For America’s Retailers, a Mix of Momentum, Hope and Uncertainty
Retail planning is challenging in normal times — it’s a far greater dilemma during a pandemic.
With COVID-19 continuing to spike, retailers have planned very conservatively for the first half of 2021, but they’re grappling with how to approach the second half. Should they gamble on a rebound in mall traffic and pent-up demand for apparel, as vaccinations roll out and people start going out again, to work and to events? Or proceed with extreme caution? Filled with uncertainty, retailers have held back from making sales and profit forecasts.
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“Looking to 2021, the key question is how sustainable holiday’s robust growth will be in the new year, given the remarkably sound consumer fundamentals and the uncertain impacts of COVID-19 before the vaccines are widely available, particularly on employment growth,” said Craig Johnson, president of Customer Growth Partners, who said holiday 2020 sales rose 6.8 percent to $756 billion. “If employment growth lags, retail sales growth may ease to about 3.5 percent, but if employment accelerates, we may well see solid 4.5 to 5 percent year-over-year growth again.”
“You’ve got to make some bets in 2021,” said one retail chief executive officer who requested anonymity. “Everybody is scrambling to get their supply chains back up. Hopefully as the vaccine gets widely distributed we’ll see some momentum in the second half. People are eager to get out again.”
“There is excitement about the vaccine. Confidence is coming back,” said Deirdre Quinn, CEO of Lafayette 148. In 2021, “We are still opening stores, in Toronto, China and SoHo, N.Y. There are other markets where we are in serious negotiations,” such as Naples, Fla., and Troy, Mich., Quinn added. “You will never find leases as good as they are now. I think [business] will come back faster than we realize, but I’m staying extraordinarily cautious. There is a new normal emerging out of this.”
Retailers are coming off a healthy holiday season due to strong e-commerce and robust selling trends in home, health, wellness, groceries, appliances and electronics, fragrances, jewelry, as well as “casual, comfy and cozy” clothes and sneakers. While business in the first half of 2021 will be soft, “Going into next fall, expectations will get better,” said Steve Sadove, Mastercard senior adviser and former chairman and CEO of Saks Fifth Avenue. “Consumers are going to want to go out to events again, and retailers will be more optimistic in their inventories. They’ll buy more inventory but the promotional strategy of 2020 will repeat itself. They will start the holiday season earlier again,” around mid-October, as seen in 2020. “That’s positive for retail and better for consumers. You won’t have the crush of the crowds.”
Retail experts expect slow recovery in downtown retailing and the real estate market in 2021, as workers return to their offices, and expansion-minded retailers and brands take advantage of vacancies and favorable lease deals. There are already signs consumers are starting to travel again, which will support certain categories like resortwear, swimwear and luggage. And if in-person events and parties start up again later in the year, and more people return to offices, sales of dress apparel, eveningwear and tailored clothes should get a lift, as some spending shifts away from home goods and outdoor furniture and accessories.
“We expect retail sales spending to see a boost from the new round of stimulus,” Jack Kleinhenz, chief economist of National Retail Federation, said Monday. “Consumers responded quickly to last spring’s stimulus checks, and distribution of the new checks will come at a critical time that will help carry 2020’s momentum into 2021.” Legislation signed Dec. 27 will provide one-time $600 stimulus checks to individuals making up to $75,000 a year and extends $300 weekly checks for the unemployed for almost three months.
“As we closed out 2020, it was an end to a whirlwind year whose challenging economic environment will almost certainly continue in 2021,” Kleinhenz said. “The coming year might be just as eventful as the economic recovery faces many uncertainties. Recoveries do not proceed in a straight line and the prospects for volatility over the next few months are high.”
In 2021, retailers will double up on conveniences and services such as BOPIS, curbside pickup, more personalized online interactions and quick deliveries. Independent, local shops will gain popularity, as municipalities continue to encourage consumers to patronize them, and technologies and delivery services evolve to enable smaller retailers to be competitive in e-commerce.
On the dark side, 2021 will see thousands of stores, mainly in the over-spaced and troubled women’s apparel and department store sectors, and scores of unproductive malls disappear. The industry continues to undergo massive correction in square footage. Industry pundits predict about 25 percent of America’s shopping centers will vanish in the next four to five years, driving developers and landlords to repurpose outmoded formats and square footage left vacant by bankrupt and downsizing retailers. Staff reductions will continue, meaning fewer people will have more to do. “Physical retail stores will be expected to be an Apple Genius Bar type of experience. There may not be quite as many retail associates, but the ones who are there will be asked ‘where can I find XYZ products right now?'” said Raj De Datta, CEO of Bloomreach, a platform that helps retailers provide better experiences.
