Memo #8: What Main Street Retail Businesses Are Most Vulnerable?

By: Maureen Atkinson, Lisa Hutcheson, Patrick Watt, J.C. Williams Group

We know that main street retail businesses have been hit hard by the COVID-19 shutdowns. As we look ahead, and consider how to develop effective re-opening plans and public policies to bring back our main streets, the critical questions become: what types of retail businesses will be most vulnerable to failure through the re-opening and recovery period? And how can we address these vulnerabilities?

There are many factors that will influence the vulnerability of retail businesses. For instance, many small, independent businesses have very limited resources, and will find it difficult to access current government support programs. This Memo focuses on three key factors that will influence the success of main street retail businesses: shifts in consumer demand; the costs for reopening to meet new COVID-19-related standards; and the core business fundamentals of the individual business.

Shifts in Consumer Demand

While COVID-19 has created a number of new and unforeseen changes for main street retail, the crisis has also resulted in the acceleration of retail trends that already existed. Some of these include:

Growth in restaurants and personal services: This trend is driven by the increasing desire of consumers for experiences rather than goods, and paying for services that they might have performed for themselves in the past, such as manicures or men’s grooming. This fits very well with self-pampering and “little rewards” trends also seen in many areas.
Declining interest in merchandise stores, especially apparel: This trend is partially driven by the move to buying many of these items online, especially basics. It is also part of the trend for buying less “stuff” and a concern about the environmental impact of over-consumption. In the apparel and accessories stores category, sales grew by less than 2% in 2019 according to Statistics Canada.
Increasing adoption of digital channels: This trend has been growing for both merchandise purchasing and ordering from restaurants. Statistics Canada reports that Canadian e-commerce sales grew by 23% in the third and fourth quarters of 2019. The convenience of buying online has led to a move to purchase many items online. As retailers’ digital resources expand and the consumer becomes more experienced in buying this way, the online experience has improved and is therefore more competitive with the in-store experience.

These trends will likely continue to influence how customers will use main streets.

At the same time, a number of entirely new impacts and trends have rapidly emerged for main street retailers, driven primarily by the COVID-19 lockdown.

A focus on the basics: Our analysis of the latest monthly sales data from Statistics Canada reveals that retailers selling products like groceries, personal care, and other essentials have seen demand increase or remain steady, whereas others selling non-essentials have seen consumer purchasing fall substantially (see chart).

Source: J.C. Williams Group, Statistics Canada

More time spent in the home, and on activities at home: With so many Canadians working from home, consumers are now making investments in their personal space, which means that home improvement, electronics, and furnishings stores are likely to benefit in comparison to other retail categories such as apparel. In addition, activity and leisure-based products such as books, hobby, or games are also being sought out.

Household financial pressures: Consumers are concerned about their financial situation. A Leger survey found that 28% of Canadians reported losing income or their jobs on a temporary or permanent basis. The resulting financial anxieties are likely to lead to an emphasis on lower-cost or discount items, as they did in the 2008 financial crisis.

Lifestyle needs in work-from-home situation: As more consumers work from home, categories like apparel will be negatively affected by less demand for office attire, while sporting goods will likely be positively affected as consumers no longer have access to gyms.

Fear of contracting the virus: The issue of personal safety is a contributor to reduced retail activity. As of mid-May, the Leger survey found that 53% of Canadians were personally afraid of contracting the virus and 63% were afraid for their family. Reassuring Canadian shoppers that they will be safe is crucial for main street’s rebound.

Asked directly which businesses should re-open, consumers reported wide differences across business types. The visual below shows the percentage of Canadians who said these businesses should be opened “very soon”.

The medium- to long-term effects of these trends are hard to forecast because this pandemic has been so extraordinary, and there is no point of comparison. Our best assumption is that COVID-accelerated trends will continue, notably the acceleration of digital shopping because of growing familiarity among shoppers. We also believe that the need for increased public health precautions will diminish somewhat over time, but some customers will continue to be concerned even after an effective treatment or vaccine is found.

The Costs of Reopening in a COVID World

The cost of reopening and meeting public health requirements is a second significant risk factor for main street businesses. Our analysis suggests these will be different across various business categories.

The chart below shows the range of COVID-related issues retailers will face, with assigned risk levels (High, Medium, Low) across categories. To take one example, grocery stores are selling goods considered basics and have a moderate risk profile with social distancing and physical configuration because of their larger store size and aisle format. However, they will be required to ensure their larger staff complement is well trained to deliver the increased levels of sanitation that are required. The definitions for each of the retail categories can be found at the end of this article.

Our analysis suggests that some categories will experience much higher levels of reopening risk than others, and that these businesses will be more challenged to continue operating in the COVID world – especially if they were not already in a robust financial situation prior to the lockdown.

The Fundamentals of the Business

While pre- and COVID-related retail trends and the costs of reopening will have different impacts across business categories, there are risk factors associated with general business fundamentals that will influence the vulnerability of all businesses.

Simply put, businesses that are well run and have strong leadership can be very successful, while others in the same category that lack these traits will fail. The ownership and financials are two key factors.

The owner: Unlike large chain stores, the small business owners on main street are a critical factor in their success. Some of the key traits that are critical for owners include their retail know-how, their level of energy and flexibility, their ability to change with trends, and their connection with their customers.

Business financials: Important indicators across categories generally include cash flow, past investment in the business to modernize and upgrade leasehold improvements, cash on hand, and turnover.

These key factors will determine the capability of a business to pivot and adapt to the current challenges and a new operating environment.

Which Businesses are Most Vulnerable?

To assess the types of businesses most likely to be vulnerable to failure, we have looked at pre-existing and COVID-related consumer demand trends, the costs of reopening across business categories to comply with new public health requirements, and the fundamentals of main street businesses.

Based on our analysis, we believe there are three traits of main street retailers that will result in the greatest vulnerability of going out of business today and in the new COVID operating environment.

Businesses that do not have digital capabilities, with the possible exception of personal service businesses. Being able to communicate and sell online has become even more important than before the pandemic.
Poorly financed businesses. Regardless of access to government aid programs, all businesses will have to invest in changes that will be costly. Without some financial cushion, a business will just not be able to cope.
Businesses whose owners are not able to be flexible. Many main street businesses have owners that are entrenched in their way of doing things. This is a time when all businesses will have to be flexible as the way they operate will have to change.

What is the Future for Main Street Retail?

This memo has laid out the major trends and factors influencing the vulnerability of retailers in this crisis. While main street retail businesses will be very challenged in the weeks and months ahead, there are many actions that can be taken by the businesses themselves, and by local organizations such as BIAs, to ensure that this important sector remains vibrant and healthy. The subject of our future memos will address the opportunities and actions to guarantee a strong future for main streets.