With Covid-19 cases hitting record levels in the Midwest, uncertainty looming over the timing of a potential vaccine, the dearth of rapid testing and no clear prognosis for when the pandemic might functionally end, don’t expect U.S. retail to rebound to pre-crisis levels anytime soon, cautioned a leading management consulting firm on Wednesday.
Despite the boost from e-commerce, North American apparel sales are poised to fall 20 percent to 30 percent from 2019 levels in 2020 and 10 percent to 25 percent from 2019 levels in 2021, McKinsey & Company analysts said in virtual briefing.
Althea Peng, who leads McKinsey’s apparel, fashion and luxury practice for the Americas, says she’s hopeful for a bullish scenario, where foot traffic might return to stores in the second quarter of 2021. But a bearish scenario, characterized by a wave of virus insurgencies, additional foreclosures, limited stimulus impact, low vaccine adoption and higher consumer pessimism, could keep shopping malls looking like ghost towns till the first quarter of 2022.
The earliest apparel sales might return to pre-pandemic levels, she added, is Q1 2023. If dire conditions persist through next year, retailers can expect to languish till Q2 2025.
Online sales, Peng said, will continue to gain market share, though they won’t be enough to compensate for the decline in brick and mortar. “In 2019, we were roughly 80 percent brick and mortar and 20 percent online,” she said. “This is projected to shift to more of a one-third/two-thirds split between online and brick and mortar in 2020.”
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E-commerce penetration is expected to come down just slightly in 2021 as stores are expected to be mostly open for the full year, in contrast to the mass closures that defined most of 2020 and resulted in several retailers, including iconic businesses such as Century 21 boarding up for good, and others like Lord & Taylor heading for a six-foot-under fate. The absolute increase in e-commerce sales from 2019 to 2021 (a compound annual growth rate of 16 percent) will be mostly offset by lower brick-and-mortar sales (a -15 percent CAGR drop).
Not all channels will perform the same, however. Digital-first brands and retailers are doing better than ever, gaining an extra 20 percent in sales from 2019 levels in 2020 and a projected 25 percent from 2019 levels in 2021. “Amazon and other digital-first retailers have been able to do not only rapid recovery but [achieve] real gains during this period as consumers have moved their [dollars] online,” Peng said.
Mass retailers—think Target and Walmart, both of which posted record second-quarter sales—have also overperformed, not only because of their one-stop-shop upper hand but also because they’ve been able to remain open during stay-at-home orders.
One sector that has seen one of the biggest slumps is off-price retailers, which saw sales tumble 40 percent from 2019 levels this year because of their reliance on physical transactions and low e-commerce penetration. They may be able to make a more rapid recovery, with an anticipated 20 percent drop from 2019 levels in 2021, though this is predicated on a return of store traffic.
Vertically integrated brands and department stores, Peng said, are also floundering, sliding 40 percent from 2019 levels in 2020 with a mere 5 percent improvement expected in 2021.
Emma Spagnuolo, a McKinsey associate partner, anticipates some customers’ use of online channels to stick even after the contagion is no longer a threat. According to a recent poll, consumers’ willingness to buy clothing and footwear online post-pandemic jumped 8 percent to 10 percent points. “So this means we have net newbies, who before had not been making any purchases online, now will be moving at least some of their digital purchases to the digital channel,” she said.
Adding to the “complexity” is the fact that she’s seeing a 35 percent to 40 percent growth in users of omnichannel-type services—such as buy online, pick up in store and purchasing through social media or apps—post-Covid-19. (The only behavior not expected to linger past the pandemic, Spagnuolo said, is curbside pickup.)
All of this presents a double-edged sword. Coupled with the inefficiencies of legacy operating models, high shipping and logistics fees that cannot be passed onto the consumer, higher return rates, the steeper cost of acquisition at scale in digital, a shift to e-commerce will likely put the squeeze on profitability.
Successful retailers, Spagnuolo said, approach e-commerce from two angles: capturing a greater share of traffic by boosting conversion and retaining customers, and “supercharging profitability” by thinking outside the traditional legacy model to find ways to reduce costs across the system, increase data transparency and promote the proper attribution of costs to create clarity and accountability.
On the revenue side, the winners are the ones who put the customer at the forefront, chiefly through personalization. “A seamless experience on your website will [also] allow them to go to your website more often and make them more comfortable shopping your site,” she said.