Memo: Retail’s 2021

Year two of the pandemic, 2021 saw what can be best be described as sustained disruption throughout the world of retail. Wave after wave of pandemic variant and ensuing outbreak continued a chaos that we was supposed to be over in 2020. And yet, retail found ways to make its products easier to buy, more experiential to discover, and more available than projected (whether physically or digitally). We’re looking back at the main themes from this past year that will influence the year ahead.

The prolonged effects of Covid-19:

The pandemic is far from behind us. While we didn’t see mass lockdowns like 2020, the retail industry continued to form around new ways of shopping, new customer needs, and developing behaviors. The pandemic is woven throughout the rest of the year’s themes, with the Delta and Omicron variants making it clear that new disruption is never off the table. From a December memo on “Resilient Retail”:

The pandemic has caused a substantial shift in how consumers behave. It has begun to impact brand preferences, the decrease in impulse buying, a reduction in non-essential purchases, and a 35% increase on the reliance of online shopping.

Winners and losers have been born along the way. Major retailers proved most resilient, with the ability to skirt around supply chain back-ups (which we’ll get to in a moment) and get inventory on shelves ahead of the holidays. One example is Target, who found a way to keep digital shelves stocked in case their physical ones came up short.

The supply chain delays

Supply chain backups dominated retail headlines this year. As a result, major retailers responded with 2021’s holiday season starting earlier than before, with customers hoping to get ahead of out-of-stock notices. Agile, digitally native retailers were able to compete as well. But no one was immune. With COVID expected to continue disrupting the supply chain, impacting staffing and inventory availability, retailers will continue to develop omnichannel and staffing strategies that provide enough flexibility and control to outlast another year or two of these consumer behaviors. In October, we broke down the year in cascading effects caused by supply chain disruptions.

There are currently 90+ ships drifting off of the coast of Los Angeles and Long Beach, California. Nationally, truck drivers are employed at historic lows. Internationally, retailers are concerned by the news that China has begun limiting power at its many factories and shipping facilities, further hindering import timelines. And some of the most fortunate brands are buying the ships necessary to move products from A to B with some semblance of reliability.

But Lowe’s and many of the retailers in its class are no longer optimistic that any of the current issues will find resolution in the coming weeks. That may mean that we will see an uptick in top CPG brands as some of the top gifts of the season.

Even so, the holiday season saw retailers in a better position than many analysts believed. Some of them found new ways to consolidate supply chain management, other brands and retailers opted to buy their way out of supply chain disruption. Here is American Eagle Outfitters for example, the company also acquired Quiet Logistics:

The AEO pattern of acquisitions breaks a decades long cycle of reducing costs by off-shoring blue collar business functions. Historically, the market punished companies looking to build more robust, fully vertical systems. But no longer. If this two-year period has taught us anything, it’s that inventory control is a necessary function for brands. But also, that eCommerce operations are no longer on the fringes of big retail. The largest companies are building systems for direct-to-consumer growth.

eCommerce kept growing

Online retailers and their enablers, including Shopify, benefitted from the shift from in-store to eCommerce shopping that continued in 2021. What was reactionary in 2020 became more intentional this year and that’s expected to continue in 2022. From August:

So here we are, back again. Though government mandated shutdowns are far from likely, corporations are instituting their own versions of them. CBS News reported that Walmart and Kroger will require masks as the second wave of worry is anchored by the spread of the Delta variant. Whether more or less dangerous than the first model of pandemic, businesses have to respond proactively. Few industries are as preemptive as retail; other industries will follow.

This means longer lines, shorter in-store supply, and a decrease in consumer satisfaction as customers lament the persisting inconveniences of mainstream physical retail. Like before, eCommerce will be there to pick up the pieces. It will look something like a j-curve.

The rise of the Metaverse and Web3:

One of the biggest stories of the year is the rise of interest in the metaverse and Web3, both will continue to develop into next year. I mean, Oculus Quest 2 was the number one gift for Christams 2021 according to the free app rankings in the Apple app store. The shift from Web2 to Web3 finds internet users delving into digital-first and digital-only spaces, where their avatars and PFPs define their status. Consider it the new country club.

Brands are going to join in more in the new year, following a lead well established by Nike, which has led retail brands into metaverse presence development (MPD). MPD will define the next generation of marketing and brand equity; these are the companies leading in the digital world. For Nike, it’s been a worthwhile play so far.

This trend will continue. In one prediction from this year, we explored the shift from eCommerce to simply “commerce,” which will account for any purchases made in any space – physical, online or digital. When goods can be bought digitally and their inherent value is also digital, that means new competition in retail that overrides physical demands and disruptions. Just look at what’s happening to the supply chain – it’s all connected.

DTC’s new store strategy

It was a big year for first-generation DTC brands. Of the many that went public was Warby Parker, whose growth strategy belies a more significant trend that will define the paths for other mature DTC brands going forward. Warby Parker is going to continue opening more stores, along with other brands including Allbirds, which also went public this year. In August:

No, DTC was never meant to be online only. Warby realized over the years that its customers wanted to shop for glasses in stores, and it built the infrastructure to meet them. Now, the question is whether they can leverage their growing consumer-base to achieve operating leverage. And can Warby Parker continue climbing the chart?

Expect more similar brands to expand their store networks in populated areas where they can boost their online business simultaneously.

And last, the acquisition boom

It was an even bigger year for exits. Companies including Manscaped, BuzzFeed, Milk Makeup and more went public with the help of special purpose acquisition companies. In March, retail vet Art Peck launched a $200 million SPAC to acquire emerging retail brands. Good Commerce Acquisition Corporation will focus on e-commerce and data-led companies that also have ties to wholesale and retail. What became clear this year is that retail is not a funding race, it’s an EBITDA one. From October:

Over the past few years, several categories have benefited from the tailwinds of the shift towards online retail. Suddenly, SPACs were interested in direct-to-consumer retailers. Private acquisitions became a popular headline. Companies like Figs, Warby Parker and Brilliant Earth debuted on the public markets; each share market capitalizations north of $1 billion. Warby Parker and Figs, both north of $5.3 billion in market cap, are setting the market for the brands suspected to follow: Allbirds and Away are but a few in the pipeline. Now, companies like Gymshark are mulling an IPO, signaling a final stage of sorts.

All of these themes will influence the next year and beyond for retail. Covid is still here, the supply chain ripple effects will be long lasting, and the metaverse will become more mainstream. What’s been proven at the same time is that retail is resilient, and DTC is a viable model with its biggest practitioners moving to the next stage. It makes sense – it’s a long game. We’re still in the thick of it.

By Web Smith and Hilary Milnes | Art by Alex Remy and Christina Williams 

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