COVID-19 INDUSTRY BRIEF
EFFECTS OF THE CORONAVIRUS ON THE Retail E-Commerce Updated August 26, 2020
- Pandemic Impacts: One sector seeing positive demand growth from the COVID-19 pandemic is e-commerce. While the retail sector has been heavily impacted overall, as consumers remain largely at home, e-commerce, which was already a growing segment, has grown significantly in 2020. Per U.S. Census Bureau data, adjusted e-commerce sales increased 14.8 percent and 44.5 percent for Q1 and Q2, respectively, over last year.
- E-commerce Surge: The pandemic caused a surge in e-commerce sales across a wide variety of platforms, accelerating growth in online sales by as much as four to six years. As of May 2020, online spending was up 77 percent on a year-over-year basis according to Adobe Digital Insights. The by-online-pick-up-in-store segment grew faster than the overall e-commerce channel, growing 195 percent in May.
- Supply Chain: Although there were some supply chain issues related to delayed import shipments at ports and reports of some warehouses being closed due to regional COVID-19 issues early in the pandemic period, most third-party logistics operations were considered “essential critical infrastructure” by the U.S. government. Although delivery times have slowed compared to pre-pandemic levels, the channel is delivering significant growth.
- Valuation Outlook: E-commerce should remain busy throughout the balance of the year, although there have been winners and losers based on the segment. Segments seeing high growth are healthcare, grocery, toys and play equipment, home office, cosmetics, books, video, music, games, athleisure apparel; weaker segments have included shoes, some categories of sporting goods, diamonds, and certain segments of apparel.
Date February 2021
- As shutdowns began across the globe in March 2020, e-commerce sales in the U.S. skyrocketed, growing 44.5%, 36.6% and 32.1% for the second, third and fourth quarters of 2020, respectively, over 2019.
- Online holiday shopping increased 32.2% in 2020 over 2019, according to Adobe Analytics.
- November e-commerce sales, which included Cyber Monday, reached $100 billion for the first time.
- Black Friday weekend sales were predominantly online, while in-store traffic declined significantly for many retailers.
- Several prominent brick and mortar-based retail brands transitioned to online only formats in 2020.
By the numbers
E-commerce To the Rescue: It comes as no surprise the e-commerce channel has grown significantly over the past decade and has been a consistent bright spot for retail trade overall. However, as retail stores began to close in March 2020 because of rising coronavirus infection rates, e-commerce quickly became the preferred shopping channel for millions of consumers. As stores around the world closed based on government-established essential and non-essential classifications, consumers chose to shop online out of convenience as much as caution. Retailers that pivoted immediately to established omni-channel platforms successfully made the transition right off the bat. Others had to quickly assess capacity and system capabilities to shore up online sales channels as their brick-and-mortar sales evaporated. Accordingly, U.S. e-commerce sales grew 44.5%, 36.6% and 32.1% for the second, third and fourth quarters of 2020, respectively, over 2019.
Online holiday shopping increased 32.2% in 2020 over 2019, according to Adobe Analytics. Additionally, November e-commerce sales, which included Cyber Monday, reached $100 billion for the first time. Retailers began promoting deals earlier than in prior years when Black Friday typically signals the official start of the season. In 2020, many consumers started their holiday shopping in October as retailers launched Black Friday-level discounts early.
Major retailers like Target and Dick’s Sporting Goods that offered curbside and other convenient pickup options for online orders saw even stronger holiday sales, according to data from Salesforce. Their analysis found that digital sales increased an average of 49% over last year, compared with approximately 28% for retailers that did not offer curbside pickup and similar options. Target performed especially well as sales through its curbside service grew by 500%, while its digital comp sales increased 102%.
Amazon continued to outperform in 2020, which is not surprising given the company’s expansive product lines and delivery capabilities. Amazon pushed its Prime Day event back to October 13-14 from mid-July in prior years to capitalize on early holiday shopping. The company’s fourth-quarter performance, labeled “monster” and “blockbuster” by news outlets, included a record-breaking holiday sales performance. North American fourth-quarter sales increased 46% year over year to $75.3 billion as shoppers turned to the e-commerce leader during a winter surge in COVID-19 cases and disruptions to holiday shipping driven, in part, by postal service capacity issues. Additionally, sales were up 50% for independent sellers on its Marketplace, which enables third parties to sell products on Amazon’s platform. While the company added more than $1 billion to its fourth-quarter domestic operating profit over 2019, its success did not come without the burden of added expenses. Amazon’s North American operating expenses grew by nearly 40% to $72.4 billion and the company expects COVID-19-related costs of $2 billion in the first quarter of 2021.
