Retailers had an ugly year in 2020. What will 2021 look like?

TORONTO — With many of us planning to spend at least part of 2021 like we did in 2020 — trading our business wear for yoga pants and sweats — the outlook remains gloomy for many retailers in Canada, especially apparel. While more closures are likely, the COVID-19 pandemic offers silver linings for some businesses.

“Retailers weren’t prepared for what lay ahead in March. It happened all so quickly, nobody could have prepared for it,” said Lisa Hutcheson, a managing partner with global retail consulting firm, J.C. Williams Group.

“The ones that have pivoted very quickly and adapted are weathering this new storm out and therefore will be even better positioned for next year. So I think it will be better.”

The retail landscape in 2020 was always going to be grim, but the pandemic turned it into a graveyard of bankruptcies and closures, with dozens of chains shuttering doors at hundreds of store locations across Canada. And this does not even account for the countless local businesses also forced to close after serving neighbourhoods for decades.

Apparel and fashion sales in particular suffered one of its worst years, with that segment of the industry on track to see a 90 per cent plunge in profit, according to the State of Fashion report by The Business of Fashion and consulting firm McKinsey & Co.

Brands already vulnerable pre-pandemic were among the first to fall — and if 2020 didn’t take them, 2021 likely will, retail experts say, adding that stores too short-sighted to see past spring as an opportunity to reinvent themselves missed their opportunity. 2020 was a test of the survival of the fittest: those agile enough to switch gears quickly — and lucky enough to carry the right merchandise during a pandemic — were the ones left standing. That combination will continue to bolster some retailers in 2021.

“Look, they all took a blow irrespective, but it was less of a blow versus some other retailers that just didn’t have the (online) infrastructure that was set up and they didn’t have the ability to dial up,” said Farla Efros, managing partner with HRC Retail Advisory.

WINNERS: ATHLEISURE AND LOUNGE WEAR, HOME IMPROVEMENT

Staples is one example of a retailer with the right combination: an office supply company that had to pivot at a time when businesses were transitioning quickly to working from home. The retail chain had already been working to enhance its digital experience and improving its technology when the pandemic hit, and was able to change course and accelerate efforts that were already underway, Hutcheson explained. They were also among the first businesses to launch curbside pickup — and do it with relatively few hiccups, she added.

And they are not alone. Grocers, home improvement companies, and many retailers that sell comfort wear and supplies for the home and outdoors did well in 2020, and are among those expected to weather ongoing challenges in 2021.

Homebound and nowhere to go, Canadians will likely continue to invest in upgrades at home, experts predict, whether it is extending their living space to the backyard, or refreshing their indoor environment.

“I don’t think any of those retailers would have ever thought that you’d build double digit growth in things like paint. They haven’t seen that in probably 50 years,” Efros said.

“There was a point where you couldn’t even get any materials to build a deck. They were just non-existent — furniture, all those things.”

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Even grocers — essential businesses that will do well regardless — continued to improve their services, accelerating and giving more space to its curbside pickup service, expanding its online shopping and home delivery service. Voila by Sobeys, for example, launched at an opportune time this past summer in Toronto, with plans to expand in 2021. It is an online grocery delivery service that uses robots to assemble the orders, reducing the amount of human handling a product goes through before they are delivered to the customer’s home.

With life still a long way off from “normal” even with the vaccines, lifestyle brands and apparel makers that sell athleisure, loungewear and outdoor wear like Urban Outfitters and Lululemon will also continue to do well in a pandemic environment.

Vancouver-based Lululemon, for example, reported third quarter sales of US$1.1 billion — up 22 per cent from a year earlier. Long before COVID-19, the athleisure company had committed significant time and resources into integrating their online and store operations, making it a seamless experience for shoppers. That put them in a better position than others to handle the shock of the pandemic. In recent months, the company managed to increase its market share in the U.S. with new customers.

This summer, when other apparel companies were struggling to stay afloat, Lululemon spent US$500 million purchasing Mirror, an interactive home fitness company that lets users exercise with professional trainers from the comfort, privacy and pandemic safety of their own home. It demonstrates the company’s understanding that people are always looking for ways to stay physically fit, Hutcheson said. It also reflects Lululemon’s history as an “experiential” brand, something many retailers are increasingly striving to incorporate into their businesses.

Lululemon

LOSERS: APPAREL AND SHOES

Despite the upbeat outlook for some retailers, between 160,000 and 225,000 small businesses could permanently close because of COVID-19 restrictions, according to estimates by the Canadian Federation of Independent Businesses (CFIB).

