As the world continues to face into a truly unprecedented crisis, global lockdown measures to control the spread of COVID-19 have paralysed economies and unsettled societies. Widespread business closures, social distancing restrictions and isolation have caused significant disruption.
The International Monetary Fund (IMF) expects the global economy to contract sharply by 3% in 2020 -much worse than during the financial crisis of 2008. The Euro Area is expected to report significantly weaker growth, with output falling 7.1% in 2020, while advanced economies are predicted to suffer a 6.1% fall before bouncing back in 2021.
These are extraordinary times. Never has a single event had such a wide-ranging impact on financial markets, businesses and households. The stakes are high and governments and central banks in advanced economies will continue to run significant fiscal deficits to avoid high levels of structural unemployment, protracted disruption to supply chains and waves of business failures. The benefit of running large deficits today is seen as far outweighing any eventual costs. As countries around the world emerge from lockdown, governments will cautiously explore ways to enable societies to manage the interconnected realms of public health and economic wellbeing..... [download full report to read more]
The impact of COVID-19 on consumer behaviour
Governments across Europe have begun to ease restrictions as the threat of COVID-19 is downgraded. Pockets of spending are starting to return, but consumer caution remains high as society transitions to a new normal in the way we work, socialise and shop.
The shock to societal norms has forced many consumers to seek alternative customer journeys as store closures rendered many previous behaviours redundant. Many shoppers are now reassessing old spending patterns, reordering priorities and feeling a sharp hit to confidence. As European consumers reconcile the impact of the crisis on their daily routines, four distinct consumer behaviours have emerged:
1. Cautious: cut back on some spending and waiting for more normal times
2. Undeterred: spending levels have remained unaffected by the impact of the virus
3. Hibernators: cutting back on all non-essential purchases
4. Confident: spending levels have risen
The prevailing consumer instinct is to hold back some spending on non-essential purchases and adopt a more cautious view of personal finances. This constitutes 41% of ‘cautious’ European respondents surveyed. Typically, these consumers delayed some spending on discretionary purchases, focusing on essentials, while waiting for normality to return.
One in five consumers consciously cut back spending on all non-essentials as concerns about the future significantly undermined their confidence as they effectively entered a ‘hibernation’ mode. This consumer segment is disproportionately comprised from the least affluent households with spending predominantly focused on essentials.
A third of consumers claim that the crisis has not influenced their level of spending on retail products, appearing undeterred when it comes to shopping... [download full report to read more]
Consumer trend 1: Focussing on essentials
Understandably, consumers have prioritised their spending on essentials such as food and health, avoiding discretionary purchases within categories like apparel, electricals and homewares. Indeed, across the European countries surveyed, 61% of consumers agreed that they had prioritised their spending on essentials since the coronavirus outbreak, with Italy (76%), France (75%) and Spain (75%) experiencing the largest shift. Clothing and footwear were consistently the worst affected sectors across all countries, highlighted by a net balance of 73% of Italian consumers suggesting they had cut back spending in these sectors since the outbreak (Figure 4). A similar proportion of consumers in Spain also suggested this was the case, with electricals, homewares and furniture experiencing significant declines.
Unsurprisingly, food has been the stand-out beneficiary during the lockdown as measures legislated the closure of restaurants, cafes and bars. The transition of spending away from food services towards the grocers has greatly benefited the food and drink sector with 22% of U.K. consumers suggested they shopped more within this category. Every country surveyed experienced an increase in spending across food. Interestingly, Switzerland showed just a marginal increase of 1%.... [download full report to read more]
Consumer trend 2: Accelerated shift towards online
As lockdown measures were implemented across Europe, a predictable switch towards online channels emerged. The shift was immediate but it was felt unevenly across regions and sectors. Some retailers struggled to cope with a sudden surge in demand, pushing websites to breaking point and exceeding fulfilment capacity.
