State of play: Retail in the pandemic

It's been a long half-year since most businesses in the U.S. went into lockdown. Most companies didn't have a plan for something as unprecedentedly widespread as this pandemic proved to be. In a matter of days in March, city streets emptied, businesses boarded up and many had to contend with the stark reality that they might not have what it takes to weather the oncoming storm.

Almost overnight, businesses had to ramp up plans for curbside delivery, in-store pickup and contactless payments while dealing with new safety protocols and the logistical nightmare of getting products on shelves. Companies had to come up with new ways to stay in touch with customers when they couldn't connect in person and figure out how to get them to keep shopping in the midst of growing economic uncertainty.

Protocol spoke with leaders across retail to learn about the technology they're using to see out the pandemic, and what may change forever as a result. They outlined three major areas to watch:

1. The supply chain
2. The shopping experience
3. The new customer relationship

Supply chain woes

Some of the earliest images of the pandemic were of grocery stores running out of hand sanitizer, Clorox wipes and more confusingly, toilet paper. Unclear guidance from officials early on, coupled with the general lack of clarity that comes with panic buying, were likely the culprits, and they came to epitomize the issues that retailers faced as customers stayed home.

People turned to the online retailers they knew, and even Amazon struggled to keep up with the demand; for a short time, it had to suspend fulfilling orders on what it deemed nonessential products. Supply chains fell apart — even for industries used to similar shocks, such as grocery stores. "They're somewhat accustomed to being able to react very quickly and having to deal with the pandemonium of products going off the shelf quickly [and] having to refill them," said Bill Kammerer, Deloitte's supply chain consultancy lead. "Unfortunately, this was the size of a hurricane recovery in Florida, [multiplied] by 50 states — so that certainly put a lot of pressure on their supply chains."

For many retailers outside of the grocery world, there was little forecasting for an event at this scale. "This is probably across all of their supply chains; it's been just the continual challenge of capacity and performance through distribution and fulfillment centers," Kammerer said. In the facilities themselves, state-mandated social distancing measures have reduced capacity. Even if you find people to work more shifts and run overnight, you may not have enough room to use them.

But the problems aren't just in retailers' facilities. International trade slowed to a crawl when lockdown orders went into effect, and many companies found their products stuck at ports. If items are stuck on the West Coast coming from China, they can't make it inland for distribution across the country, Kammerer said. And if things aren't moving east on trains and planes, then those vehicles aren't going to be heading back west to pick things up, and vice versa.

"If there's not enough products going to exports, you don't have enough capacity going out there to bring the product back," Kammerer said. Throw on top of this pandemic an ongoing shortage of truck drivers, trucking companies choosing to take PPP funds over getting back on the road and the tariff war with China, and you have a perfect logistical storm. "The cracks in the supply chain are so large that they can't be pushed back together," said Eddy Badrina, co-founder and CEO of Eden Green Technology, a vertical farming startup.

For many retailers who have either just joined the world of ecommerce or who have ramped up their offerings during the pandemic, fulfilling orders has become a challenge. Even if they have products in stock, the increasing number of companies shipping products — and weaknesses in the capacity of the U.S. Postal Service — makes it hard to live up to the standards that giants like Amazon have taught customers to expect.

"Everything in ecommerce happens on the internet, and then suddenly you need to ship," said Shippo founder Laura Behrens Wu, whose service matches retailers to shipping providers. "It's happening in the real world, and when real people are involved, things get messy."

But with the busiest retail season of the year bearing down on companies, things are unlikely to to get better before they get worse. Even the largest companies have staffed up; Amazon recently announced it was hiring 100,000 more workers after bringing on the same number over the summer to deal with the surging demand. "It's like Christmas every day," said Bob Biesterfeld, CEO of the transportation and logistics firm C.H. Robinson.

