] recognizing that we needed to make all of the improvements on [the web]site.
When Amazon introduced autonomous retailing to the general public with its Go concept store in 2018, it didn’t promise a deployment timeline or make bold proclamations about the death of traditional stores. Nevertheless, it was evident to many that it wouldn’t take long for such formats to proliferate since consumers were primed by mobile shopping and contactless payments.
It's got to be a much more serving mentality than ever in the history of retail.