That Covid-19 has been humanity’s biggest disruptor of life and businesses is an understatement. In the context where the online and multi-channel impact were being seen across the world on physical retails including malls, the corona scare might become a game changer with regard to retail across the world. In short, the future is not easy to predict, even though a lot of gloomy reports about retail are doing the rounds.

As retail has four important variables which have very different dynamics, one single outlook for the sector will not work.

Retail segment : The effect on mass merchandise stores as compared to lifestyle formats, including malls, is going to be very different because of consumption as also business dynamics.

Supply chain and inventory impact : While some of the categories would be affected by the inventory pile-up due to the lockdown, several other categories might end up running into severe supply issues and therefore stock out situations, as manufacturing is almost at a standstill for various categories.

Fund flow and working capital impact : Retail is essentially about the fast rotation of working capital, which is inventory. Clearly the inventory status is going to affect this in a significant manner.

Shopper behaviour effect : Panic buying has been seen for essential products. However, essential products have various categories and the consumption of these is not uniform. For example, panic buying of biscuits would not affect future purchases. Whereas if a person has purchased extra shampoo, toothpaste or even groceries, they are not going to brush their teeth four times or cook extra food because of this. Similar is the case with lifestyle products, high ticket items, etc. Some of them might even see a spurt in sales while many categories might witness muted sales.

Impact on key segments

The impact of these variables on the key segments of Indian retail would be as follows:

Kirana or the small standalone stores : The impact on them might be minimal and could even be positive to an extent. Their business model has a tight OPEX and core base of regular shoppers. If the supply side is sustained, these stores might even see a growth in patronage. Supply chain constraints might also not hit them very hard as manufacturers always focus on distribution to this segment since it constitutes a significant majority of the retail sector.

The only downside they might face is a cash-flow crunch. Kirana stores are known to offer rotational credit. Even if they reduce this during this period, their cash flow might be affected because many of them have to go and pick up the stocks paying cash.

Mass merchandise stores: Supermarkets might have a relatively lesser impact because they are largely selling essential products. However, hypermarkets might face the brunt of this shutdown because most of them are in malls. Even the standalone ones need to sell food and FMCG categories. As hypermarkets tend to have much higher inventory levels, that is going to be a serious issue.

In the food segment itself, many products with shorter shelf life like juices are going to expire and might have to be written off. Returning such stocks to vendors appears farfetched. Their profitability would also be hit because the higher margin categories like apparel would not sell in the lockdown and might have lower sales even after the lockdown. The inventory of various other categories like apparel, etc., in a hypermarket would have to be liquidated through massive discounts.

Consumer durables & IT product stores: These stores would also be hit hard. First is the loss of sale from the seasonal high of certain categories linked to summer like air-conditioners. Next would be the supply chain bottlenecks that manufacturers would face because of disruption from Chinese vendors. Last but not the least is the shopper behaviour of postponing high ticket purchases in a period of uncertainty and gloom.

Apparel and other lifestyle stores: One of their biggest challenges is going to be excess stocks. The existing stocks from the previous season plus the summer lines would put tremendous pressure on these businesses. Physical stores would have to liquidate stocks of the previous season to create space for fresh stocks. End-of-season sales and massive discounts might have a very limited effect because of the current sentiment.

If the next season lines are usually sourced from China, the retailer might have some relief as orders might not have been placed or the stocks might not have been even sent by the vendor. The other dimension of inventory from China is the sentiment and concern about products from China. Any retailer who has inventory of such products might be affected.

Apparel as a category might escape such a situation to some extent as a lot of products are being sourced from Tirupur as also countries like Bangladesh and Taiwan.

Discount formats might benefit as they would be able to source inventory at throwaway prices as their shoppers are drawn by low prices and not the latest fashion or trend.

Online retail: Online retail is again not a single segment and most of what I have mentioned earlier about the various categories and segments would apply to the different online retailers. In addition to this would be the challenge to restart supplies from their various smaller non-food vendors. Medium and small-scale enterprises are being hit hard by this crisis and lockdown. They form a significant chunk of the vendor base for various non-food categories. Their business impact would trickle down to the online retailer.

Buyer behaviour

Lastly, let me explain the potential shopper and buyer behaviour after the corona scare is over or at least is reduced.

First is the aspect of money in hand, which is critical for retail. Although the government has appealed to businesses to continue paying their employees, this cannot be for an indefinite period. In case of any move to contain the manpower cost by salary cuts or manpower rationalisation, the spending sentiment is going to be badly hit. Even those with no such cuts or employment threat would become very cautious and tighten their purse strings. All discretionary categories, especially lifestyle products, would be severely hit because of this.

Next comes shopper’s preference, of online vs offline. Assuming that the buying sentiment is not negatively affected, there is going to be a surge in buying after this crisis is over. This would interestingly be more for physical retail stores. After the lockdown experience shoppers are raring to go out. So, experience would become an important aspect of shopping and hence the appeal of physical stores would be more than online purchases, at least for the medium term. Functional purchases or known brand purchases driven by discounts would continue to be online driven.

There is a word of caution to retailers, especially the lifestyle formats. The shopper with money and seeking experiential shopping would expect very good service. If retailers start to cut down on store staff to minimise the cost impact of Covid-19, it would be a very short-sighted approach.

In summary, I do not foresee any dramatic downturn to the retail sector. However, I am qualifying this with the caveat that this is hugely dependent on shopper sentiment not being hit by wage cuts or job losses. What would happen is an interesting reorganisation of the retail segments and categories with regard to shopping preferences from physical stores versus online.

The writer is a retail and shopper behaviour expert

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