15 Apr 2020 21:08 IST

What will shopping look like after Covid-19?

Physical store or online? Supermarket or kirana? Shopper preferences will reshape the retail scene

That Covid-19 has been humanity’s biggest disruptor of life and businesses, in recent history at least, is an understatement. Apart from creating an overwhelming sense of caution, fear and concern, it has severely impacted sentiment with regard to most commercial transactions. Amid the global growth of online and multi-channel marketing, and their effect on physical retail, including malls, the Corona virus crisis will be a mighty game-changer for retail across the world.

Let’s take a look at how the Indian retail scene might look once the pandemic’s immediate impact is behind us. Although there are gloomy predictions that it will take a long time for the sector to return to normal, it is not so simple to visualise the post-Covid scenario.

Four key variables

This is because of four important variables, with very different dynamics:

    Retail segment: The effect on mass merchandise stores as compared to lifestyle formats, including malls, is going to be very different.

      Supply chain and inventory: While some categories will be affected by the inventory pile-up due to the lockdown, several others might run into severe supply issues and therefore stock out. Manufacturing is almost at a standstill for various categories, and when nothing is being made, nothing can be supplied.

        Fund flow and working capital: Retail is essentially about the fast rotation of working capital, which is inventory. Clearly, this will be affected significantly, with many standalone stores possibly even heading for a cash crunch.

          Shopper behaviour: We have seen panic buying of some essential products. However, the consumption of essential products is not uniform. For example, panic buying of biscuits will not affect future purchases. But just because people buy extra shampoo, toothpaste or groceries, they are not going to brush their teeth four times or cook extra food. Therefore, not all essential products will see the same kind of sales pattern, post this crisis. Similar is the case with lifestyle products and high-ticket items. Some of them may see a spurt in sales while many other categories could witness muted buying.

            Here’s a look at the impact of these four variables on key retail segments:

            Kirana or small standalone stores: The impact on their operations might be minimal, and may even be positive to an extent. Their business model enables operation on a tight OPEX base and core base of regular shoppers. If the supply side is sustained, these stores might even see growth in patronage. Social media is buzzing with posts that describe how such stores have been of great help during this crisis and urge shoppers to support them after the crisis is over.

            Supply chain constraints might not hit them very hard as manufacturers always focus on penetration to this segment since it constitutes a significant majority of the retail sector.

            The only significant downside they might face is cash flow. Kirana stores are known to offer rotational credit. Even if they reduce this during this period, their cash flow might be affected because of the simple fact that many of them have to go and pick up stocks. In many cases, this might not be on credit. Getting business loans is almost impossible for such businesses as retail is not declared an industry. As such there are no industry-specific credit norms.

            Mass merchandise stores like supermarkets may see a lower impact because of the tag of selling essential products. However, hypermarkets could face the brunt of the shutdown because most of them are located in malls. Even standalone stores need to focus on the food and FMCG categories. As hypermarkets tend to have much higher inventory levels, there is going to be a serious issue on this front. In the food segment, many packaged products with a shorter shelf-life, such as juices and other beverages, would have expired and will have to be written off. Even if they are returned to the vendors, the net loss remains as it is only a question of whose pocket the money comes from.

            Non-food FMCG products purchased as part of the panic buying would only get stored at home and this will affect future sales. The inventory of various other categories like apparel, etc, in a hypermarket would have to be liquidated through massive discounts. This will definitely happen for apparel at least, as the Covid-19 lockdown happened during a season change. Therefore existing apparel, as well as the summer stock will now have to be sold within a shorter period.

            Consumer durables and IT products: These stores will also be hit hard. First is the loss of sales from the seasonal high of certain categories linked to summer, such as air-conditioners. Next would be the supply-chain bottlenecks that manufacturers are set to face because of disruption from Chinese vendors. Last, is the shopper behaviour of postponing high-ticket purchases in a period of uncertainty.

            Apparel and other lifestyle stores: One of their biggest challenges will be excess stocks. Physical stores would have to liquidate stocks of the previous season to stock newer styles. End of season sales and massive discounts may have few takers, given the mood of cautious buying.

            If the next season’s lines are being sourced from China, the retailers may not be stuck with too much inventory. But there is a high probability that such inventory has not yet come into the retailer’s books as orders from China may have been stopped due to the virus scare.

            Any retailer holding inventory of products bought from China may take a significant hit in sales. The apparel category may be spared such a situation to some extent as a chunk of products is sourced from Tirupur, as also countries like Bangladesh and Taiwan.

            Discount formats might benefit as they source inventory at throwaway rates, and their shoppers are drawn by prices and not the latest fashion or trend.

            Online retail: Online retail is not one single segment, and most of the points made about the various categories and segments would apply to different online retailers. In addition, they will face the challenge of resuming their sourcing from various smaller vendors. Medium and small-scale enterprises, hit hard by the lockdown, form a significant chunk of the vendor base for various non-food categories, and this will impact the businesses of online retailers.

            Lastly, a look at the potential shopper and buyer behaviour after the Corona scare is over.

            First is the aspect of money in hand, which is critical for retail. Although the government has appealed to businesses to continue paying their employees, this cannot happen for an indefinite period. Already, there are representations to the government that such payment is not viable or sustainable. Therefore, any move to contain manpower costs by salary cuts or layoffs will hit spending sentiment hard. Even those with no such cuts or threat to employment would become cautious and tighten their purse strings, thus impacting all discretionary categories, especially lifestyle products.

            Preference for online vs offline: Assuming that buying sentiment is not negatively affected, there is liely to be a shopping surge post-crisis. This would interestingly be more for offline/ physical retail stores. After the lockdown experience, shoppers are influenced will feel a strong, compelling need to go out. So, experience would become a key aspect of shopping and, hence, the appeal of physical stores would be greater than online purchases, at least for the medium term. Functional purchases, or known brand purchases driven by discounts, would continue to be online-driven.

            There is a word of caution to retailers, especially lifestyle formats, if this happens. The shopper with money and seeking experiential shopping would expect very good service. If retailers start to cut down on store staff as a means to reduce costs due to Covid-19, it would be a short sighted approach. The shopper will look for the interaction and experience at the stores. That is the key differentiator, and any physical retailer who compromises on that front would lose out to others or to online retail.

            In many countries abroad, some operators focus on sourcing stocks from retailers who are shutting down, and sell such products are unbelievable discounts till stocks last. These formats might make an appearance in India if the effect of Covid-19 extends for long, and current retail operators, especially modern trade stores, could be hit hard.

            In summary, I do not foresee any dramatic downturn in the retail sector. However, the caveat is that this is hugely dependent on shopper sentiment not being hit by wage cuts or job losses. What would happen is an interesting reorganisation of the retail segments and categories with regard to shopping preferences from physical stores versus online sources.