The relative performance of retailers in the capital market has shown a marked increase thanks to the ongoing industry restructuring due to the impact of the pandemic. This means that businesses that want to keep up need to get up to speed.
The profound impact of the COVID-19 crisis on the retail industry continues to be evident more than a year after the pandemic hit the globe. Forced to close stores overnight and quickly turn to e-commerce, retailers watched for temporary effects, such as stockpiling and excess apparel, gradually giving way to new consumer behaviors and business practices that could permanently reshape the way the industry operates. As the effects of the coronavirus begin to take hold, the future of retail as a whole takes a turn, with disruptions leaving some companies to outperform while others go bankrupt.
It is useful to look at industry performance through the lens of capital markets. The first year of the COVID-19 crisis marked a dramatic rise in many established trends, driving some industries to peak performance while others even lagged. back behind. This growing divergence has been highlighted in many recent studies of capital market patterns during the first 12 months of the pandemic. While the stock market overall recovered quickly, the disparity between the best and worst performing sectors widened, from 27 percentage points in mid-March to 80 percentage points a year later – largest margin in recent history.
The retail industry outperforms many others, with the average company delivering a positive total return to shareholders (TRS), but trends amplified by the pandemic are driving industry restructuring started a few years ago. As in most other sectors, the gap between industry leaders and laggards is widening, with some companies significantly increasing their market value (Figure 1). .
The industry’s stock market performance demonstrates the strong headwinds the pandemic has brought to well-capitalized retailers. Companies with technologically advanced business models appear to have been several steps ahead of the crisis and have gained many advantages over the competition. The past year has shown that the formulas for retail success are changing, and those that take too long to adapt may never catch up.
COVID-19 – the year of the retail industry
Despite having to go through social distancing, consumers are not idle. Despite a significant drop in incomes for many people – particularly in Asia, where government stimulus is limited – overall global shopping volumes are still up, helping the retail sector reach 35 percent. 1 market capitalization from late February 2020 to April 2021. Many people have used the time to renovate and redecorate homes; embrace new tastes, clothing styles and beauty routines; and care for families and pets, and promote the products, services, and experiences offered online.
Retailers serving those needs have thrived — especially those with strong digital adoption (Figure 2). However, the gains are not uniform. Retailers that rely on office workers have a harder time than residential stores, and categories like business clothing and cosmetics have been hit hard. In addition, there are significant regional variations. US and Chinese companies have accounted for three-quarters of market capitalization growth in the retail sector, a performance that particularly reflects the market size and more advanced digital business models of the retailers. retail in those countries.
In many cases, the strengths that have helped a few companies outperform their peers — technology-based business models and light assets fueled by trends in growing demand — are increasing. become more important during the crisis. Interdisciplinary analysis conducted shows a group of companies following those directions to achieve valuation increases so enormous that they could become representative of their own field; those companies called Mega 25.
An elite category has emerged in the retail industry (Figure 3). The top performing products featured in Super 25, most of which epitomize the dramatic shift to digital, represent over 90% of the industry’s increase in global market capitalization . The five US companies in the retail index generate more than 80% of the total value generated from US retail, with Amazon alone accounting for nearly 60%. Meanwhile, in China, four companies generated a staggering 98% of the increase in retail market capitalization.
The Rise of Super 25
Which companies are driving performance breakthroughs, and what do they tell us about the foundations of retail success during the pandemic? The first common factor worth noting is their size: The Super 25 as a whole (excluding Amazon, to a large extent that could put it in a separate category) has an average market cap of $84 billion as of February 2020—9.5 times the average size of the remaining 166 companies in the study list. Today, the companies in this top tier are on average 12 times the size of the rest of the index, with an average market capitalization of $122 billion. This represents an average growth of 38% since the pandemic began, compared with 10% for the other 166 companies. When Amazon is included in the Super 25 calculations, the difference is even more obvious: before the pandemic,
Super 25 companies largely fall into four categories: home economy companies, value retailers, online professionals, and platform companies. Their growth points to several trends that have driven consumer spending over the past 16 months and are likely to continue.
Invest in homes. Displaced consumers with increased time budgets have been investing in their homes. Home improvement leaders Home Depot and Lowe’s and furniture supplier RH (formerly Restoration Hardware) are the top beneficiaries of this trend. These companies represent 11% of market capitalization gains for the global retail index. In fact, Home Depot, which has increased its market capitalization by $84 billion, is the 22nd biggest gainer of all companies (not just retail) since the start of the pandemic.
Focus on essential values. The pandemic is a story of two groups of consumers, with some reporting a significant drop in their income while others amass huge savings. Either way, many households have become more cautious consumers, prioritizing spending on the things that matter most. As a result, leading value-driven retailers such as Costco, Dollar General and TJX Company have been able to deliver top performance in capital markets. Seven companies in this group account for 10% of the increase in retail market capitalization.
