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How the COVID-19 pandemic could change the retail industry

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How retail businesses will adapt after COVID-19 pandemic

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Almost all UK firms and industries have been badly affected in the short term by the spread of Covid-19. Looking back at past pandemics - the Black Death, the Great Plague of London and the Spanish flu - provides some perspective on longer-term prospects for business.

The Covid-19 pandemic and government efforts to halt the spread of coronavirus have had serious negative consequences for small and medium-sized enterprises (SMEs), but less so for many large companies and multinational corporations ( Turner and Akinremi, 2020). SMEs are more vulnerable to shocks, such as pandemics, which big businesses are often able to survive ( Verbano and Venturini, 2013). Despite this, economic research has given little attention to this important difference ( Turner and Akinremi, 2020).

Although the modern economy is far more connected than in earlier centuries, previous pandemics and epidemics can give us some insights about what to expect in the longer term. Analysing the three largest pandemics to strike Britain - the Black Death (1347-52), the Great Plague of London (1665-66), and the Spanish flu (1918-19) - allows us to draw some insightful parallels with modern events ( Colvin, 2020).

What does evidence from economic research tell us?

Large companies are usually more able to prevent losses and adapt to new circumstances, including pandemics, than are smaller companies.

The ability of governments to prevent business collapse is significant, but policies do not always have equal benefits.

What do we know?

We require microeconomic data (data on companies and individuals) to explain how past pandemics have affected big business, but economists have tended to conduct macroeconomic (large-scale) studies ( Turner and Akinremi, 2020). It is also difficult to make comparisons between different periods of history, especially as wider events alter how pandemics affect the economy ( Jordà et al, 2020).

But allowing for the limited amount of data and economic research, we can still draw some conclusions from past pandemics.
The Black Death
The extreme death toll of the Black Death, and the nature of the 14th century economy, meant that its effect on big business was substantially different than other pandemics and epidemics. The Black Death killed between 40% and 60% of Europe's population, at least 75 million people. This led to radical socio-economic changes, most importantly the redistribution of wealth among the survivors and the decline of serfdom ( Herlihy, 1997).

The redistribution of wealth was particularly important for artisans and other urban residents, who gained new opportunities for commercial and social advancement. In England, the wool trade, England's most valuable export, was damaged by export duties designed to fund the Hundred Years' War and compensate for the decline in revenue caused by the Black Death. This, however, boosted the woollen cloth industry. Those companies that were able to make the switch - or, more often, new generations of merchants who were more suited to the changing market - could profit handsomely ( Lloyd, 1977).

The impact of the Black Death on big business is more difficult to judge because of the effect of contemporaneous events. When the Black Death struck, Italian companies, Europe's largest, had already shrunk in size after a series of bankruptcies in the 1340s ( Hunt, 1994). These bankruptcies also meant that later companies were far more cautious in their operations ( de Roover, 1963). There were, however, some opportunities for big companies. In the absence of Italian bankers, the de la Pole family, originally from Hull, became the Crown's most important creditors at a time when the Black Death had increased its financial requirements ( Fryde, 1988).

The economic outcome of the Black Death, therefore, was of radical change and transformation, with both disastrous and beneficial consequences for all types of businesses.
The Great Plague of London
In 1665, London and some provincial towns were struck by a particularly severe outbreak of the bubonic plague, which killed perhaps 100,000 people and temporarily halted almost all commerce, to the detriment of the city's traders. In London, there were high death rates among the poor, who lived in crowded conditions. Those merchants without the money to flee London struggled to sell their wares and were obliged to reduce their prices ( Moote and Moote, 2004).

Wealthier citizens did better. According to Daniel Defoe, some of the wealthiest trade masters continued to manufacture goods throughout the epidemic. This both kept their poor workers in employment and - so they hoped - would allow them to capitalise on the anticipated spike in demand that would follow the outbreak. But most wealthy merchants and goldsmith-bankers fled the city ( Defoe, [1722] 2015).

The diarist Samuel Pepys, who was also Chief Secretary to the Admiralty, recorded that the Royal Exchange, London's stock exchange, was empty of its usual crowd of wealthy merchants and goldsmith-bankers. Their absence meant that the Crown was unable to find creditors willing or able to fund the Second Anglo-Dutch war. When he attempted to raise a loan, Pepys was told by one banker-goldsmith that there was 'no money got by trade, nor the persons that have it by them in the City to be come at' ( Pepys, [1665] 2018).

