In August, Walgreens, a drugstore chain, announced it would raise wages, matching a decision made earlier this month by its main rival, CVS. Target raised wages earlier this year. Walmart has done this several times over the past 12 months. As with higher shipping costs, this puts pressure on margins. And additional expenses could arise in the form of federally mandated covid-19 tests for employees who refuse to be vaccinated. This month, the Retail Industry Leaders Association, which counts Target as a member, warned of insufficient testing capacity in the country to meet this requirement.
Two new shocks for American shopping
VISITORS AT a large supermarket in America these days could be forgiven for feeling disoriented. From one point of view, all-American consumerism shows up as it normally does: crowds of people struggling to steer overflowing carts in a straight line. Retail sales (excluding cars) increased at a seasonally adjusted rate of 1.8% in August from July, the fastest monthly rate since March. Other images, however, appear distinctly anti-American. To their horror, some shoppers discover empty shelves where their favorite brands of cookies, detergents, pet food and toilet rolls typically reside – the result of supply chain disruptions as epidemics of the infectious Delta variant of covid-19 have closed factories and ports around the world.
Unlike in the early days of the pandemic, when stores were laid bare by panic buying, American consumers mostly have alternatives to choose from. But the shortages are a sign that things in the country’s $ 5.6 billion retail sector have not returned to normal. If the supply shock weren’t enough, traders must simultaneously contend with demand from buyers, again eager to wander the aisles rather than scroll through apps. Having survived the initial upheaval of the pandemic, they are now in the throes of one another.
Start with the bottlenecks. Congestion at ports from China to California has pushed shipping costs to record highs. Domestic trucking costs are also on the rise, due to the increase in online deliveries. This is less of a problem for expensive things like iPhones than it is for the kind of cheaper merchandise sold by most large retailers, where shipping is a bigger chunk of the list price. Walmart has gone so far as to charter ships directly to ensure a steady supply.
At the same time, companies are facing a labor shortage. Depending on who you ask, this is because workers are scared of Delta, pampered by generous benefits of the pandemic era, or reassessing their lives and careers in the aftermath of the pandemic. Whatever the reason, the result is the virtual disappearance of customer service in department stores. The assistants who normally direct buyers to the correct shelf are nowhere to be found. With many checkouts closed, long queues form for the few that remain open. In-store posters promoting products are now reaching out to employees.
The return to brick and mortar presents a second set of problems. E-commerce, which fell from 11% of U.S. retail sales before the pandemic to nearly 16% in the second quarter of 2020, has fallen back to 13% of the total. Target’s comparable digital revenue grew only 10% year-on-year in the three months to June, compared to nearly 200% in the same period last year. Meanwhile, offline sales increased by a third in the second quarter, compared to the previous year, to $ 1.4 billion, well outpacing e-commerce (see chart 1). Coresight Research, an analyst firm, estimates that so far this year store openings have overtaken closures (see Chart 2). If this trend continues, it would be the first time since 2016 that America has added new outlets.
Investments by retailers in online capacity will not be lost. Once seen as a costly mistake, Walmart’s 2016 $ 3.3 billion takeover of e-merchant Jet.com gave America’s most powerful conventional retailer a platform it can rely on. builds a successful digital business. Some 3,000 of its 4,700 national stores now offer same-day deliveries. Likewise, Target’s acquisition of Shipt, a same-day delivery platform, for $ 550 million, a year later, formed the basis of an integrated technology network that now spans from data center in India to its some 2,000 stores in America.
Even Amazon seems to recognize that the future is “omnichannel”, mixing digital and in-store experiences, as it plans to expand its relatively fragile physical footprint, possibly with a chain of department stores. Consumers’ rediscovery of the pleasures of in-person shopping helps explain why the online giant no longer looks unstoppable; its share of U.S. retail sales actually fell from 7.8% in the first three months of 2021 to 7% in the next three months (although it remains above its pre-pandemic level by less 6%). In principle, Target, Walmart, and their brick-and-mortar peers should benefit more from the return to bricks-and-mortar than the Bezosville Beast. But the rush of shoppers to their outlets requires another reallocation of resources, before retailers’ foray into cyberspace is over.
Investors are confident that the largest companies can withstand these pandemic aftershocks, just as they did during the original covid earthquake in March 2020. The combined market capitalization of the three largest physical generalists – Costco, Target and Walmart – reached around $ 730 billion, up from around $ 520 billion at the start of the pandemic (see Figure 3). Over the past year, Costco and Target’s stock prices have outperformed even Amazon’s by a factor of two and nearly four, respectively.
Look beyond the larger retailers, which have more or less maintained their market share throughout the pandemic, and the picture is one of wreckage. As in many industries, covid-19 has lifted troubled traders out of their misery. Last year, nearly 9,600 stores closed permanently, while less than 4,000 opened, according to Coresight. The victims include venerable names like Neiman Marcus (a department store for the rich) and JCPenney (one for everyone). Targets and Walmarts can be buzzing with activity. But abandoned malls abandoned amid the cracked concrete of empty parking lots have replaced Rust Belt factories as poster children of creative destruction. â