Retail 2021: It’s all about distribution

Expect a resurgence in local shopping centers and a convergence of channels

For all of the talk of the pandemic e-commerce boom, it’s far too soon to write off the brick-and-mortar sector of the retail business. On the contrary, brick-and-mortar are likely to experience a resurgence in 2021 for one simple reason: people will want to get out of the house once COVID-19 is finally under control — and retail establishments are one of the places they’ll be headed.

Retailers and importers will also likely continue to source heavily from China, despite talk to the contrary. (See Peter Buxbaum's U.S.-China de-coupling – a big red herring)

Still, the pandemic will have left its mark on the retail business. Companies that were ailing before the virus hit did not survive. Stein Mart, Lord & Taylor, Century 21, and Barneys New York are among the retailers that are now liquidating.

E-Commerce Growth Spurt

During the height of the COVID closures, e-commerce packed “six years of growth into six months,” effectively a 12% annual increase, said Craig Johnson, president of Customer Growth Partners, a consulting and research firm. But that growth rate will not be sustainable. The numbers now show that, through 2020, 82.5% of retail sales still happened inside physical stores, a figure that is expected to decrease to only 78% by 2023. That means that, for the next few years, e-commerce will grow at around 2% per year—twice its expected pre-pandemic growth rate but well below the level of the pandemic peak.

One of the downsides of the e-commerce boom was that it caused online systems and logistics networks to become overloaded. One survey from Contentsquare, a software company that markets a digital analytics platform, showed that only 15% of consumers were happy with their online shopping experiences during the pandemic. All of these data point to ample growth opportunities for the surviving brick-and-mortar retailers to cement customer relationships with improved shopping experiences and distribution schemes.

The continuation of home-based work that started during the pandemic will have a couple of consequences. Some outlets like Macy’s, Foot Locker, and Nike are looking to switch from malls to smaller shopping centers and community locations, leading some analysts to believe that neighborhood shopping districts will grow, as workers continue to work more from home than from the office, even after the pandemic is over.

The same phenomenon of home-based work will also cause headaches for apparel retailers, as employees continue to dress down for work at home—and maybe for the office as well. McKinsey & Company’s report, The State of Fashion 2021, predicts that, even with effective control of the virus, global fashion sales will decline as much as 5% in 2021. If the pandemic drags on, the apparel industry won’t return to 2019 levels until the end of 2023, according to the same report.

Besides the potential move to local communities, brick-and-mortar retailers will strive to provide unique in-store experiences as part of their marketing strategies and to distinguishing themselves from purely online retailers. The proof of the attraction of the in-store experience is that digital retail leaders have caught on to that notion, with companies like Bonobos, Glossier, Casper, and Warby Parker launching and expanding brick-and-mortar locations in recent years. So has the world’s number-one online giant, which opened 18 Amazon book stores since 2015. The first brick-and-mortar Amazon Fresh Grocery Store opened last September, offering same-day delivery and pickup, as well as Amazon.com package pickups and returns.

“We’ll continue to see online marketplaces and traditional retailers converge,” said Greg Chapman, a senior vice president at Avalara, a provider of automated sales tax solutions.

The Bigger They Are…

Even before COVID-19, regional malls and their tenants were not doing especially well, and some retailers reduced their presence at some of those shopping behemoths. One effect of the pandemic was to accelerate the plans of companies like Gap Inc., Macy’s, Victoria’s Secret, and Nordstrom to close mall stores, as well as some in downtown locations. That’s going to leave a good deal of real estate unoccupied—square footage that could be put to different uses.

Johnson believes that, in 2021, brick-and-mortar retailers must “right-size their store fleets.” The imperative for mall operators, as a result, will be to put new business models and purposes in place to maintain profitability. Already, mall operators are attempting to take more control of their destinies by acquiring some of their former tenants. Last year, joint ventures led by Simon Property Group, a real estate investment trust, acquired Brooks Brothers and Forever 21.

At the same time, retailers are turning some mall retail space into distribution space. From 2016 through 2019, 7.9 million square feet of U.S. retail space was turned into 10.9 million square feet of new industrial space, according to a study from CBRE, a commercial real estate firm. With global retailers like Amazon and Walmart leading the way by investing in logistics, the trend of turning former retail space into warehouses and e-commerce distribution centers will accelerate, according to Predictions 2021: Retail, a report from Forrester, a market research company. The McKinsey report agrees that “major U.S. retail players like Walmart, Kohl’s, and Target have been working to convert their retail spaces into mini distribution hubs to shorten the last mile for customers.”

Best Buy recently entered that fray, with a ship-from-store pilot that began last August. On a call with investors and journalists, CEO Corie Barry explained that Best Buy would be turning 250 stores into delivery hubs to handle online orders. While Best Buy already shipped from stores before the pandemic, the new fulfillment centers will handle larger quantities and facilitate same-day deliveries in an effort to compete with Amazon.

The next step for mall owners will be to try to cash in on this distribution trend by negotiating, as part of their leasing agreements, for a cut of “online sales that involve in-mall fulfillment,” said the Forrester report.

Forrester expects heavy investments by retailers and brands in micro-fulfillment centers and drop-shipping in 2021 in an effort to “take back the distribution reins.

“Logistics will dominate retail investments,” the Forrester report concluded. “In a word, it’s all about distribution.”