After the plague, London's trade recovered swiftly ( Defoe, [1722] 2015). Perhaps surprisingly, the Great Fire of 1666 helped with the general economic recovery, as the torching of warehouses produced an even greater demand for manufacturing ( Mitchell, 1994). London's foreign export trade had a spike in demand, fuelled by continental European markets that had been deprived of English manufactures for many months ( Defoe, [1722] 2015). Likewise, regional trading towns, such as Colchester, quickly recovered, whereas towns that failed to attract new immigrants, such as Ipswich, experienced recessions ( Porter, 2009).

Overall, the duration of the Great Plague was short enough, and London was dynamic enough, that the long-term economic effects were short-lived. The facts suggest, however, that larger businesses weathered the Great Plague more easily than smaller firms, which were unable to keep manufacturing or to delay trading until market conditions improved. If this is true, it would echo the situation we see today, where large companies are more able to adapt their business models to sudden changes ( Verbano and Venturini, 2013).
The Spanish flu
The Spanish flu killed perhaps 50 million people in three waves between 1918 and 1919 ( Colvin, 2020). It overlapped with and was spread by soldiers fighting in the First World War, which also substantially altered its economic impact. In the United States, where most of the economic research has focused, the Dow Jones index was comparatively unaffected ( Taylor, 2020).

The First World War also mitigated the impact of the flu by acting as a stimulus for certain economic sectors. In neutral Sweden, the war boosted agricultural exports ( Karlsson et al, 2020). In the United States, the government ordered factories to stay open for the war effort ( Benmelech and Frydman, 2020). Unlike large industrial and agricultural firms, many American SMEs suffered serious losses from Spanish flu ( Turner and Akinremi, 2020). The differences between the two groups indicate that the fate of the stock exchange does not give a complete picture of the economic ramifications of a pandemic.

The Spanish flu and Covid-19 share a pattern in which large companies and multinational corporations weather or even benefit, often partly as a result of government support, while SMEs suffer substantial losses.

Conclusions

This brief summary of each historical outbreak and its economic consequences for big business demonstrates some continuous trends that we can use when analysing the present.

First, that pandemics and epidemics have serious consequences for trade and finance, but that the short- and long-term consequences may be very different from each other.

Second, that larger companies are more able to survive pandemics and other shocks than are smaller businesses.

And third, that the economic ramifications of pandemics are often closely intertwined with surrounding events.

What else do we need to know?

We know that large companies are better at surviving and adapting to pandemics and other market shocks, but we do not know all the details and the topic remains understudied ( Turner and Akinremi, 2020).

In particular, we do not yet have studies that have sought to differentiate between large and small firms in the aftermath of the Great Plague of London. The consequences of the Spanish flu for SMEs are also awaiting more comprehensive research.

We also know that government mitigation efforts often help larger companies more than smaller ones. But we do not know how crucial a role this played in previous disease outbreaks, nor do we know the extent of government support.

Where can I find out more?

Who are experts on this question?

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How have past pandemics affected business? - Economics Observatory

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Almost all UK firms and industries have been badly affected in the short term by the spread of Covid-19. Looking back at past pandemics - the Black Death, the Great Plague of London and the Spanish flu - provides some perspective on longer-term prospects for business.

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We've made our coronavirus coverage free for all readers. To get all of HBR's content delivered to your inbox, sign up for the Daily Alert newsletter.

Retailers need to stop expecting business to return to "normal." There's no going back to how it was anytime soon. Even before the Covid-19 pandemic and economic crisis, brick-and-mortar retailers had been fighting a fierce battle against Amazon and other e-commerce players. Those challenges have now accelerated at staggering speed.

The latest data from McKinsey shows that consumers are likely to keep the behaviors they've adopted amid stay-at-home orders, such as more online shopping and fewer mall visits. Retailers can't afford to be in a wait-and-see mode. First, they need to reimagine their baseline requirements and then turn their attention to taking their customer experience to the next level.

A New Baseline

To start, retailers have to adapt their brick-and-mortar operations to comply with health-and-safety regulations and meet basic customer expectations. This includes mask wearing, ensuring physical distancing, and controlling the number of employees and customers in stores, instituting contactless transactions, improving speed of service, and introducing more self-service options.

Retailers also need to offer a simple and seamless e-commerce experience - from browsing to researching, selecting, purchasing, and returning/exchanging. Customers will no longer tolerate sub-par digital shopping experiences like they may have before the crisis. Retailers have to make sure their sites are mobile-responsive, offer integrated services such as "buy online pick up in store" (BOPIS), and deliver a consistent, reliable digital experience across devices and channels.

For a select few retailers, such as trendy fashion stores or pop-up restaurants, executing at this baseline level is sufficient. If demand for a product is so high and/or urgent - for example, as it had been for Shake Shack burgers, Nike shoe drops, or the latest Apple release - customers will still venture out to a brick-and-mortar location. Camping out overnight or waiting in hours-long lines to shop may eventually return as a super fan's pastime. But that's no longer a strategy to rely on - enhanced in-store operations and a well-functioning digital presence are table stakes.