AT MALLS, THERE’S UPSIDE POTENTIAL
Traffic and transactions at shopping centers should improve as the year progresses and as people feel safe from contracting the coronavirus. Suburban shopping centers should benefit by companies allowing some employees to permanently work from home and establishing smaller office hubs outside cities while downsizing the downtown office space. “People are not going to be in their office five days a week and you will see more remote smaller offices for some of the bigger companies opening up closer to home,” Sadove said. “But people still love cities. New York has always recovered and it will recover again. Restaurants will open up again. New formats will open up, if you have the right economic model. There will be different kinds of rent deals, some with percent rent agreements.”
Peter Fader, professor of marketing at the University of Pennsylvania’s Wharton School, sees mall operators, as well as e-commerce, health-tech and fin-tech firms, expanding their brand portfolios through acquisitions that provide additional distribution channels and more points of contact with consumers. “Nontraditional buyers will swoop in to buy the assets of brick-and-mortar retailers that can’t wait out the recovery,” Fader said. He sees fewer shopping trips to the malls but bigger baskets each time.
According to a research report from Placer.ai, a foot traffic analytics firm, several factors favor malls in 2021. “First, people miss them,” the report stated. “If COVID-19 comes under control in early 2021, the impact on malls could be massive. Secondly, the retail mix is changing. This is creating more diversity in malls, and therefore, more complementary interactions between malls that could create a bigger overall pie. Thirdly, it feels like mall owners are ready to get aggressive and creative, from Simon buying J.C. Penney to major renovations at top malls bringing more office and residential into the mix. COVID-19 may actually bring a long-term positive to the sector. By forcing adaptation and evolution, malls could end up stronger in the coming years than they were before.” The report also indicated that top-tier malls were actually up year-over-year in January and February 2020, just before the outbreak of the coronavirus. Even struggling malls, the report indicated, could benefit strongly from a “redefinition.”
E-COMMERCE GROWTH NONSTOP BUT RATE SLOWS
The double-digit, sometimes triple-digit, gains on web sites seen in 2020 can’t be duplicated in 2021. More likely, single-digit gains will be had this year, as those who got in the habit of shopping online for the first time during the health crisis will stick to it to some degree after the pandemic.
“Curbside pickup and ship-from-store fulfillment will exceed orders fulfilled from warehouses in major metropolitan areas as brands create more smaller-format fulfillment centers,” predicted Nitin Mangtani, founder and CEO of PredictSpring, a commerce platform to connect consumers and store associates through digital experiences.
To support e-commerce growth, stores will function more like warehouses, as online operations take on higher levels of inventory including categories not carried before, or categories underplayed. Also, more mini-fulfillment centers will spring up in cities and fill up vacated mall space, to facilitate the online demand and provide faster deliveries to homes. This will help retailers stay competitive with Amazon.
James Thomson, partner at Buy Box Experts consulting, which helps brands market on Amazon, said most of his clients saw 35 to 40 percent e-commerce gains last year. Given the massive rate of e-commerce growth in 2020, and shoppers expected to return to brick-and-mortar stores and malls in the back half of this year, Thomson estimated 2 to 3 percent e-commerce growth in 2021. He’s concerned that retailers are too reliant on a “very select number of carriers,” and that they need to do a better job placing products closer to the customer, which means allocating the right products to the right locations. The planning and allocation functions become more crucial. “Retailers have to feed into this instant gratification mind set,” Thomson said. “People want to be able to find what they want, when they want it, and they want it faster than ever before.”
Thomson has another concern: As the U.S. population grows and demand for products grow, retailers will experience mounting delays receiving merchandise imported from China, Thailand and Vietnam. “We don’t have enough West Coast ports to receive all the boats coming in, and no one is building a port right now,” he said. Already boats sit in Long Beach Harbor before they can dock and unload. A few years down the road, the situation potentially gets worse, Thomson predicted.
