Retail 2021: A tough winding road to recovery

21 Jan 2021

Kate Calvert

Senior retail analyst

Retail has been one of the worst-hit sectors during 2020. Many large UK businesses have fallen victim to the pandemic and the economic strain that ensued. Senior retail analyst, Kate Calvert, gives her view on what lies ahead for retail businesses in 2021 and how they can begin the road to recovery. 

How has retail been impacted by the pandemic?

“Covid has been the ultimate survival test for the retail sector,” said Calvert. 
 
While profitability has been blown apart, tight cash-control combined with “better-than-expected” performance post first lockdown is a testament to the strength and adaptability of many of the businesses operating in the sector. 
 
One notable trend that has accelerated during the pandemic to online and digitalization, with a number of subsectors adjusting their business strategy well-before they would have anticipated. This was driven by the public having to spend extended periods locked down at home. 
 
“Many traditional retailers’ online businesses have at least doubled over lockdown as digital usage increased. Certainly, after the pandemic has subsided there will have been a step-change in online penetration towards 40%, compared to c.30% pre-Covid,” said Calvert. 
 
Household names such as Debenhams, Arcadia and Edinburgh Woolen Mill have fallen into administration with an uncertain future for the assets. Further to this, Calvert expects more consolidation ahead with the strong getting stronger as they look to acquire brands and attractive customer bases. 
40%
The new levels of online retail activity

What will dictate retail’s recovery in 2021?

“We expect 2021 will be another challenging year for retail. Near-term visibility remains poor given the announcement of lockdown three which is anticipated to last to Easter at the earliest. Adding to the uncertainty is Brexit and the impact of increased red-tape, container shortages and port congestion. Underlying demand is impossible to gauge and sales volumes will be volatile.”
 
Key to the recovery will be consumer sentiment. As the consumer can’t currently spend on leisure and holidays, retail and savings are benefiting near term. However, the inevitable consequences of the pandemic will be increasing unemployment and higher taxes, which will weigh heavy on consumer spending and demand. 
 
However, there is still room for optimism, the arrival of both the Pfizer and AstraZeneca vaccines have given a shot-in-the-arm for the sector and the last-gasp Brexit deal helps optimism. The picture will become much clearer when we have some transparent data on the vaccine rollout. 
 
“As Covid restrictions ease and consumers become more confident, we believe leisure and travel will benefit from pent-up demand as people look to get back to ‘normality’ which may suck spending away from the Covid-winning home categories.” Said Calvert.            

How can businesses begin the road to recovery?

Retail has faced severe challenges historically and this certainly will not be the last time. Calvert explained how she thinks companies can adjust in 2021: 
 
“To evolve with the changing landscape, retailers will need to become more experiential and focus on agility and flexibility. Now more than ever, evolution through innovation is critical for success.”
 
Calvert mentions that companies must address the rapid step-change in online penetration. Actions taken and investments made now are likely to define future performance for years to come. Digitalisation and technology investment will be the priority with retailers needing to focus on creating inspiring online engagement.
 
The current environment has also created an interesting dynamic for retail property: 
 
“The pandemic has forced some retailers to rethink the role of the brick-and-mortar-store. Retailers will need to consider the composition of their sites as footfall patterns change. In 2021, some locations will become unviable, while other locations have become more attractive. The high street was waning long before Covid-19 and we need fresh vision. There is a great challenge and opportunity to repurpose town centres to become a mix of community hubs and engaging retail spaces.” 
 
Calvert summarised by saying people like to shop for the social experience. It is an engrained social habit that will help contribute to the recovery of footfall and the sector in general, if not to the pre-Covid levels. 
Kate Calvert

To evolve with the changing landscape, retailers will need to become more experiential and focus on agility and flexibility. Now more than ever, evolution through innovation is critical for success.

Kate Calvert, Senior retail analyst

What are the key trends and themes?

Business consolidation will continue apace, creating opportunities for merger and acquisition (M&A) activity. Calvert thinks that the businesses that adapt and alter their strategies accordingly will emerge as the winners: “We predict that the strong will get stronger as those with robust balance sheets will take or grow market share.”
 
During the pandemic retail has benefited from constrained demand in the leisure, travel and experiences sector, however, this will create a headwind for the retail sector as the year begins to return to normality. Calvert also suggests that retailers can capitalise on additional saved cash from those who maintained income levels through the crisis, but consumers will want value for money.
 
The spending we have seen during the pandemic will likely leave a legacy. The transference of spending towards local shops and independent retailers will continue as lockdown ensues and we are likely to see continued growth in discount value brands. The wholesale channel will shrink impacted by the demise of department stores.
 
Finally, environmental, social and governance (ESG) considerations are now crucial for retail businesses. While consumers are only beginning to ask questions on the origins of products, ESG considerations are already very important for investors. It could be costly for retailers who fail to take them into account.

How will the Brexit deal impact the sector?

The eleventh-hour nature of the deal means supply chain interruptions and shortages in some categories are unavoidable. The increased red-tape has compounded the container shortage in Asia and congestion at UK ports which existed even before the festive season. Supply chain issues are detrimental for both goods going in and out of the UK but these are likely to remain a short term issue.
 
On top of the delays, there is currently some friction between major retailers and the government regarding re-export tariffs. There appears to be a lack of clarity on the rules of origin which decide whether tariffs are levied on goods that are imported into the UK and then re-exported to EU markets with little or no further processing. This creates significant cost implications for businesses who have businesses in the EU or even Northern Ireland, who have to adhere to EU customs rules.
 
Sterling has strengthened versus the dollar, hovering around the $1.35 level. This is particularly helpful for non-food retailers, as many source a significant proportion of their cost of sales in the US dollar. 
Calvert said, “Sterling’s strength plus a lower national living wage increase has created a positive cost tailwind in 2021. With there now being a degree of certainty over trade terms, retailers can now focus on adapting to the changing retail landscape.” 
 

Will fresh stimulus help recovery? 

According to the British Retail Consortium (BRC), new lockdown measures will result in an estimated £2bn per week in lost sales. To offset this, the Treasury has announced it will rollout one-off grants worth £4.6bn to businesses in the retail, hospitality and leisure sectors to support them through the coming weeks of full lockdown. 
 
While support through the government furlough scheme and a business rates holiday has been a vital lifeline for the sector, when the furlough scheme ends in April and without long-overdue action on rates and property costs, many physical companies will struggle to compete with online retailers in a reduced demand environment. 
 
Looking ahead, from April the National Living Wage will increase by 2.2%, which is less than the 5-6% increases in recent years. This represents a small reprieve for businesses again, however, the government is committed to reaching a living wage two-thirds of the median wage by 2024 and this will demand further increases of 5-6% in the years ahead. 
£2bn
Estimate amount of lost sales per week due to the third lockdown

So, what’s next for the sector?

Not only was 2020 a “lost year” for many retailers, but it will go down in industry history as a seminal year. The thought of a world where a company would have to close all of its stores would have been unthinkable for any retailer before Covid. The resulting acceleration in the structural shift online and the need for more traditional retailers to pivot and become online businesses overnight has certainly separated the strong from the weak. The structural shift online and consolidation will intensify certainly in the early stages of 2021 as retail bounces back to a completely different position from where it started. 

Get in touch with the experts

Kate Calvert

Equity Analyst, Retail

I joined Investec in October 2013. I have over 20 years’ experience covering the General and Food Retail sector as both research analyst and specialist sales, having started my career at Safeway as a Location Planning Analyst.

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