The COVID-19 outbreak has forced enterprises to revisit, and relook at, their existing operational and business models. The rapid spread of the novel coronavirus (SARS-CoV-2) has prompted national and international regulatory authorities to restrict transportation and enforce nation-wide, lockdown measures. As a result, much like the Chinese city of Wuhan, many major global manufacturing hubs have either been completely shut down or have had their operations significantly reduced.
As expected, these restrictions have had a significant impact on supply chains. While every business relies on supply chains in one form or the other, the degree of reliance differs. As we tread steadily into a future of contingencies, some industries need a closer look in terms of the impact and adjustments. In this article, I will be focusing on retail as an industry segment will examine the impact and implications of COVID-19 for businesses operating in this domain.
Retail’s Challenges in a COVID-19 World
The World Trade Organization (WTO) expects global merchandise trade to decline by as much as 32% in 2020 due to the direct impact and fallouts from COVID-19. With the epicenter shifting toward major economies such as Europe and the US, the chances of a full recovery in 2021 are uncertain. The shifting dynamics of socio-economic interactions have also created an unexpected rift in supply and demand patterns, one of the many retail challenges in this scenario. As a result, there have been simultaneous supply and demand shocks across the retail sector. These shocks are expected to slow down the economy further.
In regions most affected by the spread of the virus, dubbed as ‘red zones,’ almost every retail outlet, barring grocery stores and pharmacies, has had to cease operations. Even in areas that are moderately and lightly impacted, there has been a steep drop in purchase volume from physical outlets. Most of the world’s quintessential brands such as Macy’s, Kohl’s, Apple, Urban Outfitter, and others, have acted upon government directives or company-level mandates to protect customers and employees and have shut down their retail outlets, globally. Many of these brands have announced indefinite lockdowns until further notice. Several other brands, such as Ralph Lauren, while announcing resumption of services from their virtual stores, continue to struggle with delivery challenges.
The impact is clearly visible across retail stock as well: L Brands, the parent company of iconic brands such as Victoria's Secret and Bath & Body Works, is down almost 50% year-over-year, despite strong cash reserves of over $2 billion.
Moreover, the state of uncertainty that exists around the length of the confinement period has shifted consumer interest away from and toward certain product categories across the retail industry. For instance, while the fresh food category has witnessed a sudden drop in demand, food products with longer shelf life have recorded a spike in purchases. This trend has created a lopsided sales and demand life cycle in the retail industry, defined by a marked fluctuation in demand.
While brick-and-mortar stores have taken a hit in terms of sales and demand, the effect on e-commerce has followed a different trajectory. Self-isolation and local quarantine measures have significantly increased e-commerce sales. As a result, many e-commerce providers are struggling to meet the massive influx of traffic and demand. This has, in turn, significantly impacted product life cycle management. Of course, this increase is not distributed evenly and is focused across a few categories reflecting some of the trends witnessed in brick-and-mortar retail.
The pattern of what is in demand in e-commerce has changed with a spike in the sale of essentials such as F&B items with long shelf-life, and healthcare products. A similar increase is visible for categories such as gaming and entertainment, as consumers act upon the realization that the current status quo is likely to persist for the next few weeks or months. On the other hand, categories such as apparel and luxury items have suffered as people are less inclined to make such purchases in these turbulent times. According to a Vogue Business estimate, luxury brands may lose up to €10 billion in profits in 2020, and start back on the long path to recovery only by the beginning of next year.
However, irrespective of the category, delivery of physical products is proving to be a major challenge due to the tougher movement measures implemented by governments over the last few weeks, severely restricting courier movement.
The uncertainty around sales and demand has given rise to several other challenges in the retail sector. On the inventory side, there is a dilemma in strategy formulation at the product and service level causing dramatic understocking and overstocking situations. As a result, CDCs are stretched to their maximum capacity and retail players face financial repercussions in the form of overinvestment or loss in revenue.
With global supply chains coming to an abrupt halt, businesses have had to adopt ad hoc supplier matrices to mitigate risks. This has led to retail companies facing numerous adversities on the sourcing and ordering front such as dealing with the uncertainties of makeshift replacements, and unpredictably longer lead times. Subsequently, businesses have had to sacrifice on supply chain visibility, leading to massive inconsistencies in operational data.
These challenges, combined with the lack of effective scenario planning, have given rise to governance issues. As a result, businesses are engaged in an uphill struggle to establish a collaborative environment that promotes business continuity and unfaltering customer experience. At the same time, they need to deal with confusion and lack of direction from the top, stemming from the absence of strong contingency and business continuity plans.
Developing a Course of Responsive Action
The COVID-19 pandemic has presented retailers with a test of resilience. Even beyond the pandemic, supply chains have undergone massive changes in the last decade, becoming more complex and globalized. The need for thoroughly redesigned operational models is, therefore, not new in the retail sector. However, COVID-19 has forced businesses into fast-tracking the entire transformation, and retail, as an industry, can be expected to undergo a major paradigm shift comparable to how 2008 transformed the financial and real estate markets, or how 9/11 transformed the travel industry.
In the short term, businesses will need to prioritize developing a completely Agile operational and cultural environment. This includes implementing a SWOT team to enable quick decision-making to track the business impact of the outbreak. This will allow them to monitor and rapidly react to both macro and micro factors. Additionally, they will need to critically analyze product launches and discontinuations. Lastly, they will need to abstract and act on crucial learnings from the ongoing crisis such as prioritizing the e-commerce supply chain while putting all planned commercial activities on hold.
In the midterm, we expect a growing focus on leveraging the lessons learned from the impact of the current pandemic to tackle risk. Retailers will also need to develop models that can forecast store re-openings and planned commercial activities. As the situation evolves, businesses will need to continue monitoring market dynamics at the macro and micro levels. Finally, as the crisis starts to fade, businesses will have their work cut out as they normalize supply chain decisions, renegotiate with suppliers, revisit market and product expansion plans, and redefine budget and sales targets.
While the short- and mid-term targets will be crucial in developing the foundations for proactive resilience, it is through long-term measures that retailers can prepare for a post-COVID-19 world and build a truly pandemic-proof, resilient organization. To achieve that, organizations need to take a planned approach to address the opportunities offered by this “new normal.” This will involve a greater emphasis on strategic sourcing and network planning, including integrating and creating visibility into end-to-end supply chain functions, focusing on agility and flexibility, strengthening disaster management, and finally digitalizing the entire supply chain.
This blog was also published in ET Insights.