Rethinking the In-Person Experience

For several years now, some retailers have been putting as much if not more priority on the in-store experience than on the products they sell. From Restoration Hardware to Bass Pro Shops and even Walmart, retailers have learned that holding events or offering special experiences and services in-store not only attracts customers, but also encourages them to linger longer, buy more products, and spend more on those products.

As a result of Covid-19, all retailers will have to make their in-store experiences even more extraordinary for those who can visit in person. They have to give people a reason to visit that is so compelling, it justifies their exposure to health risks and overcomes the inertia of the behaviors they adopted during the shutdown.

To get started, retailers can consider how premium movie theater brands such as Cinepolis emerged back when Netflix and other home movie-viewing options threatened the movie theater industry. These new experiences didn't simply improve what had been previously offered to customers and address the shortcomings of existing options. They made visiting a theater better than watching at home - offering luxury reclining loungers, specialty food and beverages delivered seat-side, and lobby areas with bars to hangout with friends before and after movies. Retailers that offer an exclusive, superior experience like luxury cinemas once did can draw people out of their homes.

Elevated in-person customer service is another way to compete and win over online players, but retailers must think differently about service. Service can no longer be defined as a support for sales and be limited to generic efforts, such as greeting customers, handling complaints, and managing returns and special requests. Even personal shoppers, technical experts, and certified installers have become expected from most retailers of bigger ticket, more complex product categories.

Best Buy used this approach several years ago to rebound from its losing battle with Amazon. It introduced an advisor program that allows customers to get free in-home consultations about the products they should buy and how they should be installed. The service is intended to facilitate long-term customer relationships, not necessarily to close sales. As a result, it lured customers away from online options and positioned Best Buy as a trustworthy, more personal brand.

Digitally Native Customer Experience

This new emphasis on innovation and service needs to extend to the digital customer experience as well. Most retailers with roots in brick-and-mortar simply try to replicate their in-store experience online, but such efforts are fruitless and misguided. Beyond the transaction basics discussed earlier, customers don't expect a virtual experience to be like an in-person one - nor do they want it to be.

Investing in some of the unique capabilities of digital - including real-time inventory management, predictive analytics, AI-powered search, and personalization and co-creation functions - can create completely new and different shopping experiences. Take, for example, social commerce, which not only enables companies to sell through social media channels but also incorporates social interactions; peer support, reviews, and recommendations; multimedia content; personalization; gamification; and more. A retailer can use these new capabilities to create a social, interactive, immersive experience wherever customers are - that's something no physical outlet can provide.

To get inspiration and insights for designing an online shopping experience from the ground up, retailers might want to examine the evolution of other brick-and-mortar industries and institutions. When Covid-19 forced churches to shut down their weekly services, most simply transferred their church services online using digital conferencing solutions like Zoom. But Cincinnati-based Crossroads Church seized the opportunity to re-imagine its pastors' weekly sermons. Now they film pastors delivering messages at different locations to help reinforce that week's message (for example, talking about the importance of a strong foundation at the site of a historic church). Similarly, retailers can take advantage of the greater flexibility and new contexts that digital affords by, for example, depicting a single clothing item on multiple models to show what it looks like on different body shapes and sizes or using videos to demonstrate how real customers actually use a tool.

They can also take inspiration from how digital enables immediacy and interactivity for online education platforms such as edX and Coursera. Students studying software programming can upload their coding projects and get them automatically graded, so they receive instant feedback; psychology students can use an app that goes with their class to track their habits and better notice patterns in their own behavior. What might this look like in the retail context? Possibilities include AI-enabled answers to customers' questions in real-time, instant video chat with a personal stylist, and apps that track usage of current products to make recommendations for new ones. Ideas like these arise when retailers think beyond adapting the in-person experience online.

This isn't the time for the retail industry to try to simply ride out the storm. With a more proactive, progressive approach to both digital transformation and a new era of customer experience and service, the future might look less bleary.

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The Pandemic Is Rewriting the Rules of Retail

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We've made our coronavirus coverage free for all readers. To get all of HBR's content delivered to your inbox, sign up for the Daily Alert newsletter. Retailers need to stop expecting business to return to "normal." There's no going back to how it was anytime soon.

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COVID-19 and the retail sector: impact and policy responses

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The retail sector is of paramount importance across OECD countries. It operates as a gateway to consumers from upstream sectors, accounts for almost 5% of GDP, and employs about 1 in 12 workers. COVID-19 has dramatically disrupted the sector, with the shock differing massively between brick-and-mort…