Keeping the shop doors open in the era of coronavirus

Yes, shoppers have been pouring into supermarkets. And there are signs of rising sales at hardware and DIY outlets. But elsewhere in the retail industry, it's a case of preparing for the storm.

Analysts and some of the country's top chief executives say it is not unwise for retailers to be planning for the worst-case scenario - for schools to be shut, shops closed, and self-isolation and remote working to become the "new normal". That reality has already arrived in Italy, France, other parts of Europe, some states in the United States and Britain.

Retail NZ expects about 10,000 retail workers will lose their jobs in the months to come if Covid-19 continues to spread and sales keep falling as consumers tighten their purse strings amid the continuing uncertainty.

READ MORE:
• Premium - Up to 10,000 retail jobs at risk over next few months: Retail NZ
• Coronavirus: Hundreds of hospitality businesses on brink of collapse
• Premium - How the Covid-19 outbreak has affected consumer spending behaviour
• Uncertainty looms as Warehouse posts first half loss

Insolvency practitioners anticipate a sharp spike in liquidations and business failures in the months ahead, though these are not expected to flow through immediately. Hundreds of businesses are already believed to be on the brink of collapse.

Rachel Lewis, founder of women's business advisory group She Owns It, says now is a good time for business owners to be working on their business, as opposed to in it.

A recent survey among her members found that Covid-19 disruption had already shaken up the small business sector, particularly retail operators, who were reporting that revenue was drying up and store foot traffic was falling.

"There's been a lot of fear over what the next few months are going to mean for small business because a lot of them don't have much of a buffer," Lewis told the Herald.

"There's a lot of insecurity around the future, concern that businesses are not going to make it through the next few months."

Firms are already feeling the pinch just weeks into the pandemic, but she says it is important that businesses carry on, even if that feels inappropriate.

"If you're lucky enough to have a buffer, now is a great time to focus on working on the business rather than in the business; that could positively impact your long term growth."

Lewis encourages businesses to continue to advertise and market themselves online and through social media. Now is also a good time to review business expenditure and how you can increase profit by reducing costs, she says.

"Look at how you can become a lean business or a leaner business in this time," she says. "Step back from the panic and the overwhelm of 'I don't know what to do because my sales have dried up' and instead think: 'I've got an opportunity to plan for the future and improve my customer experience'.

"In the future, it is going to get busy again at some stage, and if you can ride [this] out there is an opportunity there because some businesses will fail - if yours is not one of those, then when customers do come back, there will be more on offer if you do this right."

Nick Grayston, chief executive of the country's largest retailer, The Warehouse Group, says he believes the worst disruption caused by the outbreak is yet to come

Initially, the coronavirus had affected the Warehouse Group's supply chain and its flow of goods from China, where about 60 per cent of its product is manufactured, a result of the lockdown and widespread closure of factories there.

Now, the company is concerned about domestic challenges, including panic buying, the possible spread of the virus to its staff and a drop-off in consumer spending.

"The closing effectively of our borders, talking about containment and self-isolation, we've done a lot of contingency planning for what that means," Grayston says.

So far the NZX-listed company has experienced no negative impacts because of Covid-19, but Grayston says the challenge is not being able to predict what happens next.

The worst-case scenario for the group is that its network of more than 280 stores in its Warehouse, Warehouse Stationery, Noel Leeming and Torpedo7 retail chains are closed to stop the spread of the virus. That prospect is now the reality for thousands of retailers in the United States and Europe.

Struggling American department store chain Macy's has already closed all of its stores until March 31 in a bid to try to curb the rapid spread of the virus in the United States. This follows closures by Apple, Tiffany & Co and Nike, among others.

Grayston says The Warehouse is prepared to close its stores if it comes to that.

"First and foremost, we want to protect our people. We have put in all sorts of contingencies around IT, stores, our warehouses, our office; we have plans that we will implement as the various scenarios eventuate."

The Warehouse Group is working with the Government to ensure the public is able to buy essential products during any supply chain disruption caused by efforts to control the pandemic.

