The impact of COVID-19 on the retail industry and the next actions to be taken
1. How COVID-19 changed the retail industry’s external environment
The changes in the external environment surrounding the retail industry greatly altered conventional wisdom and just might create a new structure and circumstances (a “new normal”), which will have a wide range of impacts on politics, economy, and our lifestyles, including the digital technologies that support them. After the Japanese government announced a state of emergency, essential retail business which handle food and daily necessities received a business continuity request from the government, but many other types of retail business were forced to close. The impacts on the economy have been hard enough that some say it will take about two years to recover. The retail industry, in particular, has been severely affected since the government asked people to quarantine themselves, which greatly restricted face-to-face service in stores. Our lifestyles as consumers have also been forced to change dramatically. Staying at home and not going out to the store made online purchasing spread widely among those who had not used it before. And due to the change in workstyles resulting from people being forced to work remotely from home, life via online channels has become normal. The digital technology that supports the online lifestyle has been popular for some time, but its spread has accelerated explosively since the onset of the pandemic.
*1: Announced from Ministry of Agriculture, Forestry and Fisheries Director of Food Industry Bureau, Ministry of Economy, Trade and Industry Deputy Director of Commerce and Service on Apr. 6th, 2020
*2: Japan Center for Economic Research: average of 32 nongovernmental economists
*3 Nikkei Newspaper: Average of 32 economists
*4: BOPIS: Buy Online Pick-up In Store
2. Impact on the retail industry of drastic changes in the external environment
The drastic changes in the external environment caused by COVID-19 have had various effects on the business of the retail industry. The crisis has created stark contrasts in business performance between types of business operations.
Due to the government's request for essential business continuity, retail businesses that handle food and daily necessities such as supermarkets, drugs stores, and convenience stores (excluding stores located in office districts) have remained in good condition as consumers wait in long lines at cash registers to buy products, many of which have even sold out. On the other hand, retailers of shopping goods and luxury items deemed nonessential, such as apparel and home appliances, have stagnated.
Next, we would like to focus on the changes in the business processes of the retail industry that were particularly affected by COVID-19. In retail businesses handling food and daily necessities, some examples of quick action taken include the application of floor stickers to indicate appropriate social distancing positions for customers waiting in check-out lines. Vinyl curtains were also installed at cashier check-out counters, in part to protect employees. In addition, actions such as disinfection of shopping carts and individual packaging of products to prevent droplet infection have been added to everyday routines in response to customer demand for safety, which have added to employee fatigue. Some tried to induce customers to use electronic commerce (EC) by placing orders online for in-store pick-up. The aim was to disperse in-store customer visits, but the capacity of pre-order systems was too small to achieve the anticipated outcome.
Company headquarters, meanwhile, were forced to act urgently to achieve business continuity while responding to the sudden shift to remote workstyles. They had to implement changes such as granting authority to their employees to allow them to use company PCs at home, and to arrange for paper documents to be taken off company premises. Another example is the rotation systems they created for employees. One characteristic of the retail business is that when storefronts are fully operating, the headquarters that support them can’t stop operating either, so they were forced to make big changes in their conventional working methods. In addition, because they were unable to receive stable supplies of products from business partners, stores had to come up with new operations to deal with stockout issues, such as limiting purchases to one per customer for certain products.
In this way, business processes throughout all areas of the retail industry have felt the impact, and have been dealing with these countermeasures for several months now.
3. Possible future trends in the retail industry
What direction will the retail industry aim for now as it responds to these environmental changes?
First, the retail industry will be required to take continual action in response to changes in consumer behavior and to the “new behavior patterns” advocated by the government concerning social distancing and contactless interactions. The emerging new role of physical stores is anticipated to involve integration into the online purchasing process as the trend toward the online-merge-offline (OMO) model continues.
For store operations, it is important to create a safe environment, not only for customers but also for employees, so that they can work without undue worries. With progress toward providing contactless services and achieving social distancing, stores will have to come up with completely new layouts and store operations that support the new behavior patterns, which eventually will be the factor that differentiates stores. Responding effectively to the corresponding consumer and employee expectations will increase employee loyalty for the retail industry, where a labor shortage is expected to remain an issue in the future. The way human resources are acquired is also likely to change. Moreover, employee sharing, which has become a current industry topic, will probably continue to be discussed.
The office headquarters that support the stores will also undergo major reforms. We will likely see an acceleration of the penetration of remote work and digitization, (digital transformation), which have tended to be relatively weak trends in the current labor-intensive operations. Store managers and office headquarters will continue to be tested and questioned on the new techniques they adopt for store management and operational structure.
Relationships with business partners should also become even closer. There will be frequent discussions with business partners regarding business continuity planning (BCP) aimed at keeping business running as an essential lifeline. There will also be a trend toward mutual evaluation of each other’s value as partners making it possible to continue business together.
4．With/post COVID-19 management agendas
In operating With/Post COVID-19, the retail industry must respond to four major management agendas as it seeks to discern future trends.
A) Establishment of a new business model that supports new-normal consumers
The role of physical stores will become clearer. They will become a component of the consumer purchasing flow.
- Buy online, pick-up in store (BOPIS) is becoming common in fast food operations such as McDonald's and cafes.
- Seven-Eleven insurance sales (register at home / contract at store)
- Dark stores exclusively for online supermarkets, etc.
With the limitations of conventional sales methods removed, it is necessary to imagine and design the big picture of the consumer purchasing flow line, including the purchasing flow in physical stores.
B) Creating stores that support new lifestyle patterns
In parallel with reviewing the implements and consumables used at conventional stores, as well as the customers and operational flow lines, when opening new stores it is necessary to add new operating policies that match the layout and operation to new lifestyles. For example, when designing the new layout, flow lines which provide for and ensure social distancing between customers and measures to prevent droplet infection around cash registers must be considered. To take these kinds of measures, it is an urgent task for headquarters to visualize the current store situations and identify current issues.
C) Establishing headquarters operations which can ensure that business operations will not degenerate, even in an emergency
Amid the current remote workstyle, intended to be somewhat short-term, many companies are operating at a diminished mode, only about 70% as active as usual, a situation that forces them to make up for labor capacity shortages. This requires them to break away from the culture of sheer manpower and “human wave” tactics, and from workstyles dependent on paper documents. They are being forced to thoroughly improve operational efficiency and shift more to digital workstyles. This requires supervisor and headquarters operations to change so that they can support the store even in the event of an emergency.
D) Reexamination of business continuity plans with the involvement of business partners
For retail companies, which require business continuity as a lifeline, product suppliers are the only true business partners. In the event of an emergency, a retail company must work closely with its suppliers to fulfill the role of delivering the products society needs. At this COVID-19 pandemic moment, what is most needed is to analyze the events and responsive measures from the viewpoint of the flow of goods and information in the supply chain. The results should then be used as inputs to prepare for the future.
First and foremost, it is necessary to make constant efforts within the company to respond to the safety and security requirements in the stores (as mentioned in B above), to replicate headquarters operations to facilitate remote work (as mentioned in C above), and to involve business partners (as mentioned in C above). Action should then be taken with respect to consumers (as mentioned in A above).
In this insight, we have presented our views on future retail industry trends and the management agenda for the industry given the impact of an external environment drastically altered by COVID-19. We hope that this will be an opportunity for the retail industry itself to identify priorities and think about what actions are need in a society in which we cannot simply return to the time before the COVID 19 pandemic.