The changing shape of retail

Podcast transcript

Velvet-Belle Templeman

Welcome to Grant Thornton's Navigating the New Normal podcast series.  My name is Velvet-Belle Templeman, and I'm here talking to Luke Ritchie, National Head of Retail and Consumer Products at Grant Thornton.  Luke has over 25 years’ experience specialising in retail.  Today we're talking about the new shape of retail in a post-COVID world.  Thanks so much for joining us, Luke. 

Luke Ritchie

Thanks Velvet-Belle, nice to be here.

Velvet-Belle Templeman

Now, Luke, we've gotten used to COVID or as used to COVID as anyone could be.  This has really changed the way that we shop and what we shop for, hasn't it? 

Luke Ritchie

Well, certainly in Melbourne, it's changed things.  Given that stage four lockdown means that literally no retailers outside of supermarkets and pharmacy, and a couple of others are even open. Obviously across the rest of the country, whilst shops are open again, the flow of customers is not what it once was.  In CBD locations in particular, many people are still working from home, at least some of the time, meaning that traditional office workers who make up the lunchtime shopping rush are much fewer in number and so there's a real impact there on the supporting retail and services, like cafes and restaurants and dry cleaners, they are really struggling in those centre of city CBD locations around the country and indeed, around the world. 

Customers are changing their shopping patterns as a result.  So we're seeing the return of the big grocery shop.  Whereas previously we might be more inclined to drop into the supermarket to pick up a few things whenever we needed them.  We're now more reluctant to go to those shopping centres and so we're making fewer trips and purchasing larger baskets.  That's something that we're seeing all around the world, particularly in countries where there's more COVID cases than what we've got here.  The other thing that's happening is that customers are staying more local to their home.  Again, in Melbourne, we can only go five kilometres from our home, so that’s certainly the case for us, but the result is we're purchasing more from local grocers and bakers and convenience stores.  So there is a positive trend toward local and sustainable purchasing, so that's a positive.  

Probably the biggest change of course, is that there's a huge surge in customers who have taken to shopping online.  So online order volumes are through the roof.  They're up 2-300% or more, even in many of the retailers that we work with and, you know, the expectation is that that trend will remain even after the pandemic subsides.  So even grandma is now shopping online, whereas before she probably didn't know how to do that.  So, the shift is becoming ingrained.  They say it takes 21 days to drill in a new habit, well, it's certainly been a lot longer than that. 

And so what that means is that retailers are investing heavily in their online operations to ensure that customers receive the experience that they expect in terms of digital, delivery timeframes, processing of returns, et cetera.  The government's announcement recently about increased investment into the NBN is also a strong signal that the future is definitely trending digital.  Another major impact is the change on shopper preferences and behaviours.  So, while online shopping is up, it’s not in every category.  So grocery, sporting goods, books, outdoor, motor vehicle parts, they're all seeing major growth as categories, whereas fashion apparel, footwear accessories, department stores, and obviously restaurants and bars are way down. 

This pattern reflects the fact that people are staying home more where we would have previously gone to a restaurant or a bar we're directing that or redirecting that spend into supermarkets.  And, of course, with fewer people going into the office or going out for a drink or whatever the fashion need is lower.  So fewer people are buying fashion, footwear, and accessories.  So it's a really disparate and disjointed recovery that we'll see.  And while so ever we’ve got this sort of more at home pattern, then it's going to be really difficult for some of those categories.  We're desperate for restaurants and bars to reopen down here in Melbourne and getting back to offices and seeing real people is something that we're all looking forward to as well. 

Another big thing is that customers are becoming a lot more value conscious so there's a lot of consumer sentiment uncertainty.  So we're trading down from more expensive to less expensive brands, you know, rather than buying from specialist stores, we might go and buy from more value conscious operations, like say the Reject Shop.  Those businesses are winning more customers, and supermarkets, we're seeing more private label sales consistent with that same trend of value.  In states outside of Victoria where bricks and mortar stores have been open for a few months, we've also noticed customers placing a very high value on health and safety, both of themselves as customers, but also the retail workers. 

So if a store doesn't appear to be COVID safe or have appropriate signage, hand sanitiser, trolley wipes not clearly visible, customers, they just won't enter, they'll vote with their feet and leave.  This is definitely something that we're seeing around the world and particularly, pretty much every other Western country where there's a lot more COVID cases than what we've got here.  So there’s a whole smattering of things there, but they’re a lot of what we're seeing in terms of shifts in customer preferences. 

Velvet-Belle Templeman

Now you mentioned the move to a greater online presence, so e-commerce, are we seeing the impact of that shift on bricks and mortar retail yet? 

Luke Ritchie

Definitely, yes.  The shift towards online has been underway for some time, but COVID-19 has really just fast forwarded five years of transition into five months; it's just squeezed time.  So the technology that underpins that online shift has been advancing for years and years, but we're really seeing a huge speeding up of that with the COVID scenario.  So more and more people are shopping from their smart phones, which means basically that there are fewer customers going to physical stores.  The pandemic has accentuated it though, so until we have a vaccine we're going to be living in this environment where people will be naturally less inclined to visit large congregated spaces like shopping centres.  So we have to plan for that as a retail sector and digital isn't only about the shopping experience on your phone or on your computer.  Also, in-store retailers are using technology to help customers navigate more effectively. 