It holds daily crisis meetings daily, is looking at "contactless delivery" options if the need eventuates, and about 750 workers in its Auckland support office are trialling working from home. It is also looking at new ways of shipping goods from its distribution centre, and from different locations.

Grayston doesn't rule out the possibility that the looming economic downturn could lead to staff cuts in his own business, but he says The Warehouse is "trying very hard to avoid that".

The Warehouse this week reported an almost 20 per cent drop in its first-half net profit to $29.2 million. Excluding ongoing internal transformation costs, the underlying result was up 16.7 per cent. But now it is unsure how the outbreak will affect trade in the remaining six months of the 2020 financial year.

Dual ASX/NZX-listed outdoor equipment and apparel retailer Kathmandu has activated its pandemic contingency plan as it grapples with a significant fall in the number of people visiting its Australian and New Zealand stores, which is hitting sales. It is now expecting a significant fall in its second-half earnings.

The firm has been hit particularly hard in Europe, where movement restrictions have had a huge impact on retailers. It has been forced to close its Rip Curl stores in Europe. This week it announced that it had implemented a hiring and travel freeze.

Kathmandu chief executive Xavier Simonet says the company has been monitoring developments to ensure it is taking the best approach to protect the wellbeing of its staff and customers.

"In response to trading conditions, the group is taking decisive actions, specifically in reducing operating expenses, deferring non-essential capital projects, optimising labour costs, managing inventory levels and implementing a travel and hiring freeze," Simonet says.

"Our channel-agnostic approach, and especially our online fulfilment capabilities, should assist our ability to continue servicing customer needs despite growing government restrictions on the operation of retail outlets in many countries."

The outbreak has sent some consumers into a spending shutdown, as they opt to hold on to their money and pull back on discretionary spending in areas such as clothing, leisure and luxuries, including eating at home rather than dining out. Foot traffic to cinemas has also dropped significantly.

"Across the board, we are seeing people reducing the amount of discretionary spend," says retail analyst Chris Wilkinson. "Without travel, it is going to put more money into people's pockets, but they are going to be very mindful of that money, and cautious, because there will be job uncertainty."

Retail NZ says spending in this country's stores has fallen by about 60 per cent since the first confirmed Covid-19 case in this country almost three weeks ago, while spending online has dropped about 10 per cent.

The retail sector has an annual turnover of $98 billion and employs some 215,000 people, about 10 per cent of New Zealand's workforce. It contributes about 4.5 per cent of GDP.

Retail NZ chief executive Greg Harford urges people to support shopkeepers. "Most retailers in New Zealand are locally-owned stores, even if they are part of a franchise brand," he says. "We'd really be urging people to get out and support their local shops and communities because that's how we'll keep the economy going and keep jobs in communities."

Around the country, store foot traffic has taken a steep dive, says the people-tracking company Bellwether, which electronically counts people visiting civic spaces.

In Auckland, that decline is accelerating as each day passes.

Bellwether general manager Liz Fulford says stores around New Zealand are experiencing a decline in foot traffic of more than 25 per cent, though this is changing by the hour. "This is counts of people going directly into retail businesses," she says.

"We don't see the situation improving short term."

Disruption to business 'unprecedented'

While the outbreak is expected to accelerate insolvencies within the retail, tourism and wider hospitality sectors, among others, it is also expected to bring sales of businesses to a gradual halt.

Chris Small, managing director of business sales company ABC Business Sales, says the virus has caused uncertainty, making people keen to postpone or hold on to things - whether that is money, an asset or a business. ABC Business Sales says it is the largest seller of businesses in New Zealand.

Small says the business has noticed a drop-off transactions as people who were thinking of buying a business before Covid-19 now opted to hold off instead.

Business brokers are not yet being inundated with owners wanting to quickly sell their businesses, he says, but he expects that to happen in the coming weeks as the situation worsens.

"These are unprecedented times, there hasn't been an event like this before," Small says.

"If we're still in a similar situation, for example, if the same travel restrictions are in place, and we have the same hype around this in four to six weeks time, and we are no better off, then I'm sure we'll be getting contacted by a lot of people."

Most businesses could handle a couple of months of stretched revenue, but rarely anything beyond that, Small says.