During the pandemic, digital sales initially jumped over 100% for many grocers. Instacart, the largest third-party provider to most grocers, reported volumes up as much as 500% since the pandemic began and reported first-time profits in April 2020. Nearly 750,000 professional shoppers, more than half of whom were hired since the coronavirus outbreak, have been shopping on the Instacart platform per reporting by grocery industry publication Progressive Grocer. With many online delivery slots reserved for the elderly or more vulnerable, the biggest change in e-commerce may be the addition of the elder demographic, who have overcome anxieties about using technology to shop online.
With much of the world still under some degree of travel restriction, e-commerce has been a key option for purchasing essential items, and for many consumers remains the primary way to purchase non-essential items.
Retail Brands Shift To Online-Only: The ongoing COVID-19 pandemic continues to alter the retail status quo and shape industry trends globally. Mandated closures, capacity limitations, social distancing measures and supply chain issues accelerated many industry changes that were already underway.
In 2020, approximately 160 consumer-focused companies filed for bankruptcy according to reporting by financial analyst S&P Global. Among them were high profile names such as Neiman Marcus, J.Crew and GNC. For retail bankruptcies, 2020 comprised the largest number of filings since the 2009 financial crisis. While some predominantly brick-and-mortar-based chains liquidated entirely, others emerged from bankruptcy in a stronger financial position. Still others sold their intellectual property, data and other e-commerce assets to firms that took the brands entirely online.
Increasingly, a shift to e-commerce is a viable option for struggling retailers even after brick-and-mortar locations close. Despite a downturn in business, a retailer’s brand may still hold significant value and consumer support to reemerge in an online-only format. Brands are a powerful differentiator in distinguishing a company or products from competitors and creating a lasting impression in the minds of customers. A combination of a brand’s identity, personality, product design, awareness, loyalty and various branding or brand management and communication strategies help define and build a successful brand. Since there is often little to differentiate between several types of products in an increasingly global marketplace, branding is one of the few remaining and powerful forms of product differentiation to attract new and retain loyal customers.
History has shown online success can be found where physical stores did not. Over Gordon Brothers’ decades of brand management, Laura Ashley, Linens-N-Things and Sharper Image each found renewed success in other formats after their freestanding stores closed, and 2020 saw more brands make the transition.
In July, home goods retailer Pier 1 Imports, Inc.’s owned intellectual property (IP) and other online assets were purchased for $31 million, according to bankruptcy court documents. The company’s website relaunch went live in late August and now features over 20,000 items. Discount department store Stein Mart, which filed for Chapter 11 bankruptcy in August and subsequently closed all 282 of its stores, sold its brand, domain names and other IP and has since relaunched as a growing online-only retailer. Similiary, plans are currently underway by the new owners of the Justice brand for the relaunch of its online business after previous owner Ascena Retail Group winds down the closure of over 750 of the former chain’s retail stores in early 2021.
Meanwhile, momentum for the channel continues to increase exponentially; online retail sales in the U.S. are projected to reach $1 trillion by 2023 according to global consulting firm FTI Consulting, which is a year earlier than its 2019 projection. This growth, which is due largely to online shopping adoption gained during the pandemic, is expected to become permanent. Additionally, the company projects total online market share will reach 27% by 2025 and 33% by 2030, compared with the actual rate of 14% for 2020 indicating significant growth still to come.
E-Commerce Appraisal Metrics: Common sales and inventory metrics include website traffic, sales transactions, inventory turnover and weeks of supply, return and charge back rates, and fulfillment rates. But some metrics gain greater importance when managing online retailers’ portfolios. For example, fulfillment rate, the number of placed orders versus shipped orders, is crucial. It is entirely dependent on a company’s system accuracy and reflects its ability to fulfill orders. Typically, 95% or higher indicates a well-managed inventory system, whereas a rate of 90% or less would be cause for concern. Rates at these levels could indicate a system capability issue that may have a negative impact on appraisal values or, ultimately, going-out-of-business (GOB) sales results.