According to Behrens Wu, the reality of what's ahead for Black Friday and beyond hasn't really hit retailers or consumers yet. "I think everyone who's in the shipping industry is saying that it is going to be difficult this year, that shipping providers are going to be at capacity," Behrens Wu said. "I think there's a discrepancy between what the industry experts are saying and what ecommerce merchants are worried about right now."

It's unclear whether the logistical nightmares of the early pandemic days are going to repeat themselves as consumers ramp up spending for the holidays, but some think the issues exposed by this period will lead to long-term changes. Behrens Wu said she sees a fragmentation of the shipping market ahead, as the major players won't be able to keep up with increasing demand, which would allow regional players and even companies like DoorDash or Uber to fill the void. Kammerer said he expects sections of the supply chain will get automated to help pick up slack. It's a change that was coming and the pandemic has helped accelerate. "I think that it's going to have a lot of lingering long-term impact as it actually will make many of these supply chains a little bit stronger as they go forward," Kammerer said.

"There's still a lot that is done on pen and paper, through whiteboards and sometimes Excel spreadsheets," Kiren Sekar, executive vice president at the industrial IoT company Samsara, explained. "There's a really rapid shift happening to digital workflows, but it's still in the early stages, and the companies that have adopted some of these technologies before the pandemic are accelerating the fastest."

How shopping has changed

Before March, the overwhelming majority of people still bought things in physical stores — as big as Amazon is, it's still a relatively small slice of the retail pie. And even in lockdown, that hasn't changed too much: Before the pandemic, ecommerce accounted for about 12% of total retail sales, according to the U.S. Department of Commerce, and Amazon's share of that is usually around 20%. And even into August, around five months into lockdown and the most recent month the Commerce Department has data for, ecommerce accounted for only about 16% of all retail sales.

But still, the way that people buy products has moved far closer to home: They're spending less time browsing the aisles and more time browsing on their phones. Part of that is due to statewide or citywide regulations that forced many nonessential businesses to shut down. In a time of sheer economic uncertainty, KPMG estimates that the average expected family budget for this year's holiday shopping in the U.S. is down by about 18% year-over-year, but Adobe figures that $22.7 billion will be generated by online sales on Black Friday and Cyber Monday, jumps of over 35% from the year prior. So when consumers are spending this upcoming holiday season, they're spending online more than ever before.

Even with the boom in online spending and social distancing requirements, many are clearly still willing to brave the world to get what they need. In some cases, that's just because logistics has forced them to — grocery delivery services have struggled with the influx of demand across the U.S. — and in some cases, because there's little else to do these days. For the most part, though, the experience of going to stores has changed.

In some cases, the changes have been minimal — reducing the number of people allowed in the store, constant cleaning and plexiglass shields everywhere. Even companies like Apple, which has managed to buck trends and grow in-person retail as malls shutter across the country, has had to whittle back its stores to bare-bones staff, only allowing people in after checking their temperature and asking them if they have COVID-19 symptoms. In many other cases, businesses have rethought the concept of buying during this time, oftentimes building on initiatives they already had in the works in pilots — or that their competitors were trialing.

Some of the biggest trends in retail in recent years have focused on making the consumer buying process smoother. Nobody likes waiting in lines, and the threat of giving up on an in-person purchase and buying it online to avoid hassle has loomed large over physical retailers as Amazon's reach has grown. To combat this, retailers have been experimenting with a wonderful acronym, BOPIS: buy online, pick up in-store. This generally allows big-box stores to lean on their retail store infrastructure instead of fulfilling additional orders from distribution centers and gives customers the instant gratification of buying something and getting it the same day — something Amazon and other ecommerce sites can only offer for some products, like groceries.

Some retailers had rolled out BOPIS before, but like so many things, the pandemic accelerated usage. In a report this summer, McKinsey referred to it as part of a "next normal" for consumer retail behavior, and found that some 56% of people plan to continue using BOPIS after the pandemic recedes. Similarly, around 45% of people still plan on doing grocery deliveries.