"If it is four to six weeks [of hardship], we'll get through that; if it is anything over three months that's going to start causing pain and that's when people start thinking about needing to make people redundant, do they need to ring their landlord and let them know that they can't pay rent, bills and that has a knock-on effect.

"We went through the 1987 crash, we went through Sars, swine flu, the GFC, this will potentially outdo all of those because New Zealand has never closed off travel before - this is unprecedented territory."

Spike in business failures predicted

Tony Maginness, business recovery director at Baker Tilly Staples Rodway, says the recovery firm has increased its capacity as its "service becomes vital in the coming weeks".

Like a number of insolvency experts, Maginness says he is expecting a delay before the extent of business failures is revealed.

"Often there is a lag between businesses getting in trouble and seeking help with restructuring and liquidations," Maginness says.

"While we have heard a lot of businesses struggling in the tourism, events, hospitality and fresh produce export industries, they have not yet appointed administrators and liquidators. We have increased our capacity to help businesses as this service becomes vital in the coming weeks."

Damien Grant of Waterstone Insolvency says it took 12 months for liquidations to rise following the 2008 global financial crisis.

Grant says Waterstone has also received an influx in the number of inquiries from businesses, particularly hospitality operators and smaller lenders, following disruption from the outbreak.

"I don't think we'll start to see large formal insolvencies for another three to four months, but what you will see, [sooner] companies that were already in trouble deciding that they have no future because they needed everything to be going perfectly in order just to be able to keep the wolf from the door."

John Fisk, head of business recovery at PwC and chairman of the Restructuring Insolvency & Turnaround Association, says there was a slight increase in liquidations even before the Covid-19 outbreak, as the New Zealand economy slowed.

"In terms of the impact of coronavirus, we'll see a lag, so the number of formal insolvencies is inevitably going to increase, but it will take some time to work through before we see that," he says.

Fisk says PwC is advising its clients to focus on short term liquidity to ensure they stay afloat during this challenging time: "The first signs of the impact of this is really going to be on liquidity and how businesses cope with that."

PwC is recommending that businesses monitor the health of their staff, have at least a 12-week rolling cashflow, set up good communication channels with key stakeholders and make sure the bank is aware of the business' financial position.

Cashflow forecasting is incredibly important given the uncertainty at present, he says.

Fisk says it is possible that businesses and stores will have to close for some period of time, and it is important operators are prepared for this.

"Businesses need to be considering all sorts of options and levers they can pull, which includes perhaps having employees paid for only four days out of five a week or going on unpaid leave or having moratoriums with creditors and suppliers; businesses will have to look at a whole lot of responses and tailor them to their individual circumstances - I think it is inevitable that we will see an upturn in insolvencies at some stage in the future."

Silver lining amid chaos

Amid the gloom elsewhere in retailing, grocery sales are booming. Before long, it is predicted that homeware and DIY hardware will do the same, as people increasingly swap travel in favour of nesting at home and doing up their property.

Warehouse Group chief executive Nick Grayston says the company's stores have also recorded a spike in laptop sales as people prepare to work from home and have their children in distance learning if schools have to close.

Retail analyst Chris Wilkinson says home improvement and homeware retailers have experienced fewer people in their stores, but those people are now buying more.

"People are very much preparing their homes and home environments."

The Bunnings DIY chain is anticipating a rise in sales as thousands of workers find themselves working from home, or are stuck there with time on their hands, and notice repair jobs or home improvements that need a trip to one of its stores.

Chief executive Michael Schneider told the Australian he had a feeling that consumers were now focused on home improvements.

Wilkinson agrees. "Over the past week we've seen the grocery sector do well and we anticipate this will continue to be strong as people do more at home. Other countries have seen the same things happen.

"The big box home improvement retailers have also been doing well as consumers focus on resilience planning and prepare for mini-projects around the home. In times of distress we know consumers want to 'nest' - making their living environments comfortable and safe - and we're seeing this through the grocery and home improvement trends and also some good performance in homeware retailers over the past week."

He says less travel will refocus consumer spending and, given time, once people rationalise the risk of Covid-19, the time at home will ultimately help retailers in that category.