Monday, February 22, 2021
Since March 2020, the COVID-19 pandemic has affected practically all aspects of our daily life. Zoom meetings have replaced meetings in the conference room. Children attend lessons at kitchen tables. Family movie nights are likely a first-time movie streamed on a television, rather than a trip to the local movie theater.
Retail has certainly felt the upheaval in the pandemic. But despite what some might think, not all news is bad. Retailers have found new ways to connect with and serve customers, especially through e-commerce. Retail sales for the third and fourth quarters of 2020 show that customers are ready to spend both online and in stores – but their expectations for the shopping experience have changed.
To keep up with this new reality of retail shopping (which won’t return to prepandemic norms even if COVID-19 is kept in check), retailers need to focus on maximizing the store experience for customers and empowering online retail offerings and considering increasing costs associated with running a brick and mortar store.
Retail trends show massive online growth and positive signs of in-person sales
To be clear, e-commerce was here to stay long before COVID-19 entered our collective vocabulary. In 2019, online sales accounted for 16 percent of total retail sales, up from 7.6 percent in 2013i. Statistics show a relatively steady increase in the share of e-commerce in retail sales from 2013 to 2019.
The pandemic has put this trend into overdrive. Ecommerce sales volume reached $ 211.5 billion in the second quarter of 2020, up 32 percent from the first quarter and 44.5 percent year over year.
Although e-commerce revenue declined slightly in the third quarter, it was around $ 210 billion in the third quarter – up 37% from Q3 2019.ii These figures exclude transactions made by “Touched” online – like buying it in a store.
However, the growth in retail sales was not entirely at the expense of stationary retail. In fact, retail hit an all-time high for the quarter at $ 1.259 trillion in Q3 2020, and rebounded 14.5% after a shaky second quarter. Customers still want the immediacy and personal experience of physical retail stores. However, you want to get in touch with these stores in a different way, and that involves a blended approach that combines aspects of online and in-person retail.
Retail hit an all-time high for the quarter at $ 1.259 trillion in Q3 2020 and rebounded 14.5% after a shaky second quarter.
A blended approach that is vital to the development of the retail economy
Undoubtedly, e-commerce has played a huge role in ensuring that the US economy does not suffer any further damage during the pandemic. Home orders and consumer concerns about exposure to the virus resulted in people ordering goods online and sending them home more often.
However, e-commerce still does not fully satisfy most consumers. According to a 2018 study, 90% of surveyed shoppers said high shipping costs and home delivery longer than two days would prevent them from buying online.
Amazon (the country’s second largest retailer after just Walmart) cracked the code with its Prime service, offering free shipping and a two-day (or faster) turnaround time. Unsurprisingly, Amazon saw tremendous sales growth in 2020. Other national retailers, including Walmart and Target, have poured resources into strengthening their online shipping services.
Omni-channel marketing, which combines the strengths of online and in-person retail, offers brick and mortar retailers the opportunity to serve customers in this new environment with increased convenience when shopping online. For example, customers buy items online and then pick up their goods either in the store or, more conveniently, from the roadside in their cars.
The market shift in the retail sector poses enormous challenges for small retailers: challenges that COVID-19 has exacerbated. Ecommerce is more than just setting up a website and waiting for orders. Omni-channel marketing is difficult for small retailers because of the costs associated with setting up such a store. These costs include:
E-commerce software. Retailers either need to set up their own system for online purchases or pay a third-party provider (e.g. Shopify) to help with order fulfillment.
VAT accounting. A 2018 Supreme Court decision made electronic sales subject to state sales tax. Large national retailers have the resources to manage tax obligations from state to state. But small businesses will likely need to use third-party software options to track state sales taxes.
Search engine optimization (SEO). Businesses need to be able to draw customers’ attention to searches for key terms on the Internet, and that coveted placement costs money.
Black Friday / Cyber Monday demonstrate the growing potential of omni-channel marketing
Black Friday and Cyber Monday – usually two of the busiest sales dates of the year – show how quickly the retail market is changing.
Black Friday pedestrian traffic to physical stores decreased 48 percent. However, spend per customer increased more than 36 percent.iii Online sales on Black Friday rose 22 percent to $ 9 billion from 2019, while sales on Cyber Monday rose by $ 10.2 billion A 15 percent year-over-year increase reveals some things: 1. Customers are still willing to spend, even in the current economic downturn; 2. Buyers are more focused; They come to the stores and they know what to buy. and 3. Consumers still value in-store purchases but increasingly need a reason to visit the store.
Another important point to note is that the number of contactless roadside pickups in retail stores increased by a whopping 52 percent on Black Friday 2020. This surge recognizes consumers’ desire for safety during the pandemic, as well as their desire for instant access to retail products.
The Buy Online Pickup in Store (BOPIS) revolution combines online and in-store customer loyalty and offers consumers a more convenient way to shop. Again, even after the pandemic is over, customers are likely to continue to crave that convenience.
Legal and business challenges for brick and mortar retailers
However, BOPIS raises significant business and legal questions. Leasing provisions can be a complication for retail landlords in the current environment. For example, if an anchor store leaves the store, other retailers in the mall may be able to trigger lower rental or even termination rights. If rent is based on a percentage of retail sales, are BOPIS sales included in that total, and if so, how?
Retailers face their own legal and business challenges. The conversion of shopping centers and large stores as delivery points may be restricted by the restrictive requirements in force. In addition, restrictive agreements can limit the right to use the common space for deliveries to consumers. These issues should be addressed upfront as it is in the best interests of the retailer and retail landlord to keep customers happy.
Many stationary retail costs are fixed and do not depend on pedestrian traffic or sales. These fixed costs include items such as basic rent, insurance, business software (required to run the business, manage payroll, etc.), maintenance of the common area (CAM), and ad valorem property taxes. COVID-19 has not reduced these costs.
The latter cost can be particularly problematic. Ad valorem property taxes are usually based on the rent of the business, rather than profitability. Unfortunately, for most retailers, current property tax bills are based on a January 1, 2020 valuation date – before the pandemic became a factor – and are therefore irrelevant to current property tax bills.
Municipal income fell 21 percent during the pandemic, while municipal spending rose 17 percent. It doesn’t take an economist to realize that these two trend lines are unsustainable for city budgets and are likely to mean profound cuts in community services and significant real estate increases in taxes – or both. And in general, only property owners, not tenants, can dispute the property tax assessment. It is important that retail property owners and their tenants work together to solve these challenges.
Important considerations for retailers in the COVID-19 era
Retail trends are evolving, but ecommerce adoption in the country appears to be permanent. So retailers need to prepare to meet customer demand now and in the future after the pandemic. Some points to consider:
Create value in the store experience. Customers are not ready to give up personal retailing, but stores need to incentivize them to shop. Remember that the customer today values convenience.
Omni-channel marketing is here to stay. Look for ways to get married online and in-store deals. For example, the BOPIS model mentioned above combines the convenience of e-commerce with the immediacy of in-store shopping.
Please note the leasing regulations. Pay particular attention to BOPIS rights, rental considerations (ie are there thresholds for triggering automatic rent reductions / lease defaults?) And taxes.
Try to reduce the occupancy costs associated with brick-and-mortar retail (e.g. ad valorem taxes). The good news for retailers is that we are in a commercial real estate buyer’s market. Businesses should work with their landlords to reduce the fixed costs of doing business.
i Internet Retailer Magazine
ii US Census Bureau / trade café
iv Adobe Analytics
v National League of Cities
Copyright © 2020 Womble Bond Dickinson (USA) LLP All rights reserved.National Law Review, Volume XI, Number 53