But what is the role of the physical store when the smartphone becomes the gateway to how a consumer interacts with a retailer? It's likely going to change after the pandemic.

Some changes were already underway before we all went home. Contactless payments, long a staple across Europe, have been increasing in popularity in the U.S. before the pandemic. But during these socially distant times, the value in neither transacting with cash nor handing a card to a clerk is even more apparent. In August, the National Retail Federation found that 69% of retailers it surveyed had seen an increase in the number of contactless payments at their stores since January. Roughly 58% of the retailers said they accept contactless card payments, up from 40% last year.

Other infrastructural changes have happened at the stores that have managed to stay open during the year, from plexiglass and plastic barriers between customers and cashiers to improved ventilation systems. But for some customers, the ability to quickly dart in and out of a store, having already ordered online, is a feature they don't want to lose after the pandemic. Consumers have increasingly turned to BOPIS and curbside pickups during COVID-19, and many expect to carry on with these methods for the foreseeable future. The most recent store that Target redesigned saw its pick-up order capacity increase for just this reason: Even if a vaccine starts to hit widespread distribution in the early second quarter of 2021, it will still be a long while before the disease is beaten back and regular daily life resumes.

And even when that day comes, retailers are realizing the value that stores have, and what they lack. During the pandemic, it's been difficult to increase capacity at distribution centers or build new ones, according to Brad Bogolea, the co-founder and CEO of Simbe Robotics, an inventory-management company. Instead, companies are looking to do more with what they already have.

"Those folks that have physical stores are trying to drive a greater online presence, and keep up with Amazon and Walmart's expectations around shipping and customers getting products as quickly as possible," Bogolea said. "We're actually finding a number of these stores actually becoming local distribution centers."

Amazon took this idea to the extreme over the summer, building a Whole Foods "store" in Brooklyn that customers can't enter. In reality, the location is a glorified distribution hub where customers can pick up items and employees can fulfill online orders. It's a trend that Bogolea expects to continue, given there needs to be as little time as possible between when a grocery order is placed and when it's delivered. "This is why Jeff Bezos and team went after Whole Foods, because they knew to do grocery, they had to get closer to the customer," Bogolea said.

"The only things that grocery stores have left to stand on is freshness," Eden Green's Badrina echoed, arguing that it's the only reason to still go to a grocery store over an online channel. More modalities for buying online from local sources continue to pop up as well. FastAF, which leverages dark stores (like dark kitchens, but for products) and third-party delivery apps like DoorDash to deliver products to customers within two hours, recently launched in Los Angeles and New York. It includes well-known brands like Nike, Sonos and Aesop, but instead of having to deal with the individual stores, customers can order products and have them all show up at their house. Instagram also recently added a shop button to the home screen of the app, giving local retailers and major chains an equal footing in a space where millions of people spend considerable amounts of time each day.

For sectors outside of grocery, the differentiator will be the experiences that can be offered in store compared with online. However good AR technology and returns shipping infrastructure have gotten in recent years, they still don't come close to trying on clothes in real life. A recent study from the fintech company Klarna reported that 35% of consumers it surveyed said "an enjoyable in-store experience would make them more likely to shop again."

Store layouts will likely change as retailers are forced to accommodate online customers who want to be in and out quickly and others who want to shop in person with high-touch service.

Some may follow the path of direct-to-consumer businesses (more on them later) who have essentially used physical locations as showrooms to drive online sales. Others will find reasons for customers to convene beyond just buying the product — think a barber shop offering free coffee or an Apple store offering photography classes.

The other path is to merge the digital and the physical, much like Nike has been attempting to do with its newest flagship stores. App users can pick up orders in store, get exclusive offers and even have clothes sent to a dressing room. They can check out on their phone and customize products in a few minutes in the store. These experiences are unlocked through Nike's app, but they're not possible without a physical location. In a future where people don't want to linger, integrations like these could make all the difference.

