The coronavirus will accelerate retail’s ‘collapse of the middle’

Discussion
Photo: RetailWire
Mar 24, 2020
Steve Dennis

Through a special arrangement, presented here for discussion, is a summary of  Steve Dennis’ recent Forbes article. Steve is President & Founder of SageBerry Consulting and a senior Forbes Contributor. His first book Remarkable Retail: How to Win and Keep Customers in the Age of Digital Disruption  will be published on April 14th.

For retailers struggling with failing consumer value propositions, the coronavirus pandemic could not have struck at a worse time. Just as many are running out of meaningful cost reduction moves and are in desperate need of cash from profitable top-line growth to invest in more than a timid transformation, much of physical retail is now grinding to a halt of difficult-to-determine depth and duration.

For highly leveraged retailers, prospects for near-term recapitalization appear bleak. For any retailer that sells fashion-sensitive or seasonal merchandise, each week of declining traffic adds to the pile of coming markdowns.

Dramatically shifting consumer demands combined with the broad availability of many shopping conveniences that were once scarce — product information, product choice, distribution access and more — have laid bare the weaknesses of many once-powerful and iconic retailers. Good enough no longer is. We have to choose remarkable.

This bifurcation of retail — this widening gap between the industry’s haves and have-nots — has been occurring for years. During the past decade, in particular, success has mostly been found at either end of a spectrum. At one end — despite claims of a retail apocalypse — retailers offering remarkable value in product and convenience have been growing sales, profits and store counts. At the more premium and experiential end, plenty of specialty and high-end stores are experiencing considerable success. Poor or stagnant financial results, bankruptcies and mass store closings are largely concentrated among those trapped in the mediocre middle.

In my new book, “Remarkable Retail: How to Win & Keep Customers in the Age of Digital Disruption,” I write, “The power the consumer holds will not allow many just-good-enough retailers to sustain market share, much less ever achieve adequate financial returns.”

As I wrote that sentence last fall, a possible recession was very much top of mind, but a pandemic was certainly not.

Beyond the as-yet-unwritten story of the ravages of this outbreak and the magnitude of its tragic human toll, the spread of the coronavirus seems certain to accelerate the collapse of the Middle and push many other weak retailers (and the industries that serve them) over the edge.

DISCUSSION QUESTIONS: Do you see the coronavirus fallout driving many department stores and other mid-tier retailers out of business? Which retailers serving the middle appear best positioned to survive?

Please practice The RetailWire Golden Rule when submitting your comments.
Braintrust
"The collapse of the meh middle is one thing. It’s underpinned by the collapse of category killing as we once knew it. "
"Declining retail relevance has forced HBC to focus on a different assortment: desirable urban properties."
"I believe malls and retailers like J.C. Penney and others need to try a little more focused out-of-the-box thinking before they throw in the towel."

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26 Comments on "The coronavirus will accelerate retail’s ‘collapse of the middle’"


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Mark Ryski
BrainTrust

If the pandemic reaches levels predicted, there will be a profound and permanent change to the retailing landscape. Many retailers will close and, as Steve rightly points out, many were already vulnerable financially before the pandemic. The goal for every retailers should be to survive this crisis. For retailers selling essential goods, that means keeping your staff and customers safe and the vital food/drug supply moving. For discretionary retailers – winter is coming and I fear it will be a long and cold one. Retailing – like everything else – has changed.

Richard Hernandez
BrainTrust

So the question is: what are you doing now to avoid this possibility? Many retailers and business are or have already changed their business model to at least attempt survival. Those that have not are getting to the point where it will be too late. What is still unknown is what help the stimulus monies may provide for the survival those businesses. If I were them, I would be in tele-conferences with leadership walking through the gaps that need to be addressed – now.

Gene Detroyer
BrainTrust

I believe collapse is inevitable even for those “getting the point.”

Jeff Sward
BrainTrust

At some point, the simple math of cash flow will tell the tale. And the math for most mall retailers just got very, very scary. COVID-19 could not have come at a worse time. Even a quick recovery from this virus is going to produce ripple effects that will be felt well through the next holiday season. And I am as concerned for the small independents as I am for the boring middle. How smart can we be about a “stimulus” bill that recognizes how many moving parts there really are here?

Stephen Rector
BrainTrust

A big problem is inventory – the inventory that is sitting in closed stores isn’t getting any better with age and on top of that, there are goods sitting in ports that have no place to go. Who wins here? The off-price stores are going to have a field day once things reopen as they will have first dibs on a lot of great product that the other retailers can’t take in or, in the worst case, from stores that are no longer in business.

Bob Amster
BrainTrust

One of the consequences of the COVID-19 pandemic is that those retail businesses that were marginally surviving will not withstand the reduction in overall business, whether foot traffic or e-commerce. While e-commerce may show a slight uptick, the loss of the brick-and-mortar business (the larger portion for most retailers) will be their death knell.

