Now, more than a year since the World Health Organization declared “Covid-19” a global pandemic and each state in the United States shut down and subsequently reopened their borders, most Americans’ anxiety levels are at quite manageable levels here in July. At this time last year, pessimism was creeping in when reality hit that Covid-19 would not be a short blip in our lives but something that would have a daily effect on us for many years to come. But as we progress through the summer, this pent-up demand- dare I say similar to what was seen in the “Roaring Twenties” of the 21st century, after a tumultuous decade spent concluding the first World War and a pandemic of similar magnitude- has many excited of what is to come. Optimism is in the air and with the savings rate at an all-time high (2020 total of 33% has nearly doubled previous highs of 17% in 1975!), consumers are flushed with cash and more confident to spend their disposable income.
2020: The Year That Was… but Not All Bad
In 2020, government restrictions on public gatherings forced many retail, restaurant, and entertainment tenants to close their doors. Exceptions were made for “Essential Retail” categories. In a year of retrenchment for most, the retail landscape that unraveled in 2020 could best be described as the “haves and have-nots.” During these times, the term “K Shaped Recovery” was mentioned daily by practically every major news outlet describing the projected economic recovery pattern where the large and solvent companies were bouncing back better and stronger and the smaller and less fortunate companies trended in the opposite direction. Dominant retailers who were well-capitalized and well-positioned survived. Outdated brands who were financially strapped prior to the pandemic like Stage Stores (Goody’s, Palais Royal, Peebles, Gordman’s, and Stage Parent) and Stein Mart were already on a path towards bankruptcy and extinction, and the pandemic was the knockout punch as they, like many other retailers, could not pivot quick enough to migrate to a predominantly “online” sales and distribution model.
The three biggest factors governing a retailer’s success and stability during Covid-19 boiled down to the retailer’s:
- Specific use and whether or not it was deemed an “Essential Use”
- Strength of e-commerce platform and omnichannel offerings
- Financial size and strength of parent company to weather the storm
So who was active and how did they stack up in these 3 categories?
The large retail brick & mortar “generalists” like Walmart, Costco, and Target still saw tremendous growth while they worked through the kinks of their digital sale platforms in hopes to maintain market share and mitigate the impact of Amazon. These three retailers, that rank first, fourth, and eighth respectively in worldwide retail sales, were able to not just survive, but thrive. This was primarily due to their vast capital resources, established digital sale platform, sophisticated distribution and supply chain network, and diverse product lines, together with being categorized as “Essential Uses” were able to balance in-store and on-line sales to flourish during Covid-19 restrictions on public gathering.
In addition, there were also those particular segments that have been homeruns during the pandemic with consumers working remotely and constantly staring at ways to improve the place they now spend practically their entire day. Unsurprisingly, the home improvement and home furnishing categories saw tremendous growth with consumers not only looking to upgrade their homes, but to customize their new work environments. The home improvement giants like Home Depot’s and Lowe’s continued success were noticeable with never-ending lines out the door throughout the Covid summer months, but some retailers like At Home were completely revived by the pandemic. In April of 2020, At Home was on life support trading for less than $2 a share and talks about filing for bankruptcy filled the airwaves. With At Home not only being in the booming home furnishing category but also being the discount provider during a time when shoppers were money-conscious, 2020 was an unprecedented year and 2021 looks to follow a similar path. In its 2020 fourth-quarter earnings, At Home reported sales were up more than 41 percent and comparable stores sales up nearly 31 percent from 2019’s fourth quarter marks which led to its stock price skyrocketing up to $34 a share.
Across the board, discount retailers flourished during 2020 and continue to do so in the first half of 2021. A few others to mention include, CitiTrends, an apparel retailer with home goods targeting urban, lower income consumers, expecting to open at least 30 stores this year and planning to open at least 100 new stores by the end of 2023. Five Below plans on opening 170 to 180 new stores as their growth continues to take shape across the US originating from their Philadelphia roots. “Dollar Stores” such as Dollar Tree, represented by Metro Commercial Real Estate in Eastern PA, and Dollar General continue to open more stores than any other retailer. Dollar Tree plans to open 600 stores (400 stores under the Dollar Tree brand and 200 stores under the Family Dollar brand) stores and Dollar General plans to open 1,050 stores in 2021.
The Future is Now
In the early months of Covid-19, many restaurants and food operators got creative in how they sold food and beverages amid mounting governmental restrictions. They used social media to communicate and some developed “pop-ups” and “ghost kitchens” to assist with take-out and delivery platforms. Government restrictions on in-restaurant dining resulted in several of the top fast-food chains accelerating store remodels while maintaining robust drive-through traffic. McDonalds, Wendy’s, Burger King, Popeye’s, and Taco Bell’s store remodels over the last year were full of design innovations to adapt to the rapidly changing environment. Burger King presented a bold “suspended kitchen” design, where enhanced dining rooms will be located above drive-thru lanes. Not only is this an exciting, futuristic concept Burger King is toying with, but it will also allow them to shrink their overall footprint for some of their new restaurants.
