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Retail Rebounds in Q1 2021, but Even a Fading Pandemic Leaves New Challenges in its Wake

Retail results for Q1 2021 have been promising so far, showing that the economy may finally be emerging from a long, slow year. However, the pandemic has yet to end on a global scale, and every retailer will face a shifting set of challenges and opportunities through the spring and potentially into the summer. In short, circumstances may be improving, but retailers still have plenty of challenges ahead.

“The U.S. economy has never been shut down like this in my lifetime,” said Hilding Anderson, Head of Strategy, Retail, North America at Publicis Sapient in an interview with Retail TouchPoints. “Combined that with all the uncertainty that’s happening outside the U.S. — and we may have even more COVID issues here in the U.S. too — I was surprised at how strong it came back. But it has come back, I’m pleased with that, and it’s going to be an interesting couple of quarters.”

Some of the retailers and segments to keep an eye on include:

  • Target showcases strength of omnichannel operations: Target and other large retailers thrived in the past year with a showing of omnichannel excellence, but now they will have to expand their digital focus to new tasks;
  • Home Depot’s results prove home improvement has legs: Home improvement retailers such as Home Depot performed well in Q1, but the surge in DIY projects won’t last forever — and the hospitality industry is the canary in the coal mine;
  • Best Buy expected to perform well as electronic purchases shift: Electronics sales are expected to continue growing at Best Buy and other retailers, but shoppers will soon shift from work-from-home necessities to entertainment as we enter the next normal; and
  • Department store and apparel retailers face continued supply chain challenges: Q1 is offering apparel retailers like Nordstrom some much-needed relief, but COVID is still active in other parts of the globe, which could impact supply chains and inventory levels.

Target’s Digital Investments Paid Off in Q1 and Set the Foundations for a Strong Future

Large retailers like Target and Walmart continued to thrive in Q1 2021 on the back of their large store footprints and strong omnichannel presence. Target in particular posted a 23% sales increase, which the retailer credited to its exclusive brands and friction-busting services like curbside pickup.

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These investments are representative of Target’s swift response to changing consumer behavior, which also helped the retailer succeed during the depths of the pandemic, according to Anderson. However, while curbside was a major brand differentiator for Target and its peers over the past year, its power will wane as more and more shoppers return to in-store shopping. Anderson expects the retailer to lose a portion of its new shoppers as we enter the next normal, though it will still come out well ahead.

Curbside is still important, but it’s just one piece of a larger puzzle: delivering on convenience. “One of the things in strategy you always ask is ‘What’s not going to change in the next 10 years?’” said Anderson. “One of the key answers is convenience. People are going to be time constrained and delivering a great customer experience is going to be a valuable asset.”

Target’s overall emphasis on digital also will play an important role further out. Anderson expects supply chains to remain a key friction point for retail in the foreseeable future, and the data expertise that drives a great omnichannelm  experience can also smooth bumps in inventory and sourcing.

“The second key area as you think about how you hold onto these customers that you’ve acquired over COVID is around the data and algorithm piece,” said Anderson. “A lot of players over the next five years are shifting to become algorithmic retailers and place data at the center of their business. That means using these insights to not just draw traffic and market in a cookie-less world, but really to use it for demand planning, to source new designs to determine where you should hold the inventory for those products.

Home Depot Benefits from Strong DIY Interest, but Trends Will Shift

Home improvement retailers soared during the pandemic as shoppers shored up and spruced up their residences, and that trend is still going strong: Home Depot reported a 32.7% sales increase in Q1 2021, while Lowe’s posted its own 24% gain. Anderson expects these tailwinds to continue through the second quarter as shoppers continue working on projects, though growth may slow later in the year.

Shoppers may be spending more time outside, but home improvement projects tend to be slow by nature — starting a project is one thing, but seeing it through completion can take months due to life getting in the way. Anderson believes shoppers will continue working on the DIY projects they started mid-pandemic for some time, which will necessitate more supply runs, while Home Depot’s professional customers will keep busy due to the housing boom.

The slowdown will come, but the sectors that will be leading indicators of change aren’t home improvement — they are travel and hospitality. The speed of recovery among airlines, hotels and restaurants will serve as a herald of not just how quickly shoppers are returning to activities outside the house, but when the amount of disposable income being allocated to renovations starts shrinking in favor of vacations.

“I’ll be watching the transportation and hotel space, and whether they have a robust recovery,” said Anderson. “Typically, people have a relatively fixed amount of funds, and if you see a shift in spending it will trickle in from other areas. If we see the expected Q2 and Q3 increase in the travel and hospitality business, you’ll probably see some headwinds on the unusually high amount of spend in home improvement.”

Best Buy Benefits from Strong Electronics Interest Even as Habits Change

Best Buy hadn’t released its Q1 results as of publication time, but Anderson expected the retailer’s product mix, digital investments and omnichannel focus to pay off once more. He also expected Best Buy, along with its peers in the electronics sector, to see a shift in buying habits as shoppers shift from home office essentials to entertainment.

Fewer customers will be looking for a second monitor or a new desk chair as they return to the office, but with football season approaching and live games back on the table, viewing parties are expected to make a comeback — and more importantly, people will be able to host them inside.

The decline in home office demand also will be offset by younger shoppers starting to buy their first homes and stock them with the newest gadgets. Shoppers are continually integrating more and more tech into their lives, and Anderson believes this will carry electronics retailers through Q1 and beyond.

Nordstrom and Other Apparel Retailers Will be at the Mercy of Global Supply Chains

Macy’s latest quarterly results were surprisingly positive, and Anderson expects Nordstrom to make some degree of a comeback alongside apparel in general — but he also expects supply chains to be an ongoing problem for these retailers. While the U.S. is well on the path to beating COVID, countries such as India and the Philippines are still in the grip of the pandemic, which is going to create significant supply chain friction for the foreseeable future.

Supply chain variability is the killer,” said Anderson. “If you have variability within your work chains, if you have variability with your logistics providers, it has a disproportionate impact on what happens at the end of that supply chain. The bullwhip effect is very real. A lot of these apparel companies manufacture the majority of their goods overseas and they are going to be hit at exactly the wrong time. There will be demand. I think the issue is whether we’ll be able to fulfill that demand to the same degree as in 2019.”

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