E-commerce: The pandemic’s fast rising star

Australians are now spending almost $32 billion online, or about 10 cents in every shopping dollar. It is predicted that by 2021, 80 per cent of us will shop online, with e-commerce reaching $35.2 billion. As COVID-19 restrictions began to take hold in March, and retailers began shuttering stores, online shopping increased 21.8 per cent, compared with the same time last year. This shift to online presents several challenges for retailers.

The first challenge retailers have faced relates to online capacity and capability. While previously retailers have been quick to promote their online capabilities and investments, the sudden increase in demand left many floundering, like Coles and Woolworths, which initially suspended online home delivery and in-store pick up. To respond, retailers may choose to convert some existing stores into “dark stores” – small, decentralised fulfilment centres – to meet soaring demand.

Once shoppers have set up accounts, logins, credit card details and have gained trust, online shopping will become a habitual activity. This enduring shift to online will become permanent, placing greater cost pressures on retailers. Operationally, inefficiencies are experienced in dealing with online exchanges and returns. The small transaction size and order size associated with online shopping will require pick-and-pack order fulfilment operations that are either labour intensive (high variable cost) or mechanised (high capital investment). This order type dissimilarity and the high cost of processing individual customer orders will result in a downward pressure on the retailers’ financial bottom line.  

The post-COVID-19 consumer

The pandemic has changed every aspect of our lives and consumer spending is no exception. Consumer confidence has hit an all-time low, unemployment levels have soared, and consumers are now uncertain and anxious about the future.

Greater anxiety

Economic downturns are stressful events that have historically shaped the mindset of whole generations, with a long-term impact on buying behaviour. We are seeing a move from spending to saving, with 76 per cent of Australians pessimistic about the longer-term recessionary effects of COVID-19.

For example, consumers who lived through the Great Depression – and even those who experienced the GFC – have been found to consume in a more frugal manner. They “cocoon” themselves, choosing to stay in rather than go out. They cook and entertain at home and engage in DIY rather than spend their hard-earned dollars. In Australia alone, 41 per cent of consumers have cut back on their spending.

A shift to thrift

Consumers are now much more price-sensitive and value-conscious than before the pandemic. In times of economic downturn, there is a clear shift to thrift and simplicity. Evidence of this is in car sales, which have plummeted to their lowest levels in 20 years in Australia. For apparel retailers and luxury speciality stores, the deceleration in consumer spend could not have come at a worse time. The compounding effect of government-directed closures, social distancing measures and cascading consumer confidence has meant that COVID has collapsed sales.

Price sensitivity is a double-edged sword – it leads to a loss of retailer margins, while offering some retailers the opportunity to significantly enhance brand awareness for store labels, particularly in grocery. It is also leading to a growth in the performance of discount retail stores. However, from the perspective of business, it also brings about a double-jeopardy effect where well-positioned, price-oriented big brands with their operational scale and efficiencies have shown growth, and smaller brands poorly positioned for COVID are increasingly struggling to hold market share and survive.

Touch-free transformation

Retailers are already demonstrating significant retooling in their formats.

Increased awareness of hygiene practices has exposed consumers to new ways to shop. Online purchasing has skyrocketed, and click-and-collect and kerbside delivery have become common shopper lingo. As consumers try these new shopping options, and become more digitally sophisticated, these new habits are likely to stick. Consumers now expect a much greater level of convenience and efficiency in their shopping experience than ever before.

The pandemic has also fast-tracked a shift towards touchless shopping and contactless payment options. Social distancing is not just about being aware of other consumers’ proximity, it is also about being aware of contact with public shared terminals and devices such as those at checkouts. Mastercard’s recent global survey demonstrated the significance of this shift in contactless transactions; 79 per cent of consumers are now using contactless payments, citing safety and cleanliness as the main motivations for adoption of the technology.

Overall, the longevity of these significant changes to consumer behaviour may depend on how long stay-at-home restrictions remain in place. Until consumers start to feel safe stepping out to shop, dine and gather in crowded public places, consumer aversion is likely to put a dampener on spending in these categories.

David and Goliath retailers

Small and micro retailers are most likely to have pivoted quickly and adapted their business operations during lockdown compared with their larger competitors. Small stores that have successfully weathered the lockdown have had a few things in common. They either already had an online store or they very quickly shifted from selling via bricks-and-mortar stores to a digital platform. Using every platform available (social media, email or SMS), they engaged with their customers through regular updates on products and services, as well as providing informative and entertaining content. Importantly, they also leveraged the significant positive sentiment in their communities which showed many shoppers want to support local businesses.

Those small stores deemed as essential, and therefore able to remain open during the lockdown, have found implementing and managing social distancing and increased hygiene measures in stores easier to manage than larger retailers, mainly due to the smaller size of their premises, which allows for fewer customers in the store at one time and more efficient management of queuing and browsing. As we come out of lockdown and retailers around the country reopen their stores, small businesses unencumbered by long supply chains and large fleets of stores will likely bounce back faster than larger national chains. The nimbleness of small and micro retailers will likely be their saviour.

The future for shopping centres

The impact of COVID-19 on retail has arguably been most visible in shopping centres, as we view images of empty thoroughfares, closed and closing-down signs, and vacant food courts. The shopping centre of the future will need to repurpose empty shop spaces with a different retail mix – less fashion and general retail and more non-retail services (medical centres, offices, childcare, and even police stations).

The future of shopping centres was a matter of debate even before COVID-19 forced the issue. Their need to evolve into different spaces had been noted throughout 2019, both here and overseas, with calls to invest more in experiences and entertainment for shoppers, rather than just being showcases for retailers and their products. However, the need for change has now accelerated as online and digital investment by retailers has expanded by necessity and consumers have moved towards online shopping.

As more people work from home and focus on saving versus spending, there is less foot traffic in shopping centres and increased commercial vacancies. Some retail groups, such as Accent Group (The Athlete’s Foot, Platypus and Hype DC), will close a share of their bricks-and-mortar stores and shift more sales online. Others have utilised the current crisis as impetus to downsize operations. For example, Myer reported that it would use the shutdown period as an opportunity to permanently shrink more stores nationwide.

Ultimately, it is expected that the shift to online shopping will remain. The post-COVID-19 consumer will be more tech-savvy, more cautious about their health and will keep a sharper their spending. Smaller, agile retail businesses are expected to bounce back faster than larger national chains, and as online channels begin to provide greater revenues, retailers may take the opportunity to downsize.

Gary Mortimer is a professor in marketing at Queensland University of Technology. This article was written in conjunction with retail marketing academic Dr Louise Grimmer from the University of Tasmania; consumer behaviour expert Professor Grimmer at the University of Tasmania; consumer psychologist Associate Professor Jana Bowden from Macquarie University and consumer and retail researcher Dr Jason Pallant from Swinburne University.