Vertical View: UK Retail Sector & SITS Investment
It is impossible to overstate the devastating impact the coronavirus crisis has had on the already-struggling UK High Street. With the exception of a few essential categories - notably food retail and pharmacies – the physical outlets of most UK retailers have been shuttered for several weeks and (along with many other sectors of the economy) face the prospect of many more weeks under lockdown to come.
It is the depth and breadth of the economic slowdown which is having greatest impact on retail, and consumer confidence has now fallen to a hair’s breadth of its all-time low. The retail impact of this pessimistic outlook is both dramatic and fundamental. When next week’s pay packet is in doubt, today’s grocery bill, and this month’s rent get prioritized. Conversely discretionary spend on capital items (whether white goods, consumer electronics or another category) has taken a battering, and new car registrations for March 2020 are down 44% on 2019.
Since non-essential purchases are only possible via e-commerce, online sales volumes have been taking off dramatically. This is creating winners and losers: organizations such as John Lewis that had already invested pre-COVID to enable half of its sales to be made via web, are able to reap immediate benefits. Those that have been slower to move online may now be regretting that decision – in the case of Debenhams (which only made 20% of sales online) filing for administration a second time. And even some with a strong online presence, such as Next have had to pause online sales for some weeks while adjustments were made to assure safe staff separation in the warehouse and in distribution.
In contrast retailers fortunate enough to be categorized as essential have seen volumes rocketing across online and physical outlets, especially in the supermarket sector. Many have been urgently hiring additional staff to cater to the unexpected uptake in demand, and are seeing changes in consumption patterns that will drive future IT investments.
Online grocery has seen at least as much of an uptick as other forms of retail, and most UK supermarkets have become notorious for their unavailability of delivery slots. This in turn has driven growth in click and collect, by consumers unwilling to enter the store, but unable to secure a delivery. In both food and non-food, the pandemic has forced many traditional consumers to become familiar with ecommerce apps, processes and payments. This is not a habit that will be unlearnt when the lockdown is eased, and teknowlogy Group expects to see significant further investments in ecommerce enablement by all retailers that successfully weather the current storm.
Equally, the use of contactless payments, and scan and go have seen significant growth. While contactless has been around for well over a decade, until now part of the market has been reluctant to trust the technology. Though more recent, scan and go has also been around for at least a couple of years, and has also had adoption issues - although in this case it was inconvenience rather that security concerns that held back use. In both cases uptake has been driven by consumer desire to avoid physical contact with POS terminals – a change that is likely to become permanent over time.
To handle rising sales volumes while still respecting staff separation guidance calls for smarter working. At the same time retailers have had to handle rather dramatic spikes of demand, prompting more frequent reviews of stock to ensure supply is aligned to demand. We expect use of IoT tracking to continue to grow across distribution, enabling better inventory management, and stronger integration with other systems.
Inevitably much of the initial focus during the coronavirus pandemic in retail has been on how to enable customers to buy goods in ways that don’t feel threatening. We expect that as that challenge is largely addressed, the focus will over time turn to more complex supply chain issues. The UK imports up to 80% of all food, and as a result of the crisis some countries (among them Turkey, Serbia, Kazakhstan, Cambodia and Vietnam) have started to limit food exports. The grocery sector relies on a very complex global supply chain, and strengthening planning processes to accommodate the unexpected will benefit from advanced modelling, which in coming years will increasingly be enabled by machine learning. Over time ML technologies will also help automate warehouse logistics, with robots playing an increased role to ensure logistics can comply with government distancing guidance.
And finally, technologies that have previously seemed like solutions in need of a problem, are beginning to come into their own. For example, John Lewis is now offering virtual interior décor consultancy sessions, to help consumers make guided purchases for their home, while Ikea’s place app provides a very realistic view of how potential furniture purchases would look, when viewed in consumers’ own homes.
In summary, a mixed and not entirely positive view for retail. There is no escaping the significant damage that the retail sector is currently taking, which will inevitably delay or cancel many previously planned IT investments. At the same time, retailers with the means to invest can be confident that supporting growing demand for online sales will be money well-spent, as will investments seeking to drive efficiency through greater automation.