Fashion retailers require bold action to survive COVID-19 crisis
Updated: May 14, 2020
COVID-19 will continue to cause unprecedented sales decline; to survive, Fashion retailers urgently need to build confidence with customers about safety in stores now, reduce product and operational costs, and invest heavily in e-commerce and automation
Abhinav Chandra, PredictSys Inc, CEO & David Lawrence, PredictSys Inc, Adviser
May 13, 2020
Retail is currently experiencing the biggest disruption of the in-person store experience to date with global shelter-in-place orders in effect due to COVID-19. In April 2020, at least 90% of the US population was under some sort of long-term stay at home order. For the majority of Fashion Retailers (Clothing and Shoes retailers, and department stores), this has resulted in temporarily closing physical stores, leaving e-commerce as the primary means to drive sales.
Driven by these in-person store closures, Clothing and Shoes sales in March 2020 declined by 43% compared to March 2019 (year-over-year). As multiple US states are slowly, and cautiously, opening their economies, there is uncertainty about how demand for Clothing and Shoes will evolve over the next two years. We at PredictSys, Inc. analyzed multiple scenarios and forecasted quarterly sales trends for Clothing and Shoes through 2021 Q4.
In this article we present a summary of our forecasts, along with recommended actions for Fashion retailers to deal with declining sales and uncertainty.
50%+ decline in 2020 Q2; forecast to return to pre COVID-19 levels post 2021
In 2020 Q1 Clothing and Shoes sales declined by 15% year-over-year. This sales decline
was driven by physical store closures, increased unemployment (4.4% in March 2020 compared to 3.8% in March 2019), 1.7% decline in disposable income, and 5 percentage point increase in personal savings rate. These factors that negatively affected sales in 2020 Q1 will intensify in Q2, with stores closed for a longer duration, unemployment expected to be more than 15%, and a resultant further decline in disposable income. We forecast that 2020 Q2 sales will be 50 - 60% lower than last year with e-commerce accounting for 70-80% of total sales.
Given the uncertainty around the future path of the pandemic and our response, we forecast sales under three scenarios:
Scenario 1 (most optimistic): All retail stores in US will be allowed to open by May 31st with physical distancing protocols in place, which will eventually be removed by start of 2020 Q4
Scenario 2 (optimistic): All retail stores in US will be allowed to open by May 31st with physical distancing protocols, which will eventually be removed by end of 2021 Q2
Scenario 3 (most likely): Most retail stores in US will be allowed to open by May 31st with physical distancing protocols. The US will then experience a second wave of infections leading to store closures in Fall/Winter. Post second wave, stores will open with social distancing protocols, which will eventually be removed with the introduction of a broadly available therapeutic solution to COVID-19, estimated by end of 2021 Q2
Chart 1: Quarterly seasonally adjusted sales forecast until 2021 Q4, indexed to 2019 Q1 sales at 100
Beyond 2020 Q2, we forecast that sales in Q3 will be 20 - 30% lower than in 2019 Q3. 2020 Q4 has the highest variability with sales forecasted to be between 8% and 50% lower than the same period in 2019. The variability is driven by the potential for a second wave of COVID-19 infections in Q4 2020 leading to stores re-shuttering. Data from past pandemics suggests at least two waves of infections are likely. With many US states opening against the advice of health officials, we believe that Scenario 3 is most realistic and that sales in Q4 will likely be 50% lower than last year.
In the longer term, past the end of the pandemic, we forecast sales in 2021 Q4 to be 3% lower than 2019 Q4. We forecast that sales will return to 2019 levels post 2021, potentially in 2023. On an annual basis we project 2020 sales to be 23 - 36% lower than 2019 and 2021 sales to be 6 - 13% lower than 2019.
Based on our modeling and analysis, we have spelled out likely implications and recommended actions below.
Implications of above forecasts and corresponding actions to mitigate risk
Prepare for a second wave of store closures with clear procedures and increased flexibility in the supply chain
In the US, past pandemics in recent history (1918 - 1920 Spanish Flu, 1957 - 1958 Asian Flu, 1968 - 1970 Hong Kong Flu and 2009-2010 Swine Flu), have all had at least two waves of significant infection and deaths. In the absence of a therapeutic solution to COVID-19, the evidence is strong that there will also be at least a second wave of infection, though magnitude and timing remain uncertain. A second wave is likely to lead to another round of shelter-in-place requirements leading to physical store closures. Those retailers who prepare in advance are more likely to survive subsequent waves of closures. Two areas that retailers need to plan for closure of their physical stores are:
a. Have clear criteria and procedures on when, where, and how stores will be closed
In contrast to the sudden mass store closures across the whole country that we saw during the first wave in March 2020, we believe that in a second wave, the closures will be more targeted to stores at higher risk of transmission. Retailers need a clear plan for how these store closures will work, and should be prepared to answer questions like:
Under what circumstances will the stores be closed?
How will closures be communicated?
If closed for in-store shopping, when is curbside pick-up or ship from store an option?
How will staffing of the stores work?