Although highly penetrated markets, such as the U.K., were better equipped to cope, higher consumer adoption rates saw a step-change in the proportion of shopping conducted online. This trend is highlighted by the fact that more than four in 10 consumers across Europe (research included U.K., Germany, France, Spain, Italy and Switzerland) indicated they had purchased something online for the first time... [download full report to read more]
Consumer trend 3: Readjusted expectations
As consumers now focus on the easing of restrictions, their expectations have ultimately endured a period of readjustment. The overriding priority for shoppers returning to stores is safety –above that of convenience, price and choice. It is important to consumers that they perceive a safe shopping environment as they navigate store aisles while observing social distancing guidelines.
Beyond policy adherence, retailers will need to prioritise safety measures when attempting to reassure consumers and garner trust. Evidently, the most applicable measures centre around social distancing and hygiene which will become a minimum expectation from consumers during this transitionary period.
Retailers failing to meet these expectations risk loss of confidence from their customer base, arguably at a time when gaining trust has never been more important. Nevertheless, age-related disparities will arise, reflecting differences in perceived risk of contracting the virus where higher risk consumer contracting the virus where higher risk consumer groups will respond positively to retailers adhering to COVID-19 trading guidelines which ultimately could help forge lasting relationships.... [download full report to read more]
For many consumers, as the initial coronavirus panic subsides and a ‘new normal’ comes into view, it is clear that shoppers will not revert to pre-COVID-19 behaviours.
Consumers have transitioned through an initial period of anxiety, but as capacity returns to enable consideration of future scenarios, the longer-term implications and ‘fallout’ from the restrictions comes to the fore. Many shoppers appear pragmatic about the immediate state of retail, accepting various restrictions and a protracted customer experience in lieu of safety. But shopper missions have fundamentally changed. While social distancing measures remain in place, the overall experience will be considerably compromised, shifting from experiential endeavours that entail a mix of leisure and entertainment to one where the primary purpose is driven by the functional acquisition of products. The question on everyone’s mind is, how long will this last?
European consumers are remarkably aligned in their expectations of how long it will take for them to experience some semblance of normality. Most consumers believe it will take around six months before returning to ‘normal’, taking this period of disruption up to the end of 2020.
There will be a ‘step-change’ in the proportion of retail sales conducted online in 2020 as lockdown measures necessitate the shift towards this channel. Overcoming the initial barriers to online shopping will cause a step-change across countries, resulting in an estimated €13.6 billion of additional online sales in 2020 –above previous expectations –for the U.K. (€5.0 billion)*, France (€3.0 billion), Germany (€2.3 billion), Spain (€1.5 billion), Italy (€1.5 billion) and Switzerland (€0.3 billion).
Beyond the pandemic: The impact on retailers
European governments swiftly implemented measures to support their economies, businesses and households. While these measures helped limit the economic damage inflicted by COVID-19, inevitably the retail sector will emerge from the pandemic in a different form.
A ‘shake-out’ across all retail geographies is on the horizon as consumers migrate towards business models that are aligned to a new set of values. Retailers who fail to pivot their business models fast enough will cease to exist, engulfed by those with nimble strategies and new entrants. It is equally as critical to strategically tackle the heavy legacy fixed cost base of many retailers in order to become more agile. Retailers will need to address the burden of rent and other occupancy costs in order to support the footprint of the future.
Retail industries across the world are currently transitioning through a readjustment period. Accordingly, businesses that emerge ‘on the other side’ will be stronger and more adaptable to challenges that lie ahead.
Phase 1 of restructure: Survival –timing is everything
The impact of the virus pushed many healthy retailers from a positive to negative cash flow within weeks (see our previous report ‘Surviving the Cash Crunch’). As lockdown measures persisted, demands on liquidity intensified and the depletion of working capital forced many retailers into administration.
To this end, many non-essential retailers remain in ‘survival mode’, preserving capital and carefully navigating a phased approach to reopening from lockdown.
Phase 2 of restructure: The fallout -consolidation and partnerships
As the survivors gain more traction, weaker retailers in the market will fail, leading to market consolidation. During this phase, acquisition opportunities will arise which could help drive value, reposition brands and build scale.
Phase 3 of restructure: Innovation –a time to shine
As a new normal appears, consumers will have more conviction over their new needs and wants. They will also form a more conscious framework which delineates their expectations of retailers and the kind of relationship they want with them.
