Is there such thing as a retail bubble?
It’s a tough time for retailers, but also a time that presents great opportunities.
In the past, retailers with the largest size and quantity of physical locations dominated the retail landscape. This resulted in retail brands competing for real estate space and large quantities of brick-and-mortar locations being developed.
Unfortunately, as brick-and-mortar shopping decreases in popularity, those retailers have been forced into store closures and bankruptcies. This has resulted in large volumes of physical retail locations sitting unoccupied and completely empty.
What was once the driving force behind the development of the retail bubble, has now burst.
What Defines a Retail Bubble?
Simply put, a bubble is an economic phenomenon where the price of a particular asset (commodity, real estate, financial stock, or even the entire market) exceeds the actual value by a large margin. This market distortion can happen for any number of reasons, including bad policy, consumer hype, and risky institutional behavior. A retail bubble, then, is a value bubble that impacts the retail sector — everything from retail company stocks and real estate holdings to the price of commodities in inventory.
Although the world is well into its post-2020 economic recovery, there is evidence to suggest that temporary changes in consumer behavior, supply chain disruptions, and government stimulus across the globe has propped up many sectors artificially (including retail) — either creating or prolonging bubbles.
Why should you care?
There is opportunity in every crisis.
Retailers who are too fearful, or too greedy to see the looming crisis will continue running operations as they have been.
Relying on ‘tried and true’ processes in a changing industry can only lead to closures.
Meanwhile, forward thinkers see the new landscape and pivot in time to steal market share from those too slow to adapt.
How did we get here? (The retail bubble explained)
There are 4 main drivers that inflated the retail market, causing the retail bubble:
- Number of physical “brick-and-mortar” locations
- Consumer behaviour
- Inflation
- COVID-19 pandemic.
1. Number of physical “brick-and-mortar” locations
In an effort to reach as many consumers as possible retailers opened location after location. Signing lease agreements that locked them in for 20, even 30 years.
Unfortunately, changes in consumer behaviour over the last 10 years left many retailers with insufficient foot traffic.
Urban Outfitters CEO, Richard Hayne explained the situation like this,
“Our industry, not unlike the housing industry, saw too much square footage capacity added in the ’90s and early 2000s. Thousands of new doors opened and rents soared. This created a bubble. And like housing, that bubble has now burst,”
The epidemic of store closures began in 2010 and increased exponentially, and the Pandemic only exacerbated existing problems causing more than 15,500 store closures in 2020.
2. Consumer behaviour
Digital transformation has migrated nearly a quarter of all retail sales online – significantly reducing brick-and-mortar foot traffic.
Ecommerce provides consumers with greater variety, lower costs, and more convenience, making brick-and-mortar shopping less appealing. As such, physical stores must now offer these same luxuries simply to get consumers through the door.
In addition, consumer values are now also very focused on sustainability with nearly 80% of shoppers believing sustainability is important.
As a result, the desire for sustainable retail has sparked a new trend toward thrifting.
3. Inflation
Foreign factory prices have gone up increasing the prices of consumer goods.
In fact, the consumer price index is up 4.2% since last year.
On top of that, supply chain bottlenecks throughout 2020 limited inventory further increasing product prices.
4. COVID-19 pandemic
The COVID-19 pandemic was a significant driver of retail’s digital transformation.
At first, lockdowns and the need for social distancing nearly made brick-and-mortar stores obsolete. Retailers were forced to think outside of the box which drastically accelerated the movement into a digital space.
Then, as people’s priorities changed, product demand shifted drastically — faster than any retailer could have anticipated or prepared for.
For example, with the gyms closed, the price of home exercise equipment more than quadrupled in many cases. This artificially boosted earnings and profits for some retailers and birthed businesses overnight with dozens of opportunists opening up ecommerce stores to sell weights and workout equipment at huge markups.
There were also a number of changes that were initiated out of necessity in supply chain operations and fulfillment practices, like BOPIS, that are now preferred by consumers.
And finally, a large portion of government stimulus ended up in the pockets of retailers, ones that may have otherwise lost significant revenues. This may have artificially propped up demand for products that will not sustain in the coming years.
How can you turn this crisis into an opportunity?
In order to mitigate the inevitable fallout and capitalize on the changes in the industry, retailers should take a multi-pronged approach that involves investing in retail technology and reimagining the classic brick-and-mortar store.
Let’s take a look at these changes in greater detail.
1. Leverage advanced analytics
The best defence against major shifts in demand and consumer behaviour is an early warning system.
Advanced analytics is the most effective of such systems. These tools can accurately forecast demand by accounting for a retailer’s sales and return data, business constraints and preferences, and dozens of factors influencing demand (price elasticity, seasonality, cannibalization, etc.). Furthermore, these tools can dynamically adjust forecasts and alert retailers of changing trends before any human notices.
With all the information in one place, retailers gain visibility into the performance of vendors, stores, employees and products. Greater insights into their business, enable retailers to quickly respond to changes on the ground with minimal cost, time and resources.
This unified approach to planning, optimizing inventory, and price management across the business allows the retailer to be more flexible and adapt to changing consumer preferences.
These systems can provide proactive recommendations at a store/SKU level, identifying the optimal assortment and inventory levels that should be held in each store or online channel.
2. Invest resources into e-commerce
Ecommerce should be prioritized on the same level as the traditional brick-and-mortar channel because it provides a unique opportunity to meet constantly changing customer expectations.
When retailers invest in e-commerce they become accessible to consumers from virtually any location at any time of the day. This provides consumers with more flexibility and convenience — removing the constraint of physical proximity.
E-commerce also provides unique opportunities for retailers. For example, without the same limitations of physical space, retailers can drastically increase the depth and breadth of their assortment, decreasing lost sales due to limited product availability.
In addition, e-commerce platforms can use a customer’s shopping history to develop a personalized shopping experience by providing recommendations, promotions, and targeted advertisements. This further enhances the overall shopping experience and can provide retailers with increased revenue through cross-selling and up-selling opportunities.
3. Re-envision the brick-and-mortar store
Retailers are only limited by their own ingenuity when it comes to re-envisioning their brick-and-mortar stores.
In fact, creative retailers are re-thinking the way physical stores can be used by creating unique experiences that foster customer loyalty. Some of these experiences include:
- Endless aisles
- Self-checkouts
- ERP connected tablets
- Virtual changing rooms
- Product showcases
In addition to these in-store advancements, retailers have developed a variety of fulfillment options, such as BOPIS (buy online, pick up in-store) to blur the lines between online and physical retail.
As consumers’ expectations continue to evolve, so will that of the in-store shopping experience. If retailers are expecting continued and sustainable growth, implementing new store innovations and technology will become a necessity.
4. Go beyond selling products – support social causes
Consumer values have changed, the new generation is no longer looking for the newest or cheapest product.
Out of 18,980 consumers questioned across 29 countries (IBM Research Insights, 2020), the overwhelming majority were willing to change their shopping habits and even pay more for environmentally responsible brands.
Retailers need to focus on their corporate social responsibility. They should support social causes loudly and consistently through media and action. For example, investing in optimizing their supply chains to minimize environmental impact.
Tangibly supporting important social causes builds brand communities that are connected to customers on a philosophical level – creating customer loyalty and positive change in the world.
Adaption is the key to success
The changing tide of the digital transformation and consumer preference does not have to signify the end of brick-and-mortar retailers.
Being able to adapt and even find opportunities in these changes can allow retailers to not just survive, but actually thrive in the coming years.
Those that are unwilling or unable to change will close their doors, leaving space for innovation and revitalization of the industry.