E-commerce companies’ more sophisticated systems may also provide opportunities to understand inventory at the stock keeping unit (SKU) rather than department level. This could drive more precise insight by helping identify potential problems, such as small quantities, broken size runs or slow-moving goods that may generate lower gross recoveries in a disposition scenario. With this information, borrowers and lenders can work together to determine appropriate guidelines for initiating borrowing base reserves on low-recovering inventory. This inventory would likely need to be wholesaled at significantly lower recovery values at the conclusion of the sale.
Recognizing Returns: Return rates are an important indicator of the success and quality of a particular SKU and help gauge customer confidence in products. A company’s normal-course return rate has a direct impact on sales capacity projections. A return rate in excess of 20% can indicate a reserve may be needed to mitigate risk associated with a loss of customer confidence in the retailer.
A returns allowance off of gross sales is important when planning disposition strategies, especially for internet retailers. In a traditional brick-and-mortar GOB sales event, a “No Returns/All Sales Final” policy is common. However, the rate of returns from e-commerce sales tends to be higher than in-store purchases, meaning customers may expect the option to return merchandise despite an “All Sales Final” policy. Discussions on how returns are considered are a key component of an exit strategy. Depending on the nature of the business, the disposition agent may permit them for a period; however, this may not always be possible or practical. Lenders should be aware of situations where returns are not allowed and higher discounting is needed.
Consider Effects of Promotional Pricing on Final Value: Asset-based lenders and borrowers should work to develop a clear understanding of the incentives needed to drive sales, while remaining mindful of the potential impacts of various discounting options. Free shipping promotions, for example, may be something to which customers are accustomed. While continuing the promotion may be important to consumers, it also increases the expense burden. It is not uncommon for free shipping to average $4to $10 per transaction. As GOB sales multipliers for internet retailers are typically closer or lower to normal-course selling rates, a free shipping offer for brick-and-mortar retailers has the potential to represent a significant expense based on the level of inventory, number of units and average transaction size. Lenders should look to qualified appraisers to help understand shipping expense assumptions in valuation reports.
Secure Agreements To Utilize Available Third-Party Services: In cases where a third party manages e-commerce functions, lenders should examine all related legal agreements to ensure inventory can be sold through all relevant channels. The ability to use third-party services to maintain normal-course sales and fulfillment operations is essential. As an example, contract agreements may dictate certain payment thresholds be met, even in the case of a total liquidation of assets. While appraisals typically assume the ongoing use of third-party services, this could pose a major stumbling block if overlooked.
Digital Infrastructure Crucial: Maintaining a strong connection to existing customers and a reliable platform for servicing orders is essential to maximizing value in a disposition. Intangibles such as websites, customer email lists, social media presence, brand equity, customer goodwill and sales generated through referral networks and attendant economics have an important bearing on recovery values. They can also indicate a retailer’s strength in the marketplace. It is imperative for lenders to work with legal counsel to gain and retain the rights to use all associated digital assets to market the inventory of a company. Lenders should work in advance to develop a clear understanding of any terms governing ownership, control or usage of critical IP in a GOB sale scenario.
Beyond its critical role in executing Internet sales, IP can also add value to internet retailers. Increasingly, brands, domains, customer lists and other intangible assets are marketed separately from the inventory. It may be worthwhile to independently appraise the expected value these assets could bring in a sale. There may be an opportunity to partner with a secondary finance company that is comfortable lending against IP, which could add value to a loan.
Note: THIS PUBLICATION IS PROVIDED FOR INFORMATIONAL MARKETING PURPOSES ONLY. THE MATERIAL CONTAINED HEREIN SHOULD NOT BE REGARDED AS ADVICE, NOR RELIED UPON TO MAKE FINANCIAL, OPERATIONAL OR OTHER DECISIONS; NOR SHOULD IT BE USED AS A SUBSTITUTE FOR AN ASSET APPRAISAL. ACTUAL RECOVERY VALUES MAY VARY FROM TRANSACTION TO TRANSACTION AND THE RECOVERY VALUES REFERENCED HEREIN ARE FOR REPRESENTATIVE TRANSACTIONS WITHOUT REGARD TO SPECIFIC KEY FACTORS. THIS MATERIAL MAY BE REDISTRIBUTED ONLY IN ITS ENTIRETY, INCLUDING NOTICE OF COPYRIGHT. ALL RIGHTS RESERVED. ©2021 GORDON BROTHERS, LLC.
Reference sources: RCREDITNTELL, U.S. CENSUS BUREAU, FTI CONSULTING, RETAIL DIVE, CNBC, WILLIAMSON SOURCE, S&P GLOBAL, PROGRESSIVE GROCER