Brandon Rael
BrainTrust
COVID-19’s impacts will be particularly significant in the retail space. The retail operating model has always been to create inventory, borrow against the inventory and then sell the inventory. However, when you can’t sell the inventory due to the stores being closed, and no one is buying as they are focusing on essential needs, the whole value chain falls apart. Now is the time for a call to action for the mid-tier retailers to reexamine their operating model, focus on liquidity, shutting down or pausing costly non-essential long term transformation initiatives. However, the middle of the retail universe is an area where partnerships and collaborations are critical to survival. Retailers should negotiate with their landlords, examine their co-tenancy clauses of their leases to see if a forbearance or delayed rental payments could be considered due to the force majeure attributed to the global pandemic. In addition, the trio of wholesale distributors, manufacturers, and retailers are all significantly impacted by COVID-19. Now is the time for collaboration, and finding creative ways to keep the retail ship… Read more »
Dick Seesel
BrainTrust

I worry particularly about the fate of J.C. Penney right now. The company was already struggling to find a solution to its long-term financial problems, and the shutdown of many regional malls around the company does nothing to help matters. The company also lagged behind its competitors in building its e-commerce capacity — not a good place to be today or in the future.

Cathy Hotka
BrainTrust

The great recession of 2007 changed the retail landscape, and this pandemic will further change things. Customers who are sheltering in place don’t need a new pair of $800 shoes or a pricey new handbag. This would be a good time to buy stock in discount stores.

Gene Detroyer
BrainTrust

We have been writing about the decline of these mid-level retailers for years. Their collapse was always inevitable. It was just a matter of time. Now that timeline has been accelerated from years into months.

Ralph Jacobson
BrainTrust

I could not agree more with this article by Steve Dennis. I went on record at least 15 years ago warning of the “bifurcation of retail.” So for those retailers that were on “life support” on January 1, 2020, they have already started layoffs, divestitures, etc. COVID-19 will most likely only accelerate this contraction of their businesses. Literally their only hope may be government stimuli to keep them in business just long enough to file for bankruptcy protection. There wasn’t much hope for them before the virus.

Richard J. George, Ph.D.
BrainTrust

Unfortunately for some retailers living in the big middle, this will hasten their demise. Recall that before this epidemic, the big middle was and has been under siege for years. Recall Sears, “where America used to shop.” The pandemic and impending economic uncertainty are simply accelerating their relevance and subsequent decline. Even before the current crisis, the anecdote for the big middle is to become relevant. How? By offering their target market a real differential advantage or reason to shop at their stores or online. Easy to say, not easy to do.

Lisa Goller
BrainTrust

Coronavirus will further widen income disparity, fueling value and premium retail, and harming department stores. This month, Hudson Bay’s abrupt leadership change signaled a strategic shift from reinvention to real estate. Declining retail relevance has forced HBC to focus on a different assortment: desirable urban properties.

Mohamed Amer
BrainTrust
The ongoing market bifurcation is an outcome of fierce competition and changing consumer expectations. Those mechanisms are unlikely to change. The retail sector has experienced tremendous shocks to the core over the past 20 years. Two very specific ones, first the advent of Amazon and the meteoric rise of online shopping from a single innocuous category to every imaginable product and service. This was a slow, simmering disruption that has turned to a steady and rolling boil. The second shock is a real black swan event, the coronavirus pandemic and its sudden demand and supply stops. By definition, unpredictable and unforeseen – a true surprise that did not enter any contingency plans. The two shocks, one slowly developing and the other instantaneous, are shaking the physical store model to its core. Together they create the potential for a permanent behavioral shift where consumers will prefer to shop online with deliveries to the home. Any retailer that lacks an e-commerce presence with solid operational processes will eventually fall by the wayside. The trend of experiential retailing… Read more »
Carol Spieckerman
BrainTrust

The collapse of the meh middle is one thing. It’s underpinned by the collapse of category killing as we once knew it. Retailers that are reliant on softlines success (which describes much of the middle) are in double jeopardy as these categories are attacked by Amazon on one end and nimble niche players on the other and now, as spending on non-essentials grinds to a halt. Lack of category and business model diversity is accelerating the collapse.

Lee Peterson
BrainTrust

I think this crisis will further damage specialty and department store retail more than any other segment. Start with this: they’re in malls! Of course, there are exceptions, like Urban Brands, who are not, but for the most part, department stores and specialty, already hurting, will be severely damaged if we’re locked down longer than a month. Quite possibly irreparably so.

Ken Cassar
BrainTrust
Ken Cassar
Principal, Cassarco Strategy & Analytic Consultants
6 months 2 days ago

We seem to be in the midst of an accelerated Darwinian moment. Many retailers of non-essentials with weak balance sheets are not going to survive COVID-19. When we come out of our quarantines in a month or so, though, we will see unprecedented levels of consumer demand, I believe. Those retailers that were able to hold on are going to be in great shape, with significant pent-up consumer demand and less competition than before.

