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If there ever were a time to view retailing through a Darwinian filter, that time is now. A retailer surviving 2020 is, by definition, among the fittest.
The National Retail Federation’s annual report on the nation’s Top 100 Retailers is based on sales for the most recently completed fiscal year. But for some companies, what transpired in 2019 might not hold much significance for 2020 and beyond. For others, the pandemic has accelerated their path.
“Those that were dominant before [the crisis] are seen to be dominant now,” says Tory Gundelach, senior vice president of retail insights at Kantar Consulting. “And the weak are getting weaker.”
Among the traits characterizing retailers that are most likely to recover for the long haul are “strong operational capabilities” and “flexibility.”Tory Gundelach, Kantar Consulting
Gundelach cautions about discussing the COVID-19 crisis as though it were over.
“This is a really long burn,” she says. “It’s a long road, a longer game, until 2021-2022 and maybe beyond,” referring to the lingering effects on the economy in general and retailing in particular.
Strong operational capabilities and flexibility are among the traits characterizing retailers that are most likely to recover for the long haul, Gundelach says. These characteristics help define retailers that “can more easily tailor their response to the communities they serve.”
Another plus for returning to business as usual is past “experience operating in other emergencies.” Retailers that came through previous crises like the SARS outbreak in 2002-2004, the H1N1 “swine” flu pandemic in 2009-2010 or natural disasters such as hurricanes, floods or blizzards have policies and procedures already in place, she says.
The retailers with these qualifications tend to be the largest — or among the largest — in their retail segment, and mirror those at the top of the Top 100 Retailers list: Walmart (No. 1), Amazon.com (No. 2), The Kroger Co. (No. 3) and Costco (No. 4).
In addition to their operational efficiency, flexibility and previous experience with emergencies, these retailers all sell a lot of food products and household supplies, which carried them through the worst weeks of the coronavirus crisis.
Networked and prepared
If any retailer comes out of the COVID-19 crisis with an enhanced reputation, it could be Walmart, with its variety of store formats and a robust digital commerce business already in place prior to the pandemic.
Walmart’s total U.S. sales rose at least 10 percent once the coronavirus began to spread. Even as foot traffic began to drop in stores, Walmart’s shoppers were spending 16.5 percent more on each trip or order. Online sales soared 74 percent in the first quarter.
The company invested heavily in keeping its stores and ecommerce business open, and says it spent about $900 million to cover such things as pay hikes for warehouse workers, bonuses for stores associates and hiring approximately 235,000 new employees for its stores. Money was also spent disinfecting stores, equipping associates with gloves and masks, and testing associates for the virus and antibodies.
Walmart’s vast network of stores and well-financed broad experience in ecommerce provides distinct advantages over traditional supermarkets still getting acquainted with selling groceries online.
Walmart has other advantages over Amazon, says Neil Saunders, managing director for retail at GlobalData. “It has a fuller assortment, better own label, more buying power and more significant economies of scale,” he says.
“Walmart gets the basics of retailing and it shows. Even before this crisis, Walmart stores were well-stocked and well-run, much more so than many other grocers and mass merchants,” Saunders says.
“There were issues of low stocks during the panic buying period, but Walmart has recovered quickly and has kept everything operational. Having financial muscle and enormous buying power both help, but understanding and focusing on the fundamentals of retailing and getting those everyday basics right is what really counts.”
Ecommerce’s ‘watershed moment’
Prior to this year, the last major financial crisis and unsettling period for retailing came in the aftermath of the housing mortgage implosion in 2008. “There could be a more severe shake-up this time around,” says Monica Aggarwal, head of the retail and consumer group at Fitch Ratings, who sees 2021 being a recovery year and 2022 a “growth” year.
Ecommerce will be a major component of the post-coronavirus recovery, with the next few months being “a potential watershed moment,” says David Silverman, a retail analyst on Aggarwal’s team at Fitch. He points out that, other than Amazon and Wayfair, most of the top ecommerce retailers “are not digitally native.”
Showing the way in ecommerce is Amazon, which this year leapfrogged over Kroger to land in the No. 2 slot on the Top 100 Retailers chart. Shoppers helped push up Amazon’s revenues 26 percent in the first quarter of this year. Those same shoppers also rated Amazon highest when asked which food retailer they had the “most favorable” opinion of, with regard to its response to COVID-19. Amazon finished ahead of Costco, Walmart, Publix and Kroger in the poll, conducted in early May by consumer market research firm Magid.
