JCR: From ‘Apocalypse’ to Pandemic: Retail in the Age of Covid and Beyond

The following article was penned by SACP’s Michael Sullivan and Mark Gallivan for the June 2021 issue of the Journal of Corporate Renewal.

In an article in this publication in 2019, we discussed the “retail apocalypse” and how lenders, turnaround professionals, and other stakeholders could adjust to the new normal in retail. Just over a year later, a global pandemic hit, and everything changed—again.

The retail industry has endured several challenges since the start of the global pandemic. While several big-name retailers have filed for bankruptcy, others once again evolved their businesses to survive and flourish. Retailers have broadly recognized the necessity to adapt their business models to withstand the COVID-19 disruption and plan for a future in the post-pandemic era.

Professionals working closely with retailers must consider what will likely be the sustained impact on the retail community. The scrutiny of a retailer’s business model will focus on new risks and opportunities that have come into play and the reexamination of collateral and exit strategies. It seems the most certain thing in the modern retail era is uncertainty.

In the years leading up to March 2020, most retailers had been working to evolve their businesses to combat the Amazon Effect and other changing consumer behaviors:  omnichannel, digitally native, and showrooming were becoming common vernacular. As the reality of the pandemic set in, retailers once again had to quickly adapt and become agile due to government restrictions and policies, temporary store closures, stores reopening with limited operations, and the shift in how consumers wanted to interact with brands.

In response to these challenges, retailers have altered or accelerated adjustments to their business models that were already in the works as a way to preserve the go-forward business. Those with the ability to quickly pivot and deliver a truly omnichannel experience across stores, online, and social media would mitigate some of the challenges the retail industry faces.

The two main challenges for retailers in adapting their shopping experience to accommodate COVID protocols have been drawing shoppers out and incentivizing brick-and-mortar store visits while providing a personalized and safe shopping experience. While consumers have shifted heavily toward online shopping, physical retail stores continue to remain relevant. Over these past several months, consumer needs and expectations have changed, as has their purchasing journey. As the pandemic begins to subside, the question is whether these new consumer behaviors and corresponding retail adaptations are here to stay.

Curbside Pickup and Buy Online, Pick Up in Store
It is no surprise that with store closures and a massive shift toward online shopping, prominent business model adaptations have been curbside pickup and buy online, pick up in store (BOPIS). In May 2020, during the early days of the pandemic, BOPIS hit 40% year-over-year growth, and it has remained elevated in 2021, with 67% year-over-year growth in February 2021, according to Adobe Analytics.

Curbside pickup and BOPIS have allowed certain big-box retailers to convert their stores into mini e-commerce fulfillment centers, providing customers with a convenient and safe shopping experience. Retailers that quickly adapted their business model to include curbside or BOPIS increased customer convenience, allowing shoppers to order online, skip shipping fees, and have their merchandise in hand within a few hours, all while reducing their potential exposure to COVID.

While these alternatives offer customers increased convenience, there are some drawbacks for retailers. BOPIS and curbside pickup most likely result in a smaller average basket size due to customers not being exposed to more of a store’s merchandise while shopping, resulting in fewer impulse buys. While both curbside pickup and BOPIS allow retailers to retain staff, implementing and maintaining these two options may increase labor costs and cut into margins. Additional staff is required to pick orders, manage the order pickup process, and make deliveries for curbside orders.

To have a successful curbside pickup and BOPIS program, retailers need to accurately track and display in-store inventory in real time and provide a user-friendly experience when scheduling pickup times for orders. While these strategies were an excellent way to keep stores running during the pandemic, retailers will have to decide if the trade-offs make it worth keeping them as part of their go-forward strategy.

Appointment-Based Shopping – Another major business model adaptation implemented over the past year is appointment-based shopping, a tactic several high-end retailers use to provide a highly personalized shopping experience. With the pandemic restricting foot traffic and requiring social distancing, some larger retailers have begun to implement shopping by appointment, either virtually or in-person, as a way to comply with health and safety mandates.

