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A “Temporarily Closed” sign hangs in the window of Nordstrom Inc. store in the Midtown … [+] neighborhood of New York, U.S., on Friday, March 20, 2020. Some retail segments, such as grocery chains and Walmart, may benefit from the coronavirus outbreak. But for a sector already battered by the shift to online retailing and other structural changes, the coronavirus only portends more pain. Photographer: Gabby Jones/Bloomberg
By now the devastating impact of the COVID-19 outbreak on retail is becoming well known. March retail sales fell a record 8.7% and it seems a virtual certainty that the April numbers will be far worse given that the wide-spread shuttering of “non-essential” brick & mortar operations across the United States did not take hold until mid-month.
Unpacking these results reveals a wide-range of outcomes. Stocking up efforts, along with people eating at home more, drove a surge in spending at grocery stores and pharmacies. At the other end of the spectrum, department store sales (with a large concentration of fashion-related offerings) fell some 25% and apparel and accessory store revenues cratered 52%.
It’s perhaps quite the understatement to say that such a massive deceleration could not have come at a worse time. Apparel specialty players and moderate department stores have been facing significant headwinds for years and many came into the pandemic with weak balance sheets and what might be charitably considered shaky liquidity positions. Moreover, for the luxury segment in particular, March and April are the peak months for full-price selling, making them disproportionately critical to profitability and cash flow.
Unsurprisingly, retailers have been working frantically with vendors to cancel orders, return already received merchandise and obtain special markdown allowances. At one level this behavior is akin to what happened during the peak of the financial crisis when Lehman Brothers failed in mid-September of 2008, initiating a cascading impact on stocks and consumer spending. In fact where the COVID-19 crisis falls is almost exactly the same place in the fashion cycle—just one fashion season off.
The hit that luxury and fashion apparel retailers took from the financial crisis was severe. But the impact from the pandemic seems certain to be more dire. In the fall of 2008 most retailers took massive markdowns to clear merchandise, and while the sales and profit hit was substantial, at least their physical stores were open, allowing customers greater opportunity to buy the goods and affording many companies the chance to cover their overhead. While the e-commerce penetration of some key players is far greater today—over 30% at both Nordstrom
It remains to be seen when the vast majority of stores will re-open and under what sort of operating conditions. While some consumers may shift back to their pre-pandemic behaviors quickly and unabashedly, it seems likely that many will return to physical store shopping reluctantly, either out of safety concerns or the realization that they simply can do just fine with less stuff.
Either way, specific to fashion merchandise, it’s important to remember that a fair amount of spending is driven by seasonal factors. While there is still (some) hope for true summer merchandise, the window of opportunity for traditional spring full-price selling is closing fast. The bump retailers typically get from product bought for school vacations, Easter, Mother’s Day and other spring events is largely gone. Most high school and college graduations aren’t happening as in-person events. And for luxury retailers that derive a meaningful percentage of their sales from both domestic and international tourists, well that isn’t coming back in the foreseeable future. In all these circumstances, there is effectively no pent-up demand to capture down the road.
For consumers with the interest and the means to take advantage of what will likely be once in a generation bargains, it’s a big win. For fashion and luxury retailers and vendors, sadly, the losses will likely be historic and the potential re-shaping of the industry through store closings, bankruptcies and consolidations, profound.
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