For its efforts during the pandemic, Amazon says it expects to spend about $4 billion. This covers the hiring of about 175,000 additional employees, primarily in warehouses and fulfillment centers, temporarily raising wages for essential workers, and paying more to ship packages in a highly disrupted delivery system.
The company is “willing to get through this COVID crisis by adding just about more employees than anyone else,” says Mark Mahaney, an analyst with RBC Capital Markets. “It says something about the human cost that Amazon is bearing and the magnitude they are willing to spend in the second quarter.”
Innovating in grocery
Though grocery stores have, for the most part, been open throughout the COVID-19 shutdowns, more consumers are ordering more groceries online, according to the U.S. Online Grocery Survey 2020 from Coresight Research.
The survey was conducted in the middle of March at a time when consumers were stockpiling food and household supplies. As a result, the survey found that online sales might surge as much as 40 percent this year, after growing 22 percent in 2019.
The Coresight survey also found that No. 3 Kroger has the largest online sales volume of any traditional supermarket operator in the country. Kroger’s ability to perform under the pressure imposed by the coronavirus didn’t surprise anyone, since the company has long been an innovator in the grocery industry.
Beginning in March, Kroger started hiring what would become a supplemental workforce of 100,000 people, workers to help with the crush of sales in the stores and challenge of moving groceries through its pipelines. Hourly employees were given $2-an-hour “hero bonuses” for working through the pandemic.
In the early stages of the pandemic, Kroger converted one of its Cincinnati stores to a pickup-only location, operating from 8 a.m to 8 p.m. Customers are not allowed in the store other than to pick up online orders; store associates can fill orders more quickly without having to stock shelves or ring up purchases, and the store layout allows associates to more easily maintain social distancing.
Kroger had a variety of other initiatives in the works when the pandemic hit. Kroger Delivery Kitchen involves a third-party vendor — ClusterTruck — operating kitchens inside Kroger stores that provide meals for delivery or pickup. Kroger and ClusterTruck have been testing the concept since 2017 in a store in Columbus, Ohio, and last December formalized an agreement to expand to more stores in Ohio and Indiana.
In late May, Kroger launched what it is calling “telenutrition” services. Operated by Kroger Health, the service builds on the company’s “food as medicine” platform, offering virtual consultations with nutritionists, support and plans for individuals and families, and management of food-related health coverage.
Customer service and convenience
Costco Wholesale, resting in fourth place on the Top 100 Retailers chart, has been paying a lot of attention recently to customer service and amenities. In the spring, Costco said prescription delivery service provided by Instacart would expand beyond test markets in Southern California and Washington to major markets in New York, Florida, Delaware, Illinois, Arizona, California and Washington, D.C. Instacart already provides deliveries of food and most general merchandise for Costco stores across the United States.
Earlier this year, Costco paid a reported $1 billion to acquire Innovel Solutions, a delivery and installation provider for furniture, major appliances and other bulky items; the move is seen as a way for Costco to increase its ecommerce sales.
Costco was an early beneficiary of the panic buying and stockpiling by consumers in the first days of the pandemic. But sales eased as the company shut down ancillary businesses such as in-store restaurant counters, and hearing aid, optical and photo departments. It also restricted the sale of some main floor merchandise classifications.
In its third quarter ended May 10, Costco experienced heavy in-store sales early on, then — after state and local jurisdictions imposed COVID-19-related restrictions on retailers — saw members migrate online for their purchases. As lockdown orders began to ease, Costco saw its travel agency bookings increase, though foot traffic was increasing slowly. Nevertheless, the company said it expected modified food sampling stations to return to the stores by mid-June.
The nation’s two largest drug store chains, Walgreens and CVS Pharmacy, rank fifth and seventh, respectively, among the Top 100 Retailers.
Walgreens renamed itself Walgreens Boots Alliance at the end of 2014 when it completed its acquisition of Switzerland-based Boots Alliance. In June 2017 it acquired about half of Rite Aid’s drug store locations after a deal to buy all of them fell through. Otherwise, Walgreens has maintained a low profile as it transforms itself from an American institution into an international, if not quite global, player.
The state of Walgreens’ U.S. operations is such that it was on Fitch Ratings’ negative credit watch for nearly a year when it was downgraded, just as coronavirus cases were breaking out all over the place, according to Silverman.
Among the pressures impacting Walgreens’ downgrade are declining front-end (non-prescription) sales, ecommerce penetration by competitors and continued low reimbursement rates on medications, Silverman says. Plus, “leverage for the company is high.”