Retailers are able to control the number of appointments they make to ensure a safe occupancy level for each location, based on local and state guidelines. In addition to managing foot traffic to meet safety guidelines, it also allows retailers to staff shifts by the number of appointments booked. Although appointment shopping may result in decreased foot traffic, it does provide retailers with benefits beyond staffing and complying with state-mandated COVID requirements.

Appointment-based shopping delivers customers a personalized shopping experience that fits their own unique needs. Customers who create appointments have a high likelihood of conversion due to their increased intent. During an appointment, a sales associate has the opportunity to interact, serve, and engage on a more personal level with the customer and to upsell; this investment of time and attention increases basket size and brand recognition.

While it is a labor-intensive method of selling and is unlikely to replace in-store shopping entirely, it does provide shoppers and retailers with more options. Retailers that adopt this selling method typically have complex or high-value items that require a knowledgeable sales staff. This selling method also lends itself well to retailers that carry smaller, more curated SKUs.

Retailers that have had success implementing shopping by appointment have ranged from consumer electronics retailers to kitchenware retailers. In a post-pandemic world, retailers hope to maintain the customer interest in appointment-based shopping and the loyalty that goes along with it. But will customers feel the same way?

Social Media and Mobile Shopping
Consumers are not just using social media to share personal updates and keep up with current events; some are also shopping on those platforms. Although still very much in its infancy, social media shopping, at the crossroad between social media and e-commerce, has seen an uptick due to several retailers growing their digital footprint. Social media platforms allow consumers to shop and discover new products. According to Instagram, 70% of shopping enthusiasts turn to its app for product discovery.

Like appointment-based shopping, social media shopping allows the consumer to have a more intimate experience with brands. Several retailers have become virtual shopping pioneers, providing experiences like augmented reality tools that allow customers to “try on” items, livestream shopping in which companies use social media to share products and answer questions, and the ability to discover new products to purchase, all through social media.

While social media shopping has not neared market maturity yet, there is much creativity and potential in the space over the coming years. According to eMarketer, the number of U.S. social commerce buyers accelerated by 25.2%, to 80.1 million, in 2020 and will grow another 12.9%, to 90.4 million, in 2021. What started as a strategy to combat the retail apocalypse became an effective pandemic strategy for retailers that were well positioned to capitalize on it.

Lingering Impacts Post-Pandemic
Pack and Hold Inventory – At the start of the pandemic, retailers were unsure what the future would hold. As a result, as unsold seasonal inventory began to accumulate due to store closures, some retailers opted to pack and hold merchandise until the next selling season. This strategy runs contrary to the advice of many retail industry professionals. While a pack and hold strategy offers the possibility of selling seasonal merchandise at higher prices rather than discounting the inventory and selling it in the current economic climate, it also leads to additional storage costs and continues to tie up capital in “old” inventory.

Pack and hold strategies work better with basic/timeless products, as they have little risk of becoming obsolete in a year. In some cases, retailers were able to pack and hold highly seasonal inventory that consumers had not seen yet, believing that customers would purchase this “new” inventory the following season.

While there is no right answer across the board on pack and hold, the best strategy depends on the nature of the product and the retailer’s financial condition. With the arrival of spring and summer, some of the pack and hold inventory is now being rolled out in stores. The jury is still out on whether this strategy was the right call. For turnaround advisors, lenders, and other stakeholders, it is a risk that needs to be monitored and managed closely.

Real Estate – For years, retailers have been reassessing their store footprints in response to the retail apocalypse. This has been accelerated since the start of the pandemic, with commercial real estate experiencing an uptick of vacant storefronts this past year. The increase in vacancies has resulted in some retailers seizing this opportunity to open additional storefronts with lower rent costs.

Some of these empty spaces will be filled by retailers expanding and exploring new store concepts. Other vacancies will be transformed into new spaces. Lower rental costs may also attract growing retailers that experienced phenomenal sales throughout the pandemic. E-commerce retailers are also expected to take over some dark stores and operate them as mini fulfillment centers with a storefront.