QR codes are rebounding. They might be placed on mannequins or on particular products to help customers understand more about the product without having to interact really closely with people.  They're clearly used a lot, QR codes that is, to help checking in for cafes and restaurants and locations from a contact tracing perspective.  So digital innovations that help reduce the degree of physical touch points are becoming quite popular and we don't really have a sense of how far away a vaccine is, it could be a year, it could be more.  So retailers are definitely going to need to live with this for some time.  The result of all of this is that retailers are having to reduce their selling space because so much of their trade is moving online.  Department stores like Myer, David Jones, and Target have all made public statements recently about their future store networks being smaller in the future than what they are today. 

Premier Investments, which is Smiggle and Peter Alexander and others, they've announced at the results for FY20 just last week and they talked about closing up to 350 stores and that's after online sales grew by 50% to comprise what for them is now a quarter of sales for that group.  So it's a marked shift and it means that even successful retailers are looking at reducing their footprints or their selling spaces.  So those sectors that I mentioned before that are not going so well, so department stores, and fashion and accessories retailers, they are really under pressure to reduce their store networks.  To rebalance, to reflect what customers have already done, that is they've moved more online. 

So what does that mean for traditional shopping centres?  I think many retailers will be taking the view that they need to reduce stores so that's bad news actually, for landlords.  I think the larger flagship centres like Chadstone or Chermside or Chatswood will be fine.  But the smaller middling centres will be definitely under pressure.  As if you imagine those department store anchor tenants, it only takes one or two of those to leave for a whole centre to really struggle, to attract foot traffic.  So I think it's likely that we'll see leases taken up in those centres by services, more and more, and entertainment operators, even.  So rather than a centre full of shops I think we'll see more and more centres with a broader array of services in there.  Even childcare centres, for example, I think will soon be more common in shopping centres.  I also think maybe that with the trend away from expensive CBD and centre locations, we may even see some of those retailers pop up in shopping strips in outdoor spaces where there's cheaper rent and perhaps some pragmatic opportunities arising. 

Velvet-Belle Templeman

So retailers are investing more in their backend online operations, is online retail and delivery that much more cost-intensive than shopping in store and are retailers prepared to wear that cost? 

Luke Ritchie

Yeah, it's a good point, actually.  So in a traditional retail transaction, the customer picks the product from the shelf themselves, and of course they transport it to their own home themselves.  In an online transaction the retailers are paying somebody to go and pick that product from somewhere and oftentimes to also pay for shipping it to the customer's home.  So that means that online sales can be profit dilutive for retailers, which is a real challenge.  So that's why you see online offers like if you spend more than $50, you get free delivery, for example.  So for the retailer to grow the transactions and the basket to a point where it makes more commercial sense to pay the logistics side.  In all of the retailers that we work with and those that we don't as well there are dozens of new online picking shifts for workers in stores where retail operators are being diverted away from customer facing activity to picking online orders from the shops themselves.

In Melbourne, this is particularly prevalent given that the physical stores as in the front doors are closed, but many are still offering contactless click and collect operations.  So that means that the team members are in there picking and packing orders to be available for collection for customers in a contactless way.  So they're still in there working, but they're doing obviously quite a different thing.  Retailers are even diverting orders from other states like Sydney orders for online are being diverted to Melbourne because there's all these closed shops with workers in them, ready to pick orders without being distracted by customers, to ship to their home.  So that's something that's going on right now.  But whilst retailers are using their existing operations as online fulfilment sites, there can be much greater efficiencies gained through central order fulfilment, i.e. not from store networks, but from central distribution centre operations.

The big supermarkets Coles and Woolworth's are both spending hundreds of millions of dollars here in this area in terms of building robot driven, automated, large scale online fulfilment centres, whereby stock items are picked by remote controlled robots and sent by conveyor, down to stationary pickers who package the items up for customer delivery.  So that type of operation means that you can get through a lot more throughput in an hour of someone's time compared to if they're picking from stores.  That's a lot more efficient, however it's expensive.  The pure play online retailer Catch, used to be called Catch of the Day, is also launching robot driven operations in its Melbourne warehouse right now, allowing for a greater capacity to process online volume and moving Catch closer to offering same day delivery for local customers.  So it won't be too far until we can get same day delivery to our homes using that kind of technology.  And Catch is owned by Wesfarmers, so we might expect to see other brands from the Wesfarmers stable, like Kmart or Target leverage those same automation capabilities to make it more efficient for those retailers. 

Velvet-Belle Templeman

So they can start to keep their costs down.  Consumers can have anything they want delivered to their door.  Is there even a role for the shopfront or the shopping centre anymore? 