CVS is improvising a way to grow its business without spending a lot of money, and opening pharmacies in other retailers’ stores may be the way to go. That approach has worked well since CVS took over Target’s pharmacies five years ago, and the drug retailer has continued to work that model.
Most recently, CVS purchased pharmacy operations in 110 supermarkets owned by Schnucks, headquartered in St. Louis, with stores in five Midwestern states. CVS will run the pharmacies in 99 of the stores; pharmacies in the remaining stores will close and prescriptions will be transferred to CVS locations nearby.
Winning on home projects
Competitors The Home Depot and Lowe’s are also close on the Top 100 Retailers chart, with The Home Depot at No. 6 and Lowe’s at No. 9. So far this year, both have been successful in handling the unusual events that have transpired. Both companies benefited from the rise of home fix-up projects consumers undertook while under lockdown orders. And both saw ecommerce business pick up as the pandemic spread across the country.
At The Home Depot, revenues increased 7.1 percent in the fiscal first quarter and U.S. same-stores sales rose 7.5 percent. Earnings, however, fell slightly as expenses rose 17 percent. The higher costs include extra staffing and bonus pay to associates working during the pandemic.
Lowe’s beat expectations on both revenues and earnings in this year’s first quarter, in large part because it was — like The Home Depot — deemed an essential retailer during the COVID-19 crisis. It implemented curbside pickup to expand ecommerce abilities, and digital sales increased 80 percent.
No. 8 Target has worked hard to get things right this year. Early in March it earmarked about $500 million to be used through July 1 on extra pay for workers and higher operating costs during the crisis. The company was ready when groceries and cleaning supplies went flying off the shelves early in the crisis. Then Target re-loaded and had beauty products, home goods and similar merchandise fully stocked when stimulus checks arrived.
Past expenditures on strengthening ecommerce infrastructure paid off when online sales shot through the roof. Online comparable sales soared 141 percent in the first quarter. The company says about 5 million people shopped on Target.com for the first time in that time, and 2 million ordered online for pickup at stores.
Total revenue in the first quarter rose 11.3 percent to $19.4 billion from $17.4 billion last year, but earnings plummeted 64.3 percent as a result of those higher pandemic-induced expenses.
Challenging times for apparel
Clothing retailers were struggling coming into this year, for a variety of reasons. When the coronavirus began infecting the country at a pandemic rate, people just stopped buying apparel. In the month of April, when overall retail sales dropped 16 percent from March levels, apparel sales cratered 78.8 percent in the same time frame, according to data from the U.S. Census Bureau.
A little more than a dozen retailers among the Top 100 make their living on apparel sales. Already this year, two apparel-dependent Top 100 Retailers have declared bankruptcy: No. 45 J.C. Penney and No. 93 Neiman Marcus.
TJX is the highest-ranking apparel retailer on the list, standing at No. 16. Its two main engines of growth, TJ Maxx and Marshalls, have repeatedly displayed an uncanny ability to ride out the ups and downs of economic trends and retail business cycles. The strength of these bricks-and-mortar operations has inhibited robust development in digital retailing, which accounts for only about 2 percent of TJX’s total sales.
Closed stores during the height of the pandemic resulted in TJX sustaining a 52 percent drop in first quarter sales, or roughly $5 billion in lost business. In late May, as stores were reopening and websites were back in operation, there was a strong initial response from consumers; the company had hoped to have all its stores reopened by the end of June.
Macy’s, No. 20 among the Top 100 retailers, is a different type of apparel-dependent retailer than TJX, although it too had to close all its stores during the pandemic. As a department store, Macy’s has broader and deeper offerings of non-apparel merchandise. In addition, Macy’s pricing structure includes services and amenities shoppers don’t expect to find in off-price stores like T.J. Maxx and Marshalls.
Macy’s, which says sales fell by about 45 percent in the first quarter, indicated it also expected to report an operating loss of around $1 billion for the period. The company closed all 775 of its stores in March and reopenings didn’t begin until May 4.
One of the challenges Macy’s faces moving forward is to determine how stores — and how many of them — fit into its overall business plan. The company might reopen stores that will be re-shuttered rather quickly if it decides to accelerate the closing of 125 locations that had originally been planned to close over the next three years.
Lost sales and shuttered stores aren’t the only signs of damage caused by COVID-19. L Brands had committed to split itself into two companies: the successful Bath & Body Works and the troubled Victoria’s Secret, which would then be sold to private investors. Restrictions placed on retailers during the pandemic, though, soured negotiations and the deal was scuttled. L Brands founder, chairman and chief executive Leslie Wexner walked off stage as scheduled, however.