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Recovery of the Philippine retail industry: Softening the blow

Endel Mata Endel Mata

In its latest Philippine Economic Update, the World Bank said the country’s economy could contract by as much as 8.1 percent this year. Although the figure was an unfortunate downward revision from its earlier projection in October, it was still better than the government’s forecast of a 8.5-percent to 9.5-percent GDP contraction. The latest forecast came on the back of expectations that the Covid-19 pandemic’s impact would worsen, lockdown measures, and the country’s first recession since 1991.

Although the overall economic outlook looked rather grim, recent research shows that there might be hope for the retail industry if the global health crisis’ effects are curbed. Colliers projected in a study that retail vacancy would rise to 12 percent in 2020 from 9.8 percent in 2019. In March, mall operators reported a 10-percent drop in sales and fashion retailers saw a 20-percent decline, according to a survey by the Philippine Retail Association. These numbers resulted from reduced consumer mobility, physical distancing protocols, and hesitancy in exchanging cash with consumers, all of which could be treated as opportunities for the retail market to adjust to the new normal.

Predicted decline, unprecedented impact

According to an article by Grant Thornton International, retail has been in a major slump for the past two years; the pandemic only accelerated its restructuring. As some big-name department stores around the globe filed for bankruptcy, the same was seen among small retailers. Even if customers were welcome in stores, limited in-store capacity, as well as frequent disinfection, added unexpected costs and labor demands. The ban on large gatherings and social events especially hurt luxury retailers, which depend on seasonal sales.

While Covid-19’s damage to the industry is undeniable, experts say it is wrong to analyze and strategize the numbers from only one point of view. This is because grocery chains, retailers of fast-moving consumer goods, furniture and home-goods retailers, and cars and sellers of outdoor recreational goods actually benefited from the pandemic. This is a response to purchasing trends that were helped by consumers spending loose money on other things. Private equity firms looked to invest in businesses that focused on outdoor activities and sports, and in direct-to-consumer retail businesses.

In contrast, the pandemic hit apparel hard, especially formal wear. An obvious reason would be the lack of formal events, but even everyday-wear brands also suffered. As a result, several apparel businesses were acquired by investors specializing in branding aimed at enhancing marketing and engagement with online consumers to launch new brand collaborations and grow ecommerce. When looking at opportunities for mergers and acquisitions in retail, it is crucial for investors to perform due diligence to better understand the current state and potential of a business.

Department stores and shopping malls were also affected by the growing market share of online retailers. Since the main selling point of department stores is their in-store experience, they are yet to fully respond to the increasing demand for online shopping.

Looking ahead

The damage Covid-19 inflicted on the retail industry magnified the effects of poor management and decision-making. Retail business leaders must always be ready for the unexpected and not become complacent. Moneymaking should not be the only priority; innovation and product development should also be on the forefront.

Distressed retail businesses must look into specific areas to make informed decisions. The first area that brick-and-mortar retailers should check is closing underperforming stores and examining store leases. The rationalization of the number of branches should be driven by historical store profitability and anticipated future potential while also considering individual lease terms and concessions. These terms can provide useful, time-driven guides on when decisions should be made. As for mall locations, there is a challenge seen this year, since individual traffic is heavily influenced by the performance of a key store. If one key store leaves, has limited capacity or closes, that could potentially hurt mall-dependent businesses.

Another area is the customer journey. Experts say the current big winners in retail are those that pursued an omnichannel strategy, in which all points of customer contact — online, in-store, over the phone, curbside pickup, and home delivery — are not isolated, but seamless and designed to rely on one another. Consumers were forced to reconsider their purchasing methods, and the retailers that adjusted and became flexible are those that are thriving.

Fast-forwarding trends

The pandemic is not much of a shock to the retail industry. Retail businesses that were overleveraged, had many underperforming stores, or were late innovators are now suffering. The abovementioned strengths and weaknesses of the retail industry should be considered by any business when planning for the future.

It remains true that in retail, executives must be proactive in facing challenges to ensure the stability, efficiency, and effectivity of their cost structures. Taking a more reactive approach would not ease the adjustment to the new normal. Careful preparation and planning and informed decision-making are keys in running any business.

Endel Mata is a partner of the Audit and Assurance Division of P&A Grant Thornton. P&A Grant Thornton is one of the leading audit, tax, advisory, and outsourcing firms in the Philippines with 24 partners and more than 900 staff members. We’d like to hear from you! Tweet us: @GrantThorntonPH and “like” us on Facebook: P&A Grant Thornton. Email your comments to endel.mata@ph.gt.com or pagrantthornton@ph.gt.com. For more information, visit www.grantthornton.com.ph.

 

As published in The Manila Times, dated 30 December 2020