Over a half century of involvement in specialty retail, including 30 years of consulting and 15 years of store ownership, this one takes the cake. I have lived through the recession of 1979, stock crash of 1987, the Internet revolution and its crash in 2000, and, of course, 9/11 and the Great Recession of 2008. But this one is very different and will, as did many other pandemics since the 1300s, change our world. Some businesses will change more than others; fashion retailing is the most vulnerable.
The Internet –The Internet has already reduced the retail mix in shopping centers to 45%, now it may go to just 30%.[i]
Covid 19 Virus – Black Swan event is changing consumer buying habits.
Devalued Assets (Inventory) – Inventory is like bananas; it lasts just a short time.
Over two decades ago I co-founded a media company primarily involved in the new world of the Internet and spent much time trying to warn retailers of the opportunities and risks of how this new cyberworld would change their business. I warned them in 1998 that retail would have to change from an inventory repository to an experiential one, and to integrate their stores with a new digital world.
My efforts mostly fell on deaf ears, even as specialty retailers, travel agencies, and restaurants slowly lost ground to alternatives and more savvy competition. We warned of how Amazon had completely changed the shopping paradigm with some success as they saw direct competition SKU by SKU. Yet most still went to work and did the same thing over again.
Now the chickens have come home to roost. With all foot traffic gone in stores, literally only those with robust websites and delivery options have a chance to survive. Unless large cash reserves (or credit) are available, the opportunity to quickly update and change business is a very steep climb, indeed.
Even with payroll help for the short term, a huge number of independent retail stores (especially in the fashion business) will fail. Here is why.
Unlike other retailers, fashions change rapidly, almost monthly these days. With a four times inventory turnover, all inventory in stores after March 1 will be obsolete on May 15. IF stores were open then, they will be competing with others to liquidate this inventory at under cost prices. While some will have the ability to cancel orders, most probably didn’t do so until recently. So in addition to operational losses not covered by the government help for rent and utilities, expenses of selling inventory at a loss will cause losses of unimaged size when operating. These could mount to 30% or more.
Losses from selling at 75% off retail will roughly mean a loss of about half of the cost of the merchandise. Then add operational losses of 5% to 15% due to expenses and rent, this could easily be 30% on sales. But calculating a percentage on sales is not relevant anymore. But say a successful small casual wear shop did $1 million before Covid. That means the monthly sales averaged $80,000 (this time of year as Christmas is higher). That means losses could mount to $24,000 per month. If we assume that full openings don’t happen until June 1 (and that is really optimistic), then losses will mount to $72,000 just during the quarantine.
If you are not a retailer, you might assume that it could be made up in profit over the next year or so. But a realistic annual profit for a good store would be closer to 5%. That means a good year, assuming sales go back to $1 million, would yield $50,000. So it will take a year and a half to recover the losses—get back to zero.
This is the best scenario. Other issues make it worse. First, cash flow has been destroyed due to inventory sell-off. This cash is needed now for summer merchandise. But the loss on inventory was $30,000. A three-month season of inventory requires $120,000. (Three months of inventory to generate $82,000 is about $40,000 a month.)
Trade credit will help push payment out 30 days, so $80,000 in cash is required to fund next season’s buy. The $80,000 will be nearly wiped out by the $75,000 loss.
This all assumes, second, that the consumer has not changed in the interim and will generate the same sales over the next year. This is very unlikely.
Why? Because unlike a recession, the Covid pandemic will change attitudes about life, as it has since the Black Plague. In combination with new mental shopping patterns of buying online and having goods delivered, consumers will not return to the same buying patterns. Yes, there will be great pent-up demand to shop in the short run, but most of America now understands how easy it is to shop online.
It’s difficult now to project exactly how this will happen, but that it will happen is much less of a stretch.
It is the perfect storm to never reopen again. We will lose many stores, even if they try to reopen and never see quite enough traffic again. As many as a third were barely or not profitable before Covid.
How to change for the new future.
Both digital and brick and mortar stores still lack the kind of exciting experience that I tried to encourage two decades ago. And just a handful of retailers have done much to bring digital to the selling floor. Likewise, shopping for a dress or slacks online is anything but exciting. Both formats need big lessons from Disneyland, and Audi’s digital dealership Piccadilly Square in London[ii].
Trying to create lots of business online is exceedingly difficult but at this point for most that that ship has sailed. But keeping your old customer relationships and doing a better job for them is very doable. One of the new paradigms is the consumer use of video conferencing. Zoom has exploded in use over the last month or two as an example.