Luke Ritchie

Oh, absolutely.  We are in a difficult time with the pandemic that's true, but retail will respond.  Look, ultimately humans are social creatures, we want to interact with each other.  We like to experience shopping face to face.  COVID has put a dampener on that clearly for now, but it won't last forever.  So whilst there's no doubt that online shopping is here to stay, people will eventually get back to shopping in person in large part, and they will demand a great customer experience.  And this is where the future of retail will be, the intersection of digital and in person experience having a seamless operation between what's on your online operation and what's happening in your store using digital capability cleverly in store from an experience perspective.  So retailers that do this well will flourish, and those that don't will go out of business because ultimately, whilst I think we will all get back to shopping in person, there'll be slightly fewer of us doing that than before, because there is this ingrained growth in online now. 

I noticed that just this last few months, Amazon opened its first large scale full line supermarket in Los Angeles.  So that proves the point that, you know, bricks and mortar stores are important even for the largest online operator in the world.  Why?  Because shopfronts offer what online can't closeness to the customer and the true in-person shopping experience.  So, you know, as I said, whilst we're under pressure from this perspective in a COVID environment, we are adapting and we will remain, that is we, retail as a sector, is adapting and will remain strong.  Even now 80% plus of all retail is still undertaken in shops.  So yes, the shopfront will be and will continue to be fundamental. 

Velvet-Belle Templeman

Now Luke, the elephant in the room is the number of people who work in retail who have already lost their jobs during the downturn.  But it sounds like the jobs in retail will look very different in a post-COVID world. 

Luke Ritchie

Yeah, there's more than 1 million Australians working in retail.  So it's one of the biggest employers in the country.  So it's true, many have temporarily lost jobs as shopfronts have closed, but as I said, retail will bounce back and adapt.  And with online growing to a much larger share of total sales, the type of retail jobs is also shifting.  So whilst there might be fewer traditional shop floor sort of customer facing roles, there are a lot more, and will continue to be more, distribution centre or warehouse picking online fulfilment type jobs and also more digital developers and online advertising type jobs as well.  In the US I noticed Target, as in the US Target expects to hire this holiday season or this Christmas holiday period, 130,000 seasonal workers, which is more or less what they do every year.  But this year they're flagging that many of these people many more than before, will be dedicated to same day kerbside pickup type jobs, distribution centre picking roles, and those types of online fulfilment activities, rather than, you know, traditional customer service or, shelf stocking type roles.

The digital wave, isn't just hitting customers.  The employees in retailers are also working in a much more digital savvy environment, retail training, communications, promotions, and more are now being delivered from Head Office out to the shops via smartphones.  So you can watch videos and training information on your own phone through apps, and it also enables digital rostering.  So, you know, rostering for shifts is becoming Uberised.  That is to say, I'm trained in a particular category at, let's say, Kmart, I can actually bid for shifts, or I can put my own shifts up for others to take if they're similarly trained and I can work in different stores because where I'm appropriately trained, I should be able to pick up shifts in my prescribed area.  So this digital experience is impacting the retail employee side as well.  

Velvet-Belle Templeman

And the shoppers themselves, interest rates are at a record low, income tax cuts are being brought forward, are we shopping, and is there anything more we can do to encourage people to spend?

Luke Ritchie

Things like you've mentioned, also the early access to superannuation, these things have encouraged people to continue to spend, yes, helping some sectors. But there's also some evidence that suggests that some of the additional stimulus is going to savings and paying down debt.  Consumer confidence is really taking a battering so that uncertainty is being felt by households who are more comfortable retaining cash than spending.  So again, those discretionary categories like fashion, apparel, footwear, are really, really impacted by that.  So in a difficult environment, retailers have to do everything they can to meet this changing customer demand, the dampened customer sentiment.  So aside from the products that they sell, they have to have the appropriate COVID safe plans, as I mentioned before, cater for contactless, click and collect and all of those little, but important innovations to do everything that they can to help customers continue to want to come and spend their money. 

Velvet-Belle Templeman

Now, Luke, we're coming up to the Federal Budget next week.  It's unlikely that there'll be specific funding for retail, but retail is a major employer.  Is there anything that you're hoping to see from the government, or is it really dependent on retailers to bend and flex?

Luke Ritchie

Well, certainly we're hopeful of seeing broad incentives and policies that will help the retail sector, as I mentioned, more than a million Australians work in retail.  So it's a huge employer, which is of large consequence to the job and jobless numbers that the government watches closely, of course.  So whilst the shape of retail has changed, the retailers are adapting.  Certainly, the policies that the federal government employed in terms of JobSeeker and JobKeeper, as well as what I mentioned, the early access to super, they've been critical in helping many of these retail workers survive through this year and probably into next year, in some cases too. 

So yes, tax incentives, which encourage investment from retail businesses will also be welcome.  I keep talking about online and the growth in online and the need for retailers to invest in online.  So tax incentives to encourage that type of investment are definitely a good idea.  Governments around the world have flagged large borrowings to fund all of these responses.  And look, we're lucky we are in such a low interest rate environment that they can do that.  So governments are well placed to support the economy through what is probably the toughest period in a century.  But for all of that, retail is resilient and it will adapt and continue to survive. 

Velvet-Belle Templeman

Luke, thank you for your time. 

Luke Ritchie

My pleasure Velvet-Belle, thank you.