CHALLENGES FOR THE POST-BANKRUPT
Watch for the J. Crew Group, which exited Chapter 11 proceedings in September with sharply reduced debt and new ownership, to further reduce its J. Crew brand store count and work to elevate quality. The brand must repair its reputation, reclaim its cool factor and special place in fashion — a niche between luxury and mainstream, a blend of whimsy, preppy, classic, color, mixing patterns and prints, and never too trendy. J. Crew’s new owners, the Anchorage Capital Group, in November named Libby Wadle CEO, overseeing J. Crew and J. Crew Factory in addition to continuing to lead the healthier Madewell brand. It’s unclear whether the current management structure, with one CEO for two brands, is for the long term or temporary.
J.C. Penney Co. Inc. emerged from bankruptcy in early December, avoiding a liquidation. Its retail operations were sold to Simon Property Group, Brookfield Asset Management and Authentic Brands Group, with real estate and other assets still in the process of being sold to a group of majority first-lien lenders who provided the retailer with debtor-in-possession financing during the bankruptcy. In a surprise announcement Dec. 30, Penney’s disclosed it’s seeking a new CEO to succeed Jill Soltau, and named Stanley Shashoua, Simon’s chief investment officer, interim CEO, which became effective Jan. 1.
The change in command suggests the new owners want to institute a turnaround strategy for Penney’s different from the one orchestrated by Soltau. Penney’s has been ailing for decades due to frequent leadership changes; the flawed reinvention strategy of Ron Johnson who led the department store from November 2011 to April 2013, dabbling in product categories that didn’t resonate enough with shoppers, and an inability to generate enough revenue to support the business and invest back into it.
David Simon, chairman, president and CEO of the Simon Property Group, has expressed confidence in reviving Penney’s, a key anchor tenant in many of his malls. “We get out of bad stores. We buy the inventory at a discount. We right-size the overhead. And we operate with better business judgment, and lo and behold, you suddenly have a business that’s got significant positive EBITDA and you haven’t paid much for it,” Simon said in a conference call last year.
But more is required for a sustained turnaround. The Penney’s brand needs to reconnect with middle America, decide what it should stand for, sharpen the identity and reverse the pattern of eroding sales.
The Neiman Marcus Group went Chapter 11 in May under the weight of heavy debt and the disruption of the pandemic. The luxury retailer emerged from bankruptcy proceedings in September under new owners and having eliminated more than $4 billion of debt. The company’s challenges will be to continue to streamline its store base and headcount while maintaining the high level of service it’s known for; generate more foot traffic in surviving locations, and amid the pandemic to continue to reassure shoppers it’s safe to return to the stores. Neiman’s has disclosed seven store closings and could shutter more.
Neiman’s agenda centers on enhancing offerings, services and conveniences that pump up the digital side of the business, though renovations and upgrades of varying degrees at a handful of key stores are in the works. Neiman’s has obtained a total of $100 million from certain landlords to fund store projects, Geoffroy van Raemdonck, NMG’s CEO, told WWD. He sees Neiman’s moving beyond the fashion categories it has historically concentrated on. “If you look at our gifting assortment, there is much more electronics, many more products for the home, and more epicure and food than we had before. These are among the bestsellers. I believe we can expand into more categories and experiences,” he said.
Suppliers suggest Neiman’s must project a more modern and youthful image to attract larger Gen Z and Gen X populations , and that the Bergdorf Goodman women’s flagship could use a jolt of energy and updating. A plan to add a couple of selling floors at Bergdorf’s has been on hold for some time.
The Ascena Retail Group has been plodding through bankruptcy proceedings since July. A string of acquisitions over several years in an attempt to dominate the challenging mid-tier women’s specialty market was just too much for the company to handle. Now there’s not much left of Ascena after having sold off or liquidated its retail operations. In December, Ascena sold Ann Taylor, Loft, Lane Bryant and Lou & Grey to Sycamore Partners, a private equity firm that owns Belk, Talbots, The Limited and Torrid, among other holdings. In 2020 and 2019, Ascena liquidated Dressbarn and sold Maurices, Catherines and Justice.
WINNERS AND LOSERS
Ascena’s experience reflects the problems permeating the apparel specialty sector — overexpansion, merchandise sameness, inability to keep up with lifestyle and shopping shifts, and the pandemic. Banana Republic, Gap, Victoria’s Secret, J. Jill, Chico’s, Francesca’s and Ann Taylor continue to struggle. New York & Co. liquidated. Express is rationalizing its store fleet and hired Lazard Freres for financial restructuring but denies that bankruptcy is in the cards. Lucky Brand and Brooks Brothers both went bankrupt and were acquired by Simon Property Group and Authentic Brands Group; Diane von Furstenberg closed most of her stores, and the three Jeffrey luxury stores closed.