A huge opportunity for smaller shops that large ones will have a difficult time competing with is the use of video to show merchandise to specific customers and similar groups. By using the backdrop of the store, selling online live may just be a way to continue to maintain some revenue. Shop owners are usually good at this, so get started by inviting people to preview the new inventory, or even have an online sale. Some do a nice job on Pinterest already; keep trying these ideas. It’s an opportunity to bridge the gap between the old retail and the new retail now.
Learn how to unpack, checking, photograph, and post your inventory every day for sale. Even if you can’t afford an expensive online shopping cart, you can demonstrate and model merchandise via video, then have it as a reference on your website. Use the time that the government payroll assistance provides to train your employees to do this while the store is closed.
Think of your store as a runway, demonstration studio and set, to build an online show that can engage customers with your buyers who are committed to the seasons looks. This is the kind of “experience” that can differentiate yourself from others. In the future hire actors to sell, not clerks.
Consider how you will deliver goods to customers. If restaurants can make money delivering $40 worth of pizza, why can’t you make money delivering merchandise worth $50-$150? Why not drop if off the same day and offer to change sizes the next day? And for heavens sake, don’t take two days to put it in the mail and never check on them again. That kind of service is so 1999. If you want to win, compete with Disney and Amazon at the same time, they can never replace the personality of your store and commitment to style and service.
Finally, think like an American innovator. Try it, scrap it, improve it, or find a new job.
[i] Billionaire shopping center developer Rick Caruso, Interview with CNBC, March 4, 2020. https://www.cnbc.com/2020/04/06/rick-caruso-coronavirus-will-have-significant-change-to-consumer.html
[ii] Some good experiments in online selling are underway. But it has taken two decades for these experiments to happen at retail. Finally though a few companies have ventured into the new retail we have projected . Audi is one with incredible results. Others exist in various ways, yet the knowledge of the best retail merchandisers has barely influenced the online experience. Perhaps this is because “user experience engineers,” are all technical and have never sold a blouse, shoe or men’s jacket. https://www.youtube.com/watch?v=Bxg-59Vl358
Small businesses get things done. That’s why they are so frustrated at the government, even though they are supposedly moving rapidly and are “ahead” of schedule.
The clear news on the ground is that with little cash on hand, few receivables, and no current business, they are frozen. Most must hold on to what cash they have, so can’t pay their vendors and landlords. Many have paid what they can to employees, but if they have high labor component; retail, restaurants, beauty shops, and service companies, they ran out of money in just two weeks.
The reason is simple. Take a small restaurant their labor is about one third, their food cost is about the same, and rent and other costs take nearly a third, leaving from 5% to 15% to the owner (or profit). It would be nice to think that that say 10% is just going into the bank, but the owner has his own personal expenses; house payment, food, kids costs etc. So the cash accumulation in the business (even if it is a profitable one such as this example) is just a few percent per year.
So after two years a million dollar restaurant might save $100,000. Sounds like a nice nest egg, but with a payroll of $330,000 per year, $27,500 per month, and other costs of about $20,000 the total nearing $50,000 per month, will be wiped out completely in just two months. (Food costs stopped with only a week or so on hand when he closed.)
The example above assumes a nice sales volume and a well run operation. Few can boast of such success.
The President’s stated goal was to use the PPP to get money in the hands of employees. This will be done but based on the example above it could be woefully short for many. As this drags on, landlords will what their money too, even if they stretch out the payments. Restaurants that start up again with less revenue than they had, may well operate at a net loss. The expense obligations and continuing losses after opening could amount to several year’s earnings in the best year let alone marginalized profits for six to eighteen months.
Under these circumstances, smart owners will have to weigh the cost/benefit of starting up again. Some may be better off to walk away. Many will have to because they have had mediocre businesses for years anyway, and risk putting a ball and chain on their ankle for many years.
I don’t blame the federal government for this heroic effort to maintain employee wages. It is a noble one, but if enough money is not made available in grants, many will simply have no choice but to close for good.
I have been accused by some business consulting peers over the years, that I see the glass half empty. I like to refrain, I see the glass as it is, not as I want it to be. After decades of working inside small business both as an owner and a consultant, what I see now is neither half full or half empty, it just scary as hell.
By The Numbers Notes
$ 333,000 Wages
$ 333,000 Food cost
$ 200,000 Rent and other expenses
$ 866,000 Total Costs
$ 134, 000 Gross Profit
$ 90,000 Living expenses and taxes
$ 44,000 Cash left to save or invest in the business