U.S. Retail Is Doing Better than Expected Entering the Second Half of 2020
When the COVID-19 pandemic swept over the country, shuttering stores and forcing people indoors, the landscape for retail initially looked bleak. But the lockdown only accelerated trends already underway. Unable to shop in person, consumers turned to online in greater numbers than ever. Some retailers took economic hits, while others thrived. GLG talked with Craig Johnson, President of Consumer Growth Partners, to get his take. The interview has been shortened and edited for clarity.
Can you broadly frame the state of retail today and the prospects for the second half of 2020?
This is a challenging retail year. But it has better prospects than many people think. The headline is that we’re anticipating back-to-school sales up 3.7% year over year. Given everything that’s happened this year, we think getting any kind of positive sales YoY is a major moral victory.
We do three major forecasts a year. An annual forecast, a back-to-school (BTS) forecast, and a holiday forecast. We rely on a bottom-up and top-down model, the top down being the macro factors and the bottom up being our nationwide in-mall primary research observations. We have a field team of 18 people across the country, and the field researchers are in the stores literally every week across about 100 major mall and off-mall venues. And we rely on the data coming back from our team to develop our forecast.
We also do sensitivity analysis with high- and low-growth scenarios. The “Base Case” BTS scenario calls for 3.7% growth from BTS last year. The High Case forecast sees growth of 5.1%, and the Low Case sees an outright decline of 2.9% from last year — assuming that all the stores started closing again. We don’t think that’s going to happen.
Since mid-June, we have seen steady acceleration and consumer spending in retail along with related industries such as housing. So, while this is not going to be a great year — COVID-19 has done its share of damage — 3.7% is a pretty good showing, albeit down from last year’s 5.9% growth.
Why do you think we’re going to see a better back-to-school season given the current environment?
The American consumer is the biggest driver of retail spending no matter what kind of disaster may have occurred. The consumer is resilient and is the same consumer who bounced back from 9/11, the same consumer who bounced back after the Great Recession of 2008-09. The current recession may be shorter than these past recessions, and may even be over by now. Retail spending is triggered, most important, by growth in disposable personal income (DPI), and DPI growth has been very strong this year, entering the year at 3% cost. The fact that we’ve seen record unemployment numbers isn’t translating to slowing spending. Right now, unemployment is largely offset by the more than $2 trillion in government stimulus over the last several months.
We’re also not seeing store closures hurt as much as one would think. We haven’t yet seen many outright full-blown closures, outside of Modell’s and Pier 1. Demand has a way of finding its own level. People have turned to the internet, relying on it significantly at the peak of the COVID closures this past spring. The demand pool that represents disposable income built up over this time is healthy.
Are you seeing any differences in anticipated consumer spending across U.S. regions or states?
Let me break this answer into two parts. Before the COVID onset, retail had been growing relatively strongly. It was not going to be a record year, but it was going to be a good, solid year. In February we had forecast annual growth for 2020 of about 4%. At that point, growth was relatively evenly spread across different parts of the country, with a slight edge in the Sun Belt.
Now, with COVID re-rearing its ugly head in the last few weeks, we have seen some changes. Arizona is probably the worst in terms of its negative impact for a variety of reasons (store closures, the fact that the population skews older). Florida was one of the strongest with growth of about 5 or 6% in the pre-COVID period, but now it is flat. Other regions, Texas, the south-central region of Oklahoma, are doing a little bit better than anticipated. It’s still positive. Maybe not quite as positive as it was some months ago, but still it’s actually up year over year, which is a plus.
Most retail above the Mason-Dixon Line (the Mid-Atlantic, the New England, Northeast space) is basically fine. Retail sales have been holding up quite nicely in the northern half of the country.
Are any retailers outperforming their peers with their projected online sales this back-to-school season?
Yes. Over the last couple of years, Walmart and Target have really ramped up their online side of the house. I don’t think Walmart is going to be catching up to Amazon anytime soon, but they’re doing very well as a strong second place. Costco has also been boosting up its online game, though I don’t think it gets as much publicity for its online size. It should be mentioned that with the whole “stock-up” period this past spring, Costco’s in-store growth has been phenomenal. They were big, but they’ve continued on with just some very, very solid numbers, but a portion of those solid numbers is coming with online growth as well.
Others that are doing well in the online arena are some of the home furnishing sectors. You have the established pure players, like Wayfair. This has been a nice boon for them, but also companies like Williams-Sonoma have been very strong. Among those companies that have both a brick-and-mortar and an online presence, they are likely the leader digitally. Their online penetration is about 54, 55%. The rest include Restoration Hardware, which is also very strong.
Apparel and department stores are two of the sectors that are experiencing significant challenges this year. Some, like the Gap, have been doing okay. Gap might be making something of a rebound now. American Eagle is doing a little bit better. They all have decent online platforms to work with.
One sector I want to call out is consumer electronics. That will be down this year. A lot of the kids are already outfitted with consumer electronics and laptops. Those who aren’t will make purchases, but overall, that sector has been on the weak side.
For several years, the leader in the consumer electronics sector, Best Buy, has enhanced its online platform, and that paid off this year. During the store-closure period, it relied on click-and-collect, where someone buys online and picks up curbside. It’s not purely a digital sale, but it’s digitally assisted. So, we count it that way.
Walmart’s curbside click-and-collect program, C3, has been a major success. Pre-COVID, Walmart’s penetration of curbside click-and-collect was about 3.5 or 4%. Post-COVID, that’s double to 8% or even 9% of transactions at stores that have been C3-enabled. The curbside click-and-collect for places like Kohl’s and Best Buy were done on the fly this spring. But Walmart has been testing and now implementing for the last couple of years, but was in test for about three years. And it really helped that they had this as a tool for this whole COVID period.
About Craig Johnson
Craig Johnson has been President of Customer Growth Partners, a consulting and research firm serving the retail sector, since 2001. CGP clients include retailers, vendors and developers, and institutional investors. Craig has over 35 years of senior corporate and consulting experience in marketing, customer service, demand forecasting, and consumer insight for many of the nation’s largest retail and service companies.
This article is adapted from the July 21, 2020, teleconference “Outlook for Back-To-School Season.” If you would like access to this teleconference or would like to speak with David Dollar, or any of our more than 700,000 experts, contact us.