THE CORONAVIRUS: SOME POSSIBLE IMPLICATIONS FOR THE GOODS RETAIL TRADE
This brief article crystallizes thoughts on the rapidly-spreading coronavirus (COVID-19) and its impact on individuals, supply chains and health care systems across continents. Due to space constraints, we are forced to narrow our focus to the virus’ likely implications for the global retail trade, the Top 250 players of which had aggregate retail revenues of US$4.53 Trillion at the end of June 2018 (see Deloitte’s 22nd edition of Global Powers of Retailing). Reflecting the global nature of their retail operations (and relatedly, their supply chain), each Top 250 company operated in an average of ten (10) countries. Tellingly, seven (7) of the Top 10 global retailers are drawn predominantly from the fast-moving consumer goods (FMCG) sector and originate from the US. They are Walmart, Costco, Kroger, Amazon, The Home Depot, Walgreens Boots Alliance and CVS Health (owner of Aetna Inc.). Rounding out the Top 10 are the German companies Aldi and The Schwarz Group (owner of Lidl) and there is also Tesco from the UK. It is worth noting that each retailer on the Top 10 list, on average, operated in thirteen (13) countries (see Table 1 for Walmart’s outlets outside of the US). Therefore, in what follows, we will examine the dominant supply model in the goods retail trade, the evolving public health effects of the coronavirus and the public health containment measures being adopted by several governments. We conclude by teasing out some possible implications this could have for the global goods retail trade.
Table 1. Walmart International’s Outlets Outside of the United States at 31 January 20201 .
|Geographical Market||Retail Outlets||Wholesales||Other2||Total||Square Feet3|
|Source: Walmart Inc., Form 10-K for the fiscal year ended 31 January 2020. US Securities and Exchange Commission.|
The Dominant Supply Model in the Goods Retail Trade
Presently, the goods retail trade in general and its supporting distribution centres and expedition units in particular are organised around a hub-and-spoke supply model. Under this model, bulk deliveries on pallets (i.e., palletized deliveries) are made from the distribution centres and expedition units to retail outlets. We illustrate the point with the example of Walmart which currently ships somewhere in the order of 75% of its US procurement and roughly 85% of its non-US purchases of store merchandise through its distribution centres. Meanwhile, the retail outlets essentially cater to walk-in (in-store) customer traffic (or more accurately, in-store sales transactions). However, with the spread of the coronavirus (first in China’s Wuhan City in Hubei Province in December 2019 and subsequently to every continent except Antarctica), the dominant supply model is likely to be disrupted. Already, many Chinese suppliers have declared force majeure, citing the coronavirus outbreak as an extraordinary circumstance preventing fulfilment of their contractual supply obligations.
Presciently, a number of global logistics companies (for instance, Amazon through Amazon Fresh) and large grocery retailers such as Walmart (through Walmart.com), the UK’s Waitrose (through Ocado) and Spain’s Mercadona are increasingly building out the shopping architecture to offer an omni-channel experience that integrates retail stores with ecommerce, thereby facilitating online shopping supported by home deliveries.
Public Health Effects of the Coronavirus
According to the World Health Organization (WHO), as of 6 March 2020, the coronavirus had infected 100,000 people worldwide, with the casualty count peaking in China (where the vast bulk of infections have been registered), though steadily climbing in Italy, Iran, South Korea and recently in the UK, France, Spain, Canada and the US.
The growing infection rate is undoubtedly placing a damper on people’s lifestyles and putting a strain on the public health systems in developed as well as developing countries across the globe.
Public Health Containment Measures
Little is so far known about the coronavirus’ biology except that it is a highly transmissible respiratory illness related to the SARS-cov-2 and is triggered by exhaled droplets that can survive for a short while in the air (especially in a cold, humid environment) and on surfaces (for how long, we are still not sure). It is also known that symptoms include a fever and a dry cough (but unlike the regular flu, there is typically no sneezing or runny nose) and that the elderly are particularly vulnerable as, depending on lifestyle and level of physical activity, people’s immune systems tend to weaken as they age.
Importantly, little is so far known about the reproduction rate (i.e., the rate at which a new case spawns other cases) and so health containment has presently taken the form of attempting to limit the spread by restricting person-to-person contact and mingling.
This is being pursued while at the same time promoting higher standards of hygiene through the wearing of face masks, careful and regular washing of hands, deep cleaning of residential and public spaces as well as the imposition of travel bans and quarantines. Consequently, Wuhan City was quarantined in February and likewise Lombardy in Milan, Italy with effect from 7 March. While the political system in China lends itself to a much tighter form of public governance and administration whereby government edicts regarding quarantines and restriction of public assembly are vehemently enforced, the approach in countries with a more democratic tradition and where civil liberties are more jealously guarded has been somewhat tentative. Indeed, until recently, the focus had been on public education and moral suasion in conjunction with strengthening the capacity of the public health system. Increasingly, individuals in these countries are opting to raise their standards of hygiene and through social distancing are trying to avoid contact with those exhibiting symptoms of the virus. And with a bit of encouragement from health authorities, some citizens are even choosing to self-isolate at home.