But between now and then, there's the largest commercial holiday of the year. Adobe estimates that Black Friday is going to generate $10 billion in online sales, a 39% increase over last year, and that Cyber Monday will remain the biggest online shopping day of the year with $12.7 billion in sales, a 35% jump over last year. More than 42% of those sales will be completed on a smartphone. But even with cases rising across the country, there will still be in-person doorbusters at stores around the country.

Best Buy will be open, albeit socially distanced, starting at 5 a.m. on Black Friday, and Target is detailing the ways it's tried to make its stores safer during the holiday period. But with just about every major retailer offering the same discounts online throughout the month of November, will there be enough reason for people to show up in stores in the middle of the pandemic?

A socially distant customer relationship

For many businesses, the shift to socially distant shopping presented a new challenge: How do you maintain the relationship you've built with customers who would otherwise come into your store every day or week?

Simon Mulcahy, chief innovation officer at Salesforce, said that many brands have relied on transactional forms of marketing over the years — sales and discounts that they hope will drive people into their stores. But when few people are visiting stores and everything is happening online, the way to stand out is by actually making an impression and showing customers something new, he said.

"If you can get a customer to come back, purposefully, again, because they love what they got from you, that customer is worth 5x to you," Mulcahy said. "So it makes logical sense from a business perspective to not think about how you get more 1X customers but how you get more 5x customers."

Mulcahy said that early on in the pandemic, many companies that hadn't thought much about digital strategies before suddenly raced to create them. "What we saw was a kind of digital performance gap open up between companies who were already digitally connected and those who were just relying on the customer coming to them," Mulcahy said. "And if you didn't have that digital connection, you ended up really quickly losing out."

For many, the right strategies take time to perfect. "Most of these companies are still pummeling their high-value customers with discounts, [but] they don't need the discount, they're gonna buy anyway," Mulcahy said. Instead, he suggests instead using marketing channels to get customers to explore more of what the company offers, which would add more long-term value and be a better use of time. "Getting that data, understanding that customer more — you can then start to introduce new things to them. The whole thing is a really foundational principle to reinventing how you think about engaging your customers more thoughtfully."

Early on, many companies struggled to even have up-to-date information on their sites, let alone provide something like an in-store experience online. The answer can be staffing up a real-time chat service to replicate how available employees might be to customers in stores, or just making sure that what you've sold the customer really works for them.

"You've got to really understand the lifetime value of a customer: If they're a low-value customer, how do you turn them into a high-value customer? You don't just stop after you've sold them; once you've sold them those sneakers, did you follow up? Did you make sure they fit?" Mulcahy said. "You're following up with the whole of your brand, and you then build a relationship around a high performance experience overall that opens the door to the second conversation."

Direct-to-consumer brands have skyrocketed with tactics like these — using social media and allowing customers to buy products instantly on their phones. DTC brands have struggled for other reasons during the pandemic (supply chain issues are more profound for smaller players, especially ones with popular products), but the model they've used to build relationships with customers without physical stores is ripe for replication.

Nik Sharma, founder of a DTC strategy firm, had straightforward advice for companies looking to build a more DTC communications strategy: "Start ASAP." Even larger companies are seeing the value in communicating directly with customers; Sharma's firm has been working with a few of them as they've learned on their feet.

"It was really a lot of education, their internal kind of mindset, and how they think about marketing," Sharma said. "Speed is something that these larger brands just don't have. It's not in their DNA, it's not in their workflows."

But that doesn't mean you have to reinvent the marketing wheel. "Email works extremely well — it's still the kind of bread and butter for everybody," Sharma said. "With email, unlike SMS, a company could send an email a day, and you'll still never unsubscribe, but if they were to send you a text message a day, you'd be gone by day two."

More companies are experimenting with new forms of communication. "A lot more brands have jumped on places like SMS; a lot of them are using Instagram; some brands have started using Discord groups with their customers," Sharma said. He said that he would have recommended much of this before. The difference now is that the brands don't really have a choice.