Some other fast-food groups like McDonald’s presented a different approach and instead of enhancing their dine-in-seating, they will almost completely eliminate it at certain locations with a sole focus on efficiently servicing the mobile pickup and delivery customers with a nearly contactless experience.
The most drastic changes we have to deal with are not just the revamping of fast-food store prototypes, but the heightened competition from fast casual food users looking to move from inline locations to “pad” locations to give them a “front-and-center” presence where they can offer the consumer easier accessibility and convenience. For example, the “Chipotlane” was a design consideration Chipotle had in the works since 2019 but was rushed to market in 2020 to adapt to Covid-19 restrictions. About 60-70% of all new Chipotle stores incorporated this added feature adding convenience and safety with less human-to-human interaction. Chipotle was not the only one to put the full-court press on reconfiguring their design as Shake Shack, Noodles & Company, and Qdoba have all rolled out locations with drive-thru convenience. In general, most fast-food and quick-service restaurants will continue to fight to be closest to the road in a multi or single tenant building, leading to increased demand and net rent for these pad sites. However, the downside is the vacancy of inline space due to the preference for pad locations. We anticipate these second generation in-line spaces will be very attractive to “mom and pop” restauranteurs seeking new opportunities as the effects of Covid-19 continue to wane.
Brick-And-Mortar Shopping’s Continued Emphasis on Experience
Experiential retail is a term thrown around frequently in the retail industry and helps to illustrate how brick-and-mortar will always have a place in consumer sales. Technology has led to the rise in e-commerce and presented a different channel for customers to attain their desired goods and services. But certain uses and categories will always require in person engagement and the consumer to be “present” which is irreplicable by digital sales. Garrett Nelson, a senior equity research analyst at CFRA, stated in April 2021 that “E-commerce has been moderating for a couple quarters now; we think that continues more drastically as the vaccine is distributed and the pandemic gradually fades” (Pollack 2021). The counter-side of what Nelson alludes to with the plateauing of e-commerce’s sales to a more fixed percentage is brick and mortar sales will also become more fixed as well. Therefore, we can expect retailer’s omnichannel services to begin to have more defined roles as compliments. In-store sales will still remain around 80% of total sales, but retailers must re-imagine how their in-person shopping experience further connects customers to the retailer’s brand in a way impossible to accomplish from browsing through their online catalog.
One retailer striving to repurpose their in-store experience is Dick’s Sporting Goods who opened their first “House of Sports” store in New York in 2020. This new store will offer a 17,000 SF turf field and track, a 32-foot rock climbing wall, golf pro shops, a putting green, a batting cage, yoga, and other sport specific equipment services tailored to provide a hands-on experience. These enhanced amenities were designed to allow customers to “test drive” products immediately in-store strengthening Dick’s brand identity and customer loyalty while also more broadly shedding light on why brick-and-mortar will not become less, but more, important as we gear up for a post Covid-19 shopping experience.
Furthermore, some of the changes implemented to limit human contact may end up sticking around long term as their benefits are still apparent in a world where social distancing is not mandatory. One example is appointment-based and personal shopping utilized by some luxury and high-priced goods retailers. Most of the talk has been about the movement to cashier and employee-less models rolled out by the likes of Amazon Go, but a more tech driven service aligns better with grocery, convenience, and discount stores. When shoppers are conscientiously choosing to go to physical stores though they are embracing and desiring human connection after a year spent largely in isolation. Many retailers including Best Buy and some clothing retailers started to lean heavily on appointment-based sales for safety reasons but have found customers have taken a liking to having an expert advisor right by their side to answer any questions and provide product recommendations.
Americans have demonstrated tremendous resiliency during the past 16 months. Employees, retail operators, and property owners have all been tested leading to some challenging financial times for many. But it seems like our economy is on the right track supported by retail sales being up 9.8% in March, which was the largest increase since May 2020 and almost double what experts predicted for the month (Mutikani 2021). As restaurant and bars begin to open in higher capacity, these numbers will only climb in the summer and fall months where customers are ready and able to spend. The retail world was critically challenged by governmental closures, but the hardship led to innovation we would not have seen for many years to come. The retail industry will continue to innovate and build for a better tomorrow with safeguards to preempt the future effects of another pandemic. Retailers will emerge stronger, and the second half of 2021 looks to be an exciting time for all.