Mark Ryski
BrainTrust

Ken, I agree that there will be a bounce-back, but if unemployment levels increase dramatically (Federal Reserve Bank of St. Louis President James Bullard believes it could go as high as 30 percent in Q2), it could take some time for consumers to come back — not because stores are closed, but rather because they don’t have disposable income.

Cynthia Holcomb
BrainTrust
According to medical experts, until there is a Coronavirus vaccine in place, the timeline for getting back to “normal” or “the new normal” is unknown to both consumers and retailers. Once we consumers are freed from our homes, there will be a social explosion of personal freedoms returned and a life well-lived without hand sanitizers. None of the aforementioned activities equate to navigating behemoth department stores in search of crew socks. A few mid-tier retailers with specialized products will survive, others not. A cleansing of the retail landscape is upon us. The middle, the mall, the mass of product Sameness is sitting, waiting in the form of huge inventories of product in thousands of stores across our country, ready and waiting for the final act, the climax, the resolution of their decades-old decline. Personally I will miss some of these stores for what they once were in the late-1990s! Yet at the same time, it is disappointing to have watched their slow-motion decline over the past 20 years. Equating massive inventories of sameness as a… Read more »
Liz Crawford
BrainTrust

The “collapse of the middle” doesn’t simply refer to boring, middle-of-the-road retailers, but also to middle-class consumers. It truly is a Darwinian moment as the polarization of the affluent and the poor widens. It will be interesting to see the GINI index (the index of income inequality) at the end of the pandemic.

Mel Kleiman
BrainTrust

Let’s look at the new model that retail is going to have to adopt to not only to survive but to come out one of the winners. That is one that has been playing out for the last 15 years. Summed up in one word: AGILITY.

It will not be the big who eat the small or the fast who eat the slow, but the focused and the flexible who eat the unfocused and the unflexible.

Zel Bianco
BrainTrust
The key word is disruption. I mean disruption in a positive way. Mall operators and their tenants who are in the middle of this collapse need to think differently as it is not going to come back the way it was unless a wave of nostalgia hits America which we should not count on. Why not think about turning malls into multi-use distribution and pick up centers for retailers that are being challenged that are currently in these malls? And distribution and consumer pick up for Amazon, as well as other retailers that do not have the real estate to be able to handle a distribution/pick up operation. Think of it — malls are in good location/proximity to where we live, close to highways, big giant parking lots for people to pull up and grab their orders and plenty of room for truckers to pull in. Yes, there are many other logistical issues that would need to be worked out, but I believe malls and retailers like J.C. Penney and others need to try a… Read more »
James Tenser
BrainTrust

While a cleansing of retail’s “gene pool” may be a welcome outcome over the long term, the short-term pain will be catastrophic for many independent operators, franchisees, service businesses, and “non-essential” retailers.

The fallout may be indiscriminate. By that I mean that both well- and poorly-positioned stores could be affected. Financial scale may be a defense for some of the stronger companies, but many of those will take the present disruption as an opportunity to close units that have been previously unproductive.

For workers on the front lines, the loss of wages could be compounded by a loss of medical coverage. At this moment I can think of no irony more cruel.

Ricardo Belmar
BrainTrust
The COVID-19 crisis is accelerating many already omnipresent trends in retail. Coupled with a number of unknowns at this time, we have a perfect storm crashing through the boring middle of retail. Here are just a few known trends that are now exponentially accelerated: 1) “Go-to” retailers for convenience are now the “go-to” retailers for essentials. Winners here were Amazon (where the overwhelming majority of product search begins), Walmart on the discount/value end of the equation, Costco and other warehouse brands, Sam’s Club included, for a combination of value + essentials, and Target, who at the end of the day seems to be the beneficiary of every remaining scrap from the middle. In other words, customers that left those middling retailers flocked to Target and gained more value for their dollar in the process without giving up the desirability they craved. 2) E-commerce rapidly eating up more and more traffic. A month ago, if you asked most experts, the belief was online could, maybe, consume up to 20% – 25% of all retail sales. If… Read more »
Jeff Sward
BrainTrust

Great summation. Thanks Ricardo.

rshoots
Guest

There is not a segment of business that will not be impacted. Getting through this will require strong business models, astute leadership, flexibility, strong balance sheets or access to government support. Failures will be widespread. Retail, and all other commercial real estate, will never be the same again.

wpDiscuz
Braintrust
"The collapse of the meh middle is one thing. It’s underpinned by the collapse of category killing as we once knew it. "
"Declining retail relevance has forced HBC to focus on a different assortment: desirable urban properties."
"I believe malls and retailers like J.C. Penney and others need to try a little more focused out-of-the-box thinking before they throw in the towel."

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