Yet a handful of apparel specialty retailers have been performing well, even through the pandemic, and are poised for growth, namely Lands’ End, Rue21, Lululemon, Madewell, Athleta, Abercrombie & Fitch and American Eagle Outfitters.
Some department stores, including Macy’s, Sears and Penney’s, are seen continuing to lose market share and close locations. While the future for Sears is doubtful, Macy’s and Penney’s hope downsizings will produce more manageable and agile businesses.
Yet Nordstrom, Kohl’s, Target and Walmart will shine in 2021. Nordstrom has advanced omnichannel capabilities, provides superior service and conveniences, and has a high penetration of online sales. It leverages its physical assets so Nordstrom, Rack and Nordstrom Local locations can provide better inventory availability and efficiencies, pickups and returns, alterations and styling services. It’s a culture that has always put the customer first. Nordstrom reportedly experienced a solid holiday season, on top of a surprisingly strong third quarter, though its major downtown flagships have suffered through the pandemic.
Kohl’s will also do well because it provides persistent value, the stores are easy to shop, and it’s had a string of innovative partnerships including becoming a drop off point for Amazon packages, rolling out Sephora shops and Lands’ End in-store shops, and doubling up its offering of athletic styles. The Menomonee, Wisc.-based chain is likely to pick up new customers in the seasons ahead, and foot traffic declines at Kohl’s stores last year were less than at either Macy’s or Penney’s.
Target will also be a winner in 2021. It’s flexibility, knack for foreseeing trends, perceived value, range of merchandise and its pre-pandemic acquisition of the Shipt delivery service have served the chain well. As an “essential” retailer, Target stores were among those that stayed opened through the pandemic, enabling the chain to take share from competitors that couldn’t stay open. The Minneapolis-based chain should further benefit from the planned introduction of Ulta Beauty to 100 Target stores and on target.com, as well as an expanding presence of Levi’s to many more Target doors.
Walmart, another “essential” retailer, will also be a winner in 2021, in no small part due to maneuvers and offerings that keep it competitive with Amazon and Target, in particular its superior grocery operation, the growth of Walmart Marketplace, and Walmart’s e-commerce, which surged last year. Volume gains have also been spurred by low gas prices and the nation’s declining unemployment rate. The Bentonville, Ark.-based retail giant has been pruning its international portfolio, selling off subsidiaries that haven’t brought the return on investment expected. The retailer’s track record overseas is mixed.
Home Depot, Lowe’s, HomeGoods and Costco should also repeat the strong performances turned in last year as Americans continue to shelter in, and upgrade their homes, apartments and outdoor spaces. Yet these businesses tend to thrive, with or without a pandemic.
LOCAL RETAILERS TO GAIN GROUND
Consumers are heeding the call to support their local retailers and municipalities are encouraging them to do so. Americans are becoming increasingly community minded and interested in supporting smaller, creative entrepreneurs and artisans with unique offerings and who cultivate one-on-one relationships with clientele. In addition, local retailers, as well as digitally-native brands, will take advantage of vacancies on city streets and in malls to open shops. They will negotiate appealing lease terms with landlords eager to fill the space.
Major cities such as New York and San Francisco have established programs enabling stores to set up merchandise on the sidewalks and engage in social media. In Chicago last year a yearlong digital marketing campaign — “Let’s Meet #OnTheMile” — was launched to play up a local-first approach. “We’re hoping for some normalcy,” said Adam Skaf, spokesman for The Magnificent Mile Association, in an interview last year. “We’re taking an entirely local-first approach, which is not to say we don’t welcome people to drive in from other states or to fly in. We’re just not anticipating the same level of domestic and international travel that we saw before the pandemic.”
“More consumers will choose to shop from local small businesses, which will strengthen their omnichannel offerings by adopting technologies that bigger retailers have relied on,” said Nicole Reyhloe, founder of Retail Minded, a retail industry blog, publication and research firm. With e-commerce accelerating, smaller, local businesses will avail themselves of tools like Shopify and can find cheaper ways of playing in the omnichannel arena. Furthermore, local delivery services are springing up, which mom and pop type shops can afford to support their online operations.
2021 TRENDS TO WATCH
Gradual pickup in mall traffic and apparel sales.
Sustained store and mall closings.
Continued e-commerce growth but rate slows.
Enhanced services and conveniences like curbside pickup and speedy delivery.
Stores recast space to adopt storage and fulfillment functions.