With many Canadians unemployed or working from home — many businesses do not plan on returning to the office until June 2021 at the earliest — travel and tourism will continue to be among the more vulnerable companies. It also leaves fewer people looking to buy office or fashion wear, heels and dress shoes, making even the best efforts to pivot a monumental task.

“The other thing that apparel will always struggle with, versus hard goods and groceries, is that you buy so far ahead. So how would we have known 18 months ago that we are going to be in a pandemic?” Efros said.

“That’s the other piece for apparel; they’re going to get stuck with so much excess inventory.”

Companies like Montreal-based Le Chateau, which announced it was closing 123 stores and liquidating its assets, were already vulnerable; COVID-19 made it worse.

“Because their category was partywear and they buy so far in advance — they just can’t survive,” said Hutchison.

More companies are expected to join the Le Chateau and others in filing for creditor protection and closing doors in 2021, while international retailers, especially U.S. ones, will likely continue to pull out of Canada.

“There will be less stores in general,” Efros said.

“There’ll be more flagship-only. Retailers are going to look at their whole fleet within Canada and go, ‘OK, where do we need to be?’”

In this regard, department stores like The Hudson’s Bay Company (HBC) are probably at the greatest risk in general, she added.

“I’m not even sure what the role of HBC would be in the future. If maybe they would have one or two stores. Or even if they even make it.”

The view that HBC should close all but a very select handful of flagship department stores is an idea that had floated around among retail advisers, investors and analysts for years. The company’s chairman, Richard Baker, succeeded in taking the company private earlier this year in an effort to turn its business around without shareholder pressure, but the pandemic hit not long after. Today, HBC is struggling to pay its rent to a number of shopping malls.

“They can do all the right-sizing and do all those things without the street staring at them, questioning every move. Unfortunately then COVID hit, and had a complete detour in their plan like it did to everybody. Because at the end of the day, it just accelerated the inevitable,” said Efros.

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ACCELERATING CHANGES

While 2020 was an anomaly that does not necessarily represent long-term consumer trends, there are some changes that could become more permanent.

The pandemic has forced savvy companies to re-evaluate and reinvent their brick-and-mortar store experiences, test and experiment with new ideas that make shopping more convenient, seamless, and “experiential,” retail advisers say, noting that consumers have been more forgiving during this past year of hiccups and bumps.

“I think there’s just going to be much more of a push for the online business and I think the role of the store is going to look very different,” said Efros.

With consumers buying online more, retailers need to provide a compelling reason for shoppers to come back to their stores, especially when the pandemic is over, experts say.

“The store is going to have to be very much about an experience, because people … will have been very fluent in shopping online. So what is the reason to bring somebody into a store? And what‘s that experience going to look like?” Hutcheson said.

While contactless shopping is something that expanded and evolved out of necessity, many of the innovations tied to it — smart stores, cutting-edge technology — could be here to stay.

“I think we’re going to see more robotics and things like that to help minimize touching of a product,” said Hutcheson.

Shops like Dark Horse Expresso in Toronto launched Coffee Automat, an experiment for a contactless espresso bar that uses an automated barista to serve drinks.

Meanwhile, a start-up called Grocery Neighbour, which touts itself as the world’s first mobile grocery store, launched over the summer. Like a mini supermarket on wheels, trailer trucks travel to neighbourhoods, bringing the shopping experience closer to home. The idea of a travelling store is not entirely new though — there are iterations of that with other products like clothing and footwear, Hutcheson noted.

Retailers are also looking for new ways to engage and communicate with its customers online too, said Hutcheson. This will be especially important for smaller, local businesses who do not have the marketing budget for flashy engagement.

Retailers are not the only ones compelled to adapt — consumers have too. Those who had never shopped online have suddenly been thrust into an unfamiliar digital environment and forced to learn.

“They’re all of a sudden saying, ‘Oh, boy, I need to be able to figure out how to do this.’ And I think that’s what’s really going to change people’s shopping behaviours,” said Hutcheson. A survey her firm conducted over the summer found the majority of respondents said they would continue the same shopping patterns in the future.

A transformation in the retail industry has been happening slowly over the last several years, but the pandemic accelerated the sea change. It was moving too slowly before, Hutcheson said. “We were starting to see, you know, bits and pieces and it’s really just accelerated at warp speed [during the pandemic].”

“People are talking about, ‘what’s the recovery of retail going to be?’ and I don’t think it’s a recovery … It’s not going to be the new normal, it’s going to be the next normal.”

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