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COVID-19's Potential Threat to the Retail Sector

Posted on Monday, March 16th, 2020 by Steve Anderson

COVID-19s Potential Threat to the Retail Sector

Coronavirus' threat to mankind is bad enough by itself—though admittedly it's still well behind the flu—but the number it's doing on the economy. With bars and restaurants closing all across the country or going takeout-only, and the stock market shedding value like a snake that's forgotten to shed for the last three years or so, trouble spots are busting out all over. The already-struggling retail market—which had seen some signs of recovery after the holiday shopping season—could be looking at some of the biggest problems to come.

An Abundance of Caution

In a very real way, it's a good thing that retailers are closing up shop for the next little while, herein defined as “a varying amount of time depending on who you talk to.” Stores are taking the opportunity to engage in deep cleaning and sterilization, while also taking critical potential transmission vectors for the coronavirus' transfer out of the equation. Many retailers are even going so far as to continue to pay employees as if they'd shown up for work, a development which will likely be heartening to employees whose margins were already pretty thin.

Yet going any length of time with vastly reduced, or even absolutely no sales—open or not—will do a number on any business' cash flow, which is putting further strain on a market that was already stretched to the limit.

It's sufficiently bad that Coresight Research's CEO, Deborah Weinswig, has offered up some potentially disastrous pictures for retail in the near term. It's bad enough, Weinswig noted, that 2019 was a record year for store closings in the retail sector, but this year looks on pace to be even worse. Many of the factors that were impacting businesses in 2019 are still in play today, and with coronavirus only making things worse, 2020's closures could dwarf 2019's. Weinswig noted that there were just over 9,300 closures in 2019, and in 2020, that number could clear the 15,000 mark.

Mall-Based Stores Likely to Take It Especially Hard

While some stores will be able to survive thanks to their recent shift to online operations—Amazon is already reporting that it's out of stock on many common household items and delivery times are being delayed—others, like mall-focused stores, are likely to have the worst time of all.

Mall-based stores will face a two-pronged problem that's even worse than what more online-focused shops will face. They'll face the same supply problems many other retailers are facing right now—while there are signs China is coming back online, there are still slowdowns to be seen—but they'll face a double-sided demand problem.

First, potential customers aren't looking at new shirts or handbags so hard as they're considering more toilet paper or canned fruit. Second, many malls are beginning to shut down, either by government mandate or out of the aforementioned abundance of caution. Already, we've seen the American Dream megamall shut down through the rest of March, and possibly longer. The King of Prussia mall in Pennsylvania is shutting down its “nonessential retail tenants,” which basically leaves one Rite-Aid open.

A Perfect Storm Breaks for Retailers

While retailers were looking optimistic back at the start of the year, buoyed by some decent news about fourth-quarter sales and some potentially good news to follow thanks to new Apple releases and the upcoming new console generation, the impact of COVID-19 is likely to be disastrous for many retailers. We saw how bad things were getting when there were just demand problems to contend with, but ramp up the demand problem as customers increasingly stay home and step up the supply problems besides and that's a two-pronged trouble that many firms likely won't overcome.

The retail landscape, especially in malls, was challenging enough. Stores like Foot Locker (NYSE: FL), the Children's Place (NASDAQ: PLCE) and American Eagle (NYSE: AEO) were already closing stores as it was and seeing their profitability potential struggle. Now, with temporary closures likely a fact of life for retailers for at least the next while, permanent closures may well follow, and force an already-struggling retail sector to make some hard choices going forward.

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