Early on in the pandemic, several landlords and tenants found some temporary relief by negotiating modifications to existing leases and reaching agreements on new lease terms, rent deferrals, and concessions. Retailers that were able to defer rent will have deferred lease payments coming due in these upcoming months. Lenders should look into refreshing appraisals to account for any impact these lease restructurings will have going forward. This may place at risk certain retailers that have suffered sluggish sales upon stores reopening. It is crucial that retailers work with their lenders and legal counsel to understand the implications and impact of the rent deferrals taken early on in the pandemic.

Lasting Impacts
The pandemic has reshaped the retail industry, and new shopping habits have formed that will likely last beyond the crisis. As the world moves beyond the pandemic, those in retail, lending, and restructuring will need to consider how these new habits have impacted retailers and what new risks and opportunities have been created because of these changes.

How has the implementation of these new business model adaptations impacted a business’s bottom line? Will retailers continue to utilize these new methods? Did the retailer take the right precautions these past several months to emerge victorious from these challenging times, or is bankruptcy and restructuring on the horizon?

Professionals will provide the vital support retailers need to prosper in the post-COVID era. With the many changes that the retail industry has undergone these past several months, the strategies professionals use have also adapted and will need to continue to adapt as new risks and uncertainties arise. While it’s too early to tell what the lasting impacts will be, change is once again here.

Asset-based lenders have new risks and considerations to take into account when evaluating retailers. Over the past several months, several government initiatives have been implemented to help retailers through this challenging period. However, it is necessary to understand the impacts that lay ahead for these retailers once that capital dries up.

Lenders that are lending against inventory will need to evaluate how each retailer managed inventory at the pandemic’s peak. Was the inventory steeply discounted to purge it? Was inventory packed up and stored away for next season? With stores reopening, will there be a significant influx of returns of items purchased online? There are several variables at play, and lenders will need to determine how to treat and lend against this inventory.

Lenders should refresh inventory appraisals over the coming months to better understand the impact of 2020 comps and should continue to monitor sales against pre-COVID sales. Another consideration during this time of uncertainty has been the shift away from equity-based appraisals and liquidation proposals (at least during the pandemic), resulting in increased uncertainty for asset-based lenders and turnaround advisors.

More than ever, lenders need to carefully assess retailers, their strategies, and collateral with a nuanced and sophisticated approach. Lenders must understand how retailers respond to these shifts in consumer behaviors and ensure that credit facilities are structured to mitigate those risks. Considerations include:

  • As retailers continue to shift toward digital platforms and consumers keep an eye on discretionary spending, there may be a shift toward lower-price
  • Job loss has been a critical variable in how consumers have been spending their money and will continue to be a factor as the economy recovers from the pandemic’s impact
  • Lenders should continue to analyze and monitor cash flow, customer and vendor concentrations, shifts in accounts receivable, inventory composition and turn, and current sales compared to pre-pandemic sales.

As retailers transition to new working business models, professionals can safely assume that the world of retail has changed and will continue to do so. Retailers have been required to innovate and strengthen their omnichannel capabilities, rethink their strategies to create new points of interaction, address consumers’ concerns, and facilitate a safe customer journey. With nonphysical interaction becoming the new norm, contactless and touch-free shopping experiences are here to stay. It is crucial that turnaround professionals consider this shift in customer expectations.

It will become increasingly important how retailers provide a seamless merger of physical and digital channels to drive omnichannel strategies to ensure a value-driven customer experience. Understanding the new risks and opportunities presented by the pandemic will enable professionals to assist retailers through this critical transition period from lockdown to full reopening.


About Second Avenue Capital Partners – Second Avenue Capital Partners, LLC (SACP.com), a Schottenstein Affiliate, specializes in asset-based loans for the broader retail and consumer products industry. Serving middle-market companies, SACP leverages the experience of retail operators, product merchants, and lenders to deliver an array of customized, capital solutions. A unique merchant perspective gives SACP the ability to recognize and unlock value in assets other capital providers often overlook or do not understand. The firm’s tailored financial solutions are a vital resource for clients seeking capital to effectuate strategy and achieve financial objectives. SACP is headquartered in Boston with additional offices in New York, Columbus, and Los Angeles.