Some Possible Implications for the Goods Retail Trade
Depending on the virus’ reproduction rate, the efficacy of containment measures and the alacrity with which an effective vaccine is developed and made publicly available in sufficient volume and at an affordable cost, the number of individuals infected could rise well beyond current alarming levels. Under such a scenario, quarantines, social distancing and self-isolations are likely to proliferate. Moreover, experience is already beginning to show that as social distancing protocols are being diligently applied by a growing number of customer-facing retail businesses, shop floor attendants are reflexively electing to maintain their distance, resulting in a less helpful floor service. In these circumstances, walk-in traffic (footfall) to goods retail outlets is likely to be seriously curtailed. Consumers are, therefore, likely to shift to more remote forms of working, studying and online shopping, requiring home and institutional delivery.
And here, it is not unreasonable to envisage that home delivery is likely to diverge markedly from the conventional, bulk distribution on pallets and instead more greatly revolve around break-bulk packages transported by Sprinter-type vehicles directly to the doorstep (either residential or institutional).
Against this background, there is likely to be accelerated digitization through the acquisition and build-out of e-commerce websites and, by extension, the automation of the goods retail trade both at the level of the hub (the distribution centre and expedition unit) and the spoke (the walk-in outlet). Accordingly, there is the prospect of adoption of self-scanning robots, automated checkouts and the forging of a strategic alliance between retailers and call centres. The latter initiative being aimed at enabling home-confined consumers who lack the capability to shop online to place orders through call centres and have them delivered on the doorstep, possibly with the annual membership fee for such service waived in the current extraordinary public health circumstances.
Within this general context and bearing in mind that in times of uncertainty involving job losses, consumers instinctively cut back on discretionary spending and focus instead on essential items, retailers will, as a matter of course, be intensely preoccupied with improving the underlying economics of their food and non-food categories. Thus they would do well to come up with more attractive shopper propositions in the form of reliable offerings of must-have items (e.g., toiletries, hand sanitizers and cleaning products, milk, eggs, bread, fresh food) coupled with improved product and service quality on the back of enhanced day-to-day operational efficiency, while at the same time seeking to achieve sustainable and profitable growth.
Staff deployment (at more streamlined levels) is likely to be based more heavily upon data-driven product assortment, warehouse management and reorder quantity monitoring and replenishment at the level of the distribution centre and expedition unit. Relentless emphasis will also be placed on order-taking, order-aggregation and invoicing, agile home delivery and efficient product returns management. Needless to say, the requisite investment will, therefore, have to be made in personal protective equipment (gloves, hazmat suits, goggles and masks) for frontline home and institutional delivery staff. More extensive use is likely to be made of drone technology to deliver food, medicines and other critical supplies to cities, regions and entire countries (for example, Italy, France and Spain) that are under quarantine in a concerted effort to stanch the spread of COVID-19.
We reiterate the point made earlier that during periods of uncertainty such as now consumers tend to reduce spending on non-essential purchases which is, in a sense, a form of judicious income allocation. Therefore, some retailers will have to grapple with a build-up of inventories of non-essential items, prompting price discounting in the hope of selling these goods in order to be able to cover their fixed costs.
The issue, however, has its roots in expectations of an economic downturn. This engenders waning consumer confidence, which then triggers a tightening of the purse strings and ultimately translates into anaemic aggregate demand.
Recent history, particularly the global financial crisis of 2008-2009, shows that weak aggregate demand is more effectively addressed by the macro-level application of monetary and fiscal policy tools including, but not limited to, lower interest rates, targeted tax cuts, economic stimulus measures and the provision of sufficient liquidity to credit and capital markets. One notable difference though with the present COVID-19-induced global health and economic crisis is the severe contraction of the supply of labour due to the mandatory quarantine of entire cities (New York and Los Angeles), states (California) and countries (Italy, Spain, Peru and Colombia), just to name a few. Therefore, consumer disposable income is drying up and will result in a global recession unless a sustainable way is found to equitably boost the flow of income to consumers, possibly by a variant of the universal basic income (UBI). The response is likely to vary by country, depending on the amount of spending headroom that is available. However, in these unprecedented times, such initiatives could prove efficacious in staving off what is shaping up to be a spate of bankruptcies that could affect a whole raft of businesses, including players in the global goods retail sector.
It is hoped that by sharing the foregoing thoughts on a very topical public health challenge and illustrating its practical implications for the multi-trillion dollar global goods retail trade, this brief article will succeed in stimulating a wider and engaging discussion on making internal processes and global supply models more resilient in the face of emerging operational risks.
About the Author
Philip S. Baker holds a Doctorate in Business Administration (majoring in Business Economics) from the University of Manchester Business School in the UK at which he was a Commonwealth and a Tom Lupton Scholar. His current research focuses on Business Economics and Strategy, Business Model Design and Implementation, Organisational Culture and Transition, Intellectual Property Rights and Value Chain Improvement. In 2014, he launched Philip S. Baker Consulting to leverage years of professional experience gained in a range of industries and to further strengthen the empirical foundation of his writing.
1 Walmart International’s outlets, excluding Canada, are at 31 January 2019 consistent with the balance sheet date of the particular geographical market. The company’s outlets in Canada are at 31 January 2020.
2 Other includes stand-alone petrol stations.
3 Square feet in thousands.
4 Walmart’s outlets in Africa are for the most part in South Africa. However, there are other outlets in Botswana, Ghana, Kenya, Lesotho, Malawi, Mozambique, Namibia, Nigeria, Swaziland, Tanzania, Uganda and Zambia.
5 In Central America, Walmart outlets are to be found in Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua.