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03/26/2021

BDO Q&A: Four questions about the state of retail

Dan Berthiaume
Senior Editor, Technology
Dan Berthiaume profile picture

In the coming months, retail success—both in and out of malls—may depend on retailers’ ability to pivot quickly and adapt their business models to changing consumer preferences and demand shifts. 

That’s the key takeaway from the latest edition of BDO’s “Retail in the Red Report,” which noted that while 2020 saw the highest number of retail Chapter 11 bankruptcies filings since the financial crisis in 2009, the pace of filings curbed off at year end, making the numbers less bleak than originally expected.

“This underscores the efficacy of retailers’ resilience throughout the pandemic, including their ability to make faster decisions, respond to unforeseen demand shifts, and adjust their supply chains for stronger omnichannel execution,” the report noted. 

CSA spoke with David Berliner, leader of BDO’s restructuring and turnaround service, about the state of retail after such a disrupted year.

How can retailers pivot to stay out of financial jeopardy? 
Retailers are adapting their business models to demonstrate agility in addressing consumer needs and market conditions. This includes more than developing a strong e-commerce platform and omnichannel experience—retailers that are avoiding financial jeopardy will continue to prioritize what is best for the customer.   Specifically, this may include more smaller formatted stores, shorter delivery times, easier return policies, tighter control of inventory management, more consumer personalization both in-store and online and other creative methods to ensure consumer satisfaction.

What are your predictions on bankruptcy and store closure trends for the duration of 2021?
I think it’s likely there will be a slower pace of retail bankruptcies and store closures. There has been a clear slowdown in retail filings in the last few months of 2020 and first few months of 2021. With another relief package recently approved, this financial boost will likely filter back into retail sales and help retailers’ bottom lines. But retailers still need to execute on their transformation strategies in order to stay resilient. 

Poor execution from retailers with a large amount of debt or who are not adapting to consumer expectations such as BOPIS, curbside pickup or developed e-commerce platforms, might result in store closures or bankruptcy. Retailers are also noticing the benefits of expanding outside of mall locations with smaller format stores or closing stores to focus on stronger e-commerce platforms—which in turn may result in more store closures.

What are your thoughts on the future of malls as vaccine rollout takes off?
Prior to the pandemic, apparel and footwear stores and other large department stores secured much of the foot traffic into shopping malls. Since COVID, these stores and many others across various sectors faced closures and bankruptcies. Those who survived have adjusted operations to focus on building outside of malls, including stronger e-commerce platforms and smaller format stores. 

The numerous filings and store closings of mall-based retailers have increased mall vacancy rates—which grew to 10.5% by the fourth quarter—the highest in 20 years. Coresight Research anticipates 25% of America’s malls will close within the next three to five years, since underperforming malls are less able to rely on anchor stores to drive foot traffic. The decline in foot traffic within shopping malls can also be attributed to the capacity limits on movie theaters, restaurants and gyms, many of which are now integrated as part of the mall experience. 

Malls looking to repurpose their vacant space will likely look beyond traditional retail to fill the real estate—these spaces may be reimagined into healthcare facilities, office spaces, grocery stores, local fulfillment space for e-commerce orders and other non-retail uses.

Which industry sectors have the most opportunities — and which ones will have the most challenges?
Apparel stores are likely to be more successful this year compared to 2020, as the market continues to open up and consumers are increasingly inclined to get out of the house. Also, as vaccines roll out and the summer approaches, some consumers may start spending on experiences again, rather than solely on tangible items.

Sales of pet supplies, foods, treats and related products generated the highest sales in history in 2020 and are expected to continue as Americans added pandemic pets to their households. Discount stores are expected to add hundreds of stores in 2021 as more Americans look for bargains. 

Which industry sectors will have the most opportunities — and which will have the most challenges?
Essential retailers and other businesses that benefited from unprecedented sales during the pandemic may not see such revenue levels again this year. Grocery stores, for example, benefitted immensely from consumers opting to eat at home for safety purposes. They may see a slight decline in sales as consumers resume eating at restaurants again.

Professional apparel and formalwear will likely continue to struggle as more companies opt for a hybrid work environment, although there may be pent-up demand for beauty products and going-out apparel once the vaccine rollout is more widespread. Home goods and furniture stores may not experience as much success as they saw during stay-at-home orders in 2020. 

However, regardless of sector, all retailers have the opportunity to – and the challenge of — creatively reinventing their in-store experience to generate pre-pandemic levels of foot traffic.