How will staff be supported through closure?
b. Build flexibility in buying to scale inventory up or down depending on the scenario
As pointed out in the forecast above, the difference in sales in 2020 Q4 under different scenarios is high (40+ percentage point spread), driven by the uncertainty of future store closures. To deal with this variability, buying needs to be adjusted with the ability to flex inventory up or down, given the conditions, especially for seasonal and fashion products. Some suggestions include:
Be conservative in initial buys for stores across the board, allow for higher percent of in-store out of stocks in case a more optimistic scenario plays out
Where available, ask brands/manufacturers to hold inventory for increased demand in more optimistic scenarios
Make it easier for customers to order online any out of stock products or sizes while in store
Consider launching broader range of true fashion items online only
Invest in increased automation in sales planning and inventory management
There will be high uncertainty and rapid swings in sales over the next 12-15 months. Even past the end of this pandemic, profit challenges will require faster and more targeted action in the supply chain to reduce waste. To address challenges during and post the pandemic, retailers should invest in tools/software, such as PredictSys’ planning and inventory management software, which uses advanced technologies like machine learning and artificial intelligence to generate and update forecasts and recommendations on a daily/weekly basis. This will reduce waste in the supply chain, enable faster action in reaction to demand changes, and allow for buying/planning teams to focus on other value-added tasks.
Double down on e-commerce and omni-channel experience as e-commerce share of business will continue to increase even more rapidly than prior to the pandemic
Even in our most favorable scenario for store sales in which all stores in the US open May 31st 2020, we estimate that e-commerce will represent 46% of total sales in 2020 vs ~30% in 2019. Adidas reported in its Q1 earnings report that in March 2020, its online sales grew 55% year-over-year. Growth in online sales is continuing in April in China, even after stores have re-opened. One reason for the stickiness of the increase in e-commerce is that the need for physical distancing protocols in stores eliminates some of the benefits of in-person shopping such as trying on clothes, getting personalized service, etc.
To deal with this macro trend of e-commerce rapidly gaining share of spend, and the fact that e-commerce is the only channel that is likely to be available for demand generation consistently throughout this pandemic, retailers need to urgently redirect resources to invest, strengthen, and streamline e-commerce and omni-channel operations. Retailers need to quickly invest additional resources to generate and fulfill higher demand through e-commerce (see our article on some short term measures to drive e-commerce demand). In addition, a seamless omni-channel experience/operation will become a key competitive advantage for brick and mortar retailers. This will allow retailers to:
Absorb the shock of future brick and mortar closures through services like curbside pick-up or ship from closed stores
Be more flexible if in-store demand is better than expected by helping customers find products online or by using the e-commerce inventory pool to quickly replenish out of stock items in stores
Reduce product and operating costs as average sales price will decline in 2020
Three factors will push average sales price (AUR) down in 2020:
Excess inventory due to sudden large decline in demand
Increase in e-commerce which leads to more price transparency
Decline in disposable income and increased unemployment for consumers
A 1% decline in average sales price will lead to a 10-15% decline in profit if costs stay the same. To counter this large decline, retailers need to urgently find ways to reduce product and operational costs. To achieve this, retailers need to take a four-pronged approach:
Evaluate marketing and discretionary spending budgets and eliminate non-essential expenditures in 2020
Conduct a rapid, light-weight lean audit of their in-store operations to identify and eliminate waste (especially as new physical-distancing driven processes might not be optimized to start with)
Reduce product cost by negotiating lower prices with brands/manufacturers
Evaluate closing/downsizing unprofitable stores, either temporarily or permanently
Adjust store network for both short and long term success
As e-commerce share of sales increases, revenue per square foot will decline for the current store network, which will render some stores unprofitable, even after a therapeutic solution to COVID-19 is implemented. In addition, average sales price declines and new social distancing processes will put even more pressure on store profitability in the short-term. The current closures present a unique opportunity to strategically adjust the store network for short and long term success. As stores reopen, retailers should take the following four actions:
Identify and close stores that are not going to be profitable due to reduced demand even after the pandemic ends
Identify and adjust footprint and labor force for stores that might become profitable with a smaller store size, smaller assortment and/or smaller labor force. Use this opportunity to experiment with new formats, where possible
Renegotiate leases/contracts, especially for stores whose footprint/formats are being changed
For newly opening stores, evaluate if there are any savings opportunities without sacrificing revenue, e.g., opening part of the store with a smaller workforce. Based on early data from the US states that are opening their economies, we predict that physical distancing protocols will limit stores to reach 60-70% of their sales potential in the best case scenario
Rethink store processes as physical distancing will be a way of life over the next 12 -15 months
We predict that social distancing requirements will be in place in some form till end of 2021 Q2. As stores open with physical distancing protocols, store processes and staffing will need to be adjusted, and will stay in place for 12-15 months, until a therapeutic solution to COVID-19 is found. It is critical to get these processes/protocols right, as they are essential to establishing trust with customers, that shopping in stores is safe. Some of the key areas where stores will need to have clearly articulated processes and trained staff are:
Number of people in a store at a given time
Line management outside the store in all weather
Usage of Personal Protective Equipment for customers and employees
Fitting room usage and types of products that can be tried on
Return policy and procedures
Auditing to make sure social distancing protocols are being followed
These are unprecedented, challenging and uncertain times and we at PredictSys are here to help with your questions and challenges. Please reach out to me at email@example.com with any questions about information in the article above or how PredictSys can help you and your company.
PredictSys, Inc. uses Big Data and Advanced Technologies such as AI, machine learning, and customer sentiment analysis to improve fashion forecasting and to generate automated profit and customer experience optimization recommendations. Our team includes Data Scientists, Merchants, Planners, and Digital/Omnichannel experts.
Abhinav Chandra, CEO and Founder, brings more than 20 years of retail and technology expertise to PredictSys. His experience includes Head of Women's Clothing (Amazon), Head of Customer Experience (Amazon), and Associate Partner in McKinsey & Company's Retail Practice.
David Lawrence, Strategic Adviser, is a retail leader with deep expertise in merchandising, digital and e-commerce. His experience includes VP, Digital Merchandise (Tailored Brands), VP/DMM (Men’s Wearhouse, Joseph Abboud), and multiple Buying roles (Men’s Wearhouse, May Department Stores)