May 10, 2020

Coronavirus Update: Retail Industry

By Ronald Friedman, Retail Co-Leader

Coronavirus Update: Retail Industry Coronavirus Resource Center

Here we are in the eighth week of our national shutdown, and the world as we know it has most certainly changed. Retailers are being challenged every day in this closed economy. Who are going to be the survivors and what will this look like?

The big retailers are being challenged with major lease commitments that just do not go away. Macy’s, JC Penny, Dillard’s, Kohl’s, Nordstrom, L Brands and Gap are just several of the large retailers that are dealing with their property owners. Lord and Taylor plans to liquidate inventory in its 38 stores before a potential bankruptcy. These department stores have enormous square footage issues to deal with that is just not needed in today’s retail environment. Will they be able to negotiate concessions, which may include some reduction in rent, an extension of leases, or a combination of both? Today, they are depending on online sales to cover some of their operating costs. Most of their employees have been laid off or put on furlough, which keeps one of the major costs down. J Crew and Neiman Marcus have filed for bankruptcy protection, the first major retailers to do so during the crisis, but they probably won’t be the last. Who will be next?

Will the smaller brick and mortar stores survive? Unfortunately, many will not be able to withstand the national shutdown, but they have some flexibility. Property owners will not want to see vacant stores once we get back to work. We are seeing that concessions are being obtained with rent furloughs, extended leases or reduced rents. And also like the bigger chains, the smaller brick and mortar stores have been able to cut down on operating expenses with employee furloughs and reductions in other operating expenses. But their smaller footprint gives them more flexibility than the big guys, and once the marketplace opens they will be able to purchase inventory at substantial discounts, as suppliers will need to move existing inventory to create cash for the following seasons. The consumer will be the winner, and I suspect they will be out shopping for bargains when the economy reopens.

Those stores that are shut down are relying on online sales to cover some of the ongoing expenses. We are seeing retailers that did not have a digital presence move quickly to develop an online business, and some have been very successful pivoting in this direction. The online retailer is functioning with a small staff and low operating expenses. Online margins can be very good, which creates positive cash flow while operations are basically shut down. The online business is a solution to cover existing overheads, but inventories are becoming stale. Once the shutdown is over, stores do not want to be sitting with their existing inventory, which will be last season’s goods. And therefore everyone will be running sales to move inventory, and we could end up with a Black Friday in June of this year.

Many of the smaller brick and mortar stores have filed for Payroll Protection Program (PPP) loans to provide the necessary funds to ride out the national shutdown. The SBA and banking institutions were slow to roll out the program, but our clients are being funded on a steady basis now.

No one knows for sure when the retail industry will be back in full swing. Some states are starting to open up, and more will be opening in the next few weeks. New York and California are two states that are extremely important to the national economy, and retail needs to resume in these states for the nation to pull through the shutdown.

What should a retailer do now to prepare for the day that stores can return to some form of normalcy?

  1. Prepare your store floorplan for more spacing. Social distancing will continue to be the norm for the foreseeable future.
  2. Create separation at the checkout counters to keep six feet between your customers.
  3. Keep the store clean and sanitized on a regular basis.
  4. Plan your open to buys to receive fresh merchandise to mix with existing inventory.
  5. Sell your stale inventory with lower prices; cash is king to go forward.
  6. Be welcoming and create some excitement to be open again.
  7. Be prepared for curbside delivery.

I believe that once we return to some sort of normalcy, whatever that ends up looking like, people will want to get out and shop. Stores must be inviting and appealing, but remember, your customer has been shopping online for the past several weeks and that will continue. The competitive stakes will be even higher, and retailers will need to be even smarter in how they prepare to compete for consumer sales.

Coronavirus Resource Center

Have more questions about the impact of the coronavirus on your business? Visit Marcum’s Coronavirus Resource Center for up-to-date information.