A far from reasonable year
COVID has had a huge impact on most businesses over the past year. One of the sectors which has seen some of the most significant change is retail. Lockdown restrictions have hit some parts of retail harder than others and prompted an unprecedented acceleration of the general trend towards more online shopping. In this article we will examine some of the key changes revealed by UK national statistics, taking stock of what happened and its longer-term significance.
Back at the end of 2019 (remember then?) UK retail was reflecting on another year of modest growth. It was another year in which our shopping habits continued to move increasingly online at a steady albeit not spectacular pace. Overall retail sales were up a modest 3% and the proportion of business done online had edged up from 18% to 19%.
In the absence of any global pandemic a reasonable person would have predicted that 2020 would have seen a similar modest 3-4% rise in retail sales overall and a steady increase in the amount of online shopping from 19% to 20% or maybe 21%.
But 2020, as it turned out, had no intention of being a reasonable year.
Now here we sit at the start of 2021, reflecting on a year in which retail growth has overall remained flat and the proportion of business done online has rocketed up to a staggering 28%. That has led to a massive 10% decline in offline sales, hitting the high street hard.
And now we are looking at the prospect of old high street names like Debenhams and Topshop being snapped up by the new e-kids on the block in the shape of ASOS and Boohoo. Who would have predicted that at the end of 2019?
Can the High Street bounce back?
Of course, much of the growth in online retail has been driven by the fact that COVID restrictions have meant that people have been forced to buy online. At various times in 2020, pretty much nothing was open on the High Street except for supermarkets, chemists and convenience stores. But the big question that many people are wondering is whether, once this pandemic is finally behind us, how many people will return to the high street and how many will continue to shop extensively online?
There is some evidence that we can expect to see at least some bounce back. We can see that from a closer look at the 2020 data. Q2 of 2020, when the first lockdown came into effect, saw the biggest drop in offline sales. 31% of retail business in this period was done online; up from 21% in Q1. However, once the High Street started re-opening in Q3 sales did start to pick up. And, whilst the level of online retail business continued to rise, it fell back from 31% of the total to 27%. This suggests that, when COVID is behind us, we can expect to see some migration of shoppers back to the high street.
But how much of a recovery might we expect? Can we expect the High Street to return to something like a healthy (if diminished) condition?
Without question we would expect to see a short-term uplift. People have been locked in for a while now, so being able to shop on the High Street without worrying about social distancing and COVID will have a strong novelty appeal. High Street retailers will then have a short window of opportunity to persuade people to stay on the High Street rather than returning online.
That said, some might argue that COVID has simply accelerated a process that was happening anyway. The historic trend has been for online to take an increasing share of retail sales. This has been evident for years now; the last decade having seen the proportion of online sales climb steadily from 7% in 2010 to 19% by 2019. Now, whilst the jump to 28% in 2020 clearly results from exceptional circumstances, the fact remains that many people have now grown used to shopping online. Many customers are more comfortable with shopping online now, which was not the case back in 2019. So, we can be sure that the proportion of online shopping is not going to drop back to around 20% again.
But not all sectors of retail have been equally affected
Looking at the details beyond the headline figures reveals a more interesting story. For not all sectors of retail have been equally affected by COVID and, as a result, a migration to online sales has occurred far more rapidly in some sectors than others.
Food retailing has held up well but has still seen a gradual move online
If we look just at food retailers (defined as businesses whose retail stores primarily sell food, like butchers, bakers, supermarkets and convenience stores), we have clearly seen some movement to increased online shopping. However, this has been more gradual than that seen elsewhere. It remains the case that over 90% of sales continue to be made instore.
This sector has doubtless benefited from the fact that its stores have been able to remain open throughout the pandemic. Indeed, during the periods of the strictest lockdown restrictions, food retailers could remain open while most other retailers were shut.
However, food retail does have certain characteristics that would encourage consumers to continue to shop in store. When it comes to buying fresh food, many consumers want to pick the product in person rather than leave it to chance. Freshness is not something you can easily judge online. So then the question is, how much would you trust the order picker to pick the freshest product? (Of course, if all you buy is packaged and processed food then this is clearly much less of a barrier to shopping online.)
Another limitation on online shopping here is the whole question of supply. Early on during lockdown, home delivery services were put under great strain. At times it was difficult to book a delivery slot from a supermarket, which naturally limited how much business it was possible to do online.
We can expect to see more online shopping, but even given the pressures created by a global pandemic, instore sales of food products continue to remain very resilient. The future here will be one of a steady migration to an increased level of online business, but physical stores will continue to remain the key channel to market.
Non-Food Retail stores have been hardest hit by the pandemic
Other retailers have been a lot less fortunate and have had to endure long periods of enforced closure during lockdowns. This has clearly had a dramatic impact on sales and has forced a much higher proportion of business online. In-store sales have dropped from £150 billion to a little under £113 billion in a single year. Over the same period, online shopping has seen a dramatic increase from £27 billion to just over £41 billion. And these numbers don’t even include any of the pure-play online retailers, like ASOS and Boohoo.
Unfortunately, the growth of online sales here was not enough to offset the decline seen in store. These figures underline the harsh trading realities that have seen the demise of such well-known high street brand names as Debenhams, Top Shop and Dorothy Perkins.
Here the migration online has been gathering pace for a while, but the past year has seen a particularly dramatic acceleration in that trend. This form of retail increasingly needs to rely on a strong online presence to survive. In a way, many of the principles of the High Street still apply online – you need an attractive storefront, your store needs to be easy for the customers to navigate and the products need to be well presented (and of course you still need the right mix of products). A strong brand image remains just as important online as in the High Street. The media through which sales are conducted may be changing fast, but many of the underlying criteria for success remain the same.
The rise and rise of the pure-play online retailers
Retail businesses that have no stores are, as you would expect, primarily the pure-play online businesses. These businesses have had a great 2020 with sales increasing by around one third.
However, a small amount of business here is not done online. This would include such businesses as mail order catalogues, telephone selling and automated vending machines. This type of retail saw a modest rise in 2020, no doubt driven in no small part by the ability of these models to continue to operate during lockdown (and potentially even benefit from it).
Nevertheless, the big story here remains the rise of the online retailers. No doubt we can expect this sector to continue to see significant growth into 2021.