Our research highlights five key themes that retailers must embrace as a new retail paradigm emerges:
Theme 1: Identifying new customer cohorts
As identified in figure 10, a new cohort of consumers has emerged, based on their perceived risk of COVID-19. This consumer group is primed for permanent changes in their shopping habits. They have learned new shopping behaviours; and new customer journeys have been revealed in the search for alternative ways to acquire essential items, driven by a desire to reduce their risk of contracting the virus.... [download full report to read more]
Theme 2: Leveraging permanent shifts in behaviour
The closure of non-essential retail across large swathes of Europe has necessitated a clear shift towards online.
A significant proportion of European consumers (44%) are buying products online for the first time and are experiencing new customer journeys. A key consideration for retailers will be trying to identify which reactionary behaviours will endure and how they will develop in the interim... [download full report to read more]
Theme 3: Retailer voids
The retail landscape has evolved at a frightening pace. Many businesses entered 2020 with weak balance sheets and the impact of COVID-19 was ‘a step too far’ for some, pushing them into administration. Similarly, other retailers will struggle to survive as a new retail paradigm makes many existing propositions obsolete. Failure to react intelligently will leave gaps in some markets, providing opportunities for surviving retailers to swoop in and occupy obvious voids. These voids are likely to be most visible in physical retail space across Europe. Before the pandemic, there was already excess capacity of retail floor space in most countries due to the rise of online shopping and shifting consumer behaviours. For example, in the U.K. it is estimated that there is around 20%* overcapacity of retail space that businesses cannot commercially justify. In a post COVID-19 world, this figure will be higher. Also, the market will correct over a shorter time frame... [download full report to read more]
Implications for retail business models
• Direct to consumer is likely to accelerate as brands leverage online channels to offer solutions to consumers’ emerging needs and wants. Operating with larger profit margins and uninhibited by vast store estates occupied by retailers, there will be an opportunity for brands to accelerate their push to consumers in this new retail paradigm.
• Specialist retailers will emerge to fill the gaps concerning new customer demands. Armed with deep knowledge, flexible supply chains and sophisticated online operations, these retailers will operate with leaner and more flexible business models.
• Regional expertie will become an important differentiator of choice for consumers. Such retailers offer unique regional propositions that are relevant to their local communities.
Theme 4: Adapting the purpose of stores
Many themes are omnipresent across Europe. One such theme is the urgency to repurpose physical retail space. This will result in a significant shift in the value and purpose of stores. Gone are the days where physical stores are solely purposed for distributing products, accountable for their own profit and loss. The merging of physical and digital realms will become even more critical as retailers leverage technology to inject greater value into stores. For example, being able to offer extended ranges, use of augmented reality (AR), and crucially, using online fulfilment of physical orders.
Theme 5: Shifting supply chains
Retailers will need to develop more resilient supply chains and distribution platforms. At the survival phase, the priority here will be agile planning. With such an approach, it can help balance costs and reduce risk during a period of extreme uncertainty. In the consolidation phase, retailers that thrive will be those with supply, fulfilment and return systems that are flexible, nimble and responsive, and that can quickly adapt to new retail trends.
The impact of COVID-19 and the raft of policy measures that have been enacted across Europe have preserved public health but have had a devastating effect on retailers and brands. Consumer confidence across Europe, and indeed the world, has sustained a severe blow. Many households are worried about health, personal finances and job security which all undermine propensity to spend.
Permanent changes within the retail industry are likely to arise from an event of this nature and magnitude –for retailers as well as consumers.
However, these changes will be felt unevenly across Europe as a ‘new normal’ emerges. Influencing factors include policy implementation, retail sector, consumer type, culture and geography. Each country faces its own unique set of challenges as its retail industry transitions towards a post-COVID-19 era.
Throughout the disruption, three overriding consumer trends have surfaced:
1. A focus on essential spending
2. An accelerated shift to online spending
3. A readjustment of expectations... [download full report to read more]
Download the full report to gain deeper insights into the impact of COVID-19 on European retail.