Which retailers will emerge stronger from the pandemic?

The UK high street was facing challenges long before the coronavirus hit. Online shopping satiates our appetite for instant retail gratification. During the lockdown, with bricks-and-mortar stores being closed, couch-based clicking has been one of the few ways of indulging in retail therapy. But have the measures, imposed to halt the virus’s spread, permanently consigned the high street to the dustbin?

At first glance, the prospects for retailers look bleak – sales fell in April at their sharpest pace ever, as retailers (that were able to continue trading) cut prices in a bid to entice shoppers. From independent stores to well-known chains, all retailers have faced the big challenge of paying their overheads, but without footfall. Among the exceptions, of course, have been food stores and supermarkets, which have seen increased demand as shoppers, who still need to eat, bought even more food as a substitute for dining out.

Only recently, non-essential retail shops (e.g. clothes and book shops) tentatively started to reopen across the UK. Business owners and shareholders alike will be desperate to gauge the levels of demand. When Ikea reopened in early June, along with similar stores, there were enormous queues with customers waiting for hours to enter them. This suggests that recession hasn’t quashed people’s desire to spend and businesses that have seen sales severely impinged by the lockdown will certainly be hoping that Ikea’s experience is replicated elsewhere.

However, until Covid-19 is under control, people are likely to be more risk averse than previously when shopping in physical stores. The experience of adhering to a checklist of social distancing measures may be unappealing long-term.

Although it’s too early to say that the sector is on the road to recovery, those with the ability and ambition to adapt should stand the best chance of being able to thrive in future. This will mean being creative and making the best use of the available infrastructure. US retailer Target, for example, has used physical stores as distribution hubs for their online business. There’s also an opportunity for fashion retailers who can continue to make shopping a pleasurable experience for those who enjoyed it before.

Often, it takes an external shock to focus minds on the necessity for change. The pandemic has already provided the impetus for improvements that have long been required. Those retailers that can’t transform risk permanent closure, just as many have in the recent past. Plans to bring businesses into sync with changing shopping habits are likely to be accelerated – meaning the streamlining of store estates (with unprofitable outlets disappearing), enhanced shopping experiences and the introduction of new technologies. As contrarians, we are keeping a watchful eye on companies that, may be unloved now, but have the wherewithal to adapt and thrive in the ‘new normal’.

Please remember that past performance may not be repeated and is not a guide for future performance. The value of shares and the income from them can go down as well as up as a result of market and currency fluctuations.

Please note that SIT Savings Ltd is not authorised to provide advice to individual investors and nothing in this article should be considered to be or relied upon as constituting investment advice. If you are unsure about the suitability of an investment, you should contact your financial advisor.