Year of online shopping. Unsurprisingly, the global lockdowns have benefited online companies, many of which have enjoyed phenomenal growth. The top e-commerce professionals in the Super 25 increased their market capitalization by 192% and contributed 5% to the market capitalization growth of the industry, including the online retailer in the Zalando region. and niche companies such as pet product supplier Chewy and crafts marketplace Etsy.
In addition to companies that profit from consumer change, a cluster of better-performing companies reflects an increase in the blurring of retail industry boundaries. These companies are benefiting from foundational economics, using the scale and scalability of their business models to generate growing profits. Through their inherent diversification and adaptability, combined with a focus on capturing “every part of life” beyond their traditional products and services, retailers in the This industry is proving to be less affected by economic shocks than its peers. (Companies serving such e-commerce ecosystems have also enjoyed huge profits, with Shopify and Square emerging as two of the biggest value creators,
The continuous rise of Chinese e-commerce companies and ecosystems. To understand the full impact of companies in China’s ecosystem, it is necessary to go back to October 2020, before the publication of the new measurement regulation. During the peak months of the pandemic, three Chinese companies – Alibaba, JD.com and Pinduoduo – generated 29% of the market capitalization growth of the global retail industry. The lockdowns have accelerated their growth, which is already phenomenal, as strong supply chain capabilities and business model resilience have allowed these companies to respond quickly to consumers switch to online shopping.
China’s ecosystem giants are also quick to embrace online content such as short videos and live streams to drive sales. Their efforts in recent years to build omnichannel relationships with offline retailers have become another advantage as brick-and-mortar retailers look to embrace the rapid change online. . Each of these platform companies has been investing in new business models, such as community group buying, to attract high-frequency shoppers, especially in smaller cities. While the recent pullback in regional capital markets has reduced these companies’ share of global market capitalization growth to 15%, long-term trends favor continued growth. of these companies.
Expansion of the global ecosystem and platform companies. Of course, e-commerce ecosystems and platforms are also thriving outside of China, including giants like Reliance Industries and Mercado Libre. The latter shopping and payments platform is now the largest retail ecosystem in Latin America, having expanded into fintech (a business that now accounts for more than a third of revenue) as well as advertising and shipping. Walmart is also expanding its e-commerce platform with Walmart+ subscription, fulfillment, and media content services. Along with several other regional platforms, companies in this category delivered 11% market capitalization gains.
One platform company has had a bigger impact than any other. Amazon, which boasts the second-largest valuation increase of the Mega 25 in the industry as a whole, also leads — by a large margin — in the retail sector. To understand the sheer size of the e-commerce giant, consider that Amazon has poured in more market capitalization than the remaining 13 of the Super 25 combined and it is responsible for 42 % increase in total market capitalization of the industry. While Alibaba, another major online ecosystem, has increased its market capitalization by 6% during the COVID-19 pandemic, Amazon has added another 62% to its valuation.
Like the other winners in the platform and ecosystem, Amazon is more than just a retailer. With its web services and media business, the company transcends the boundaries of traditional industry structures and its valuation multiples are more similar to technology companies than to brick-and-mortar retailers. Consider that in 2020, Amazon Web Services generated 12% of the company’s global sales but accounted for 60% of the company’s profits.
If there’s one message about the retail sector’s stock market performance since the pandemic began, it’s that investors flock to companies with strong technological prowess. However, what has propelled Super 25 to soar over the rest lies in the more complexities and lessons learned from their upward trajectory in the fundamentals of retail strategy. Future.
Implications for the future of retail
Capital markets show a strong expectation of continued shifts in buying and consumption patterns — changes that are very much in line with what we’ve seen before the pandemic. As mentioned in a recent report, the magnitude and permanence of these changes will depend on the value consumers derive from adopting new channels or behaviors, how much they prefer experience and whether they have to invest more to adopt new consumption patterns. However, the formula of the retail industry is changing. For those looking to rise to the top — or stay put — the choices seem clear.
Overcoming the challenge of outstanding growth. Over the past 16 months, the capital market has seen companies outperforming their peers. The retail world has undergone a tremendous acceleration and transformation. Those who are falling behind will need to significantly raise their exchange rates and adopt bolder ways of thinking and acting — as many show they are capable of doing in 2020. Retailers that can adopt agile working and quick decision making will have higher win rates and thrive in the future.
Prepare to compete with giant platforms with abundant capital. From Walmart and Home Depot to Alibaba and JD.com, platform companies are changing the competitive landscape of retail by expanding their offerings and building deeper relationships with consumers. – and other enterprises. Given their sheer size, they will continue to outpace their competitors, so how can smaller companies compete in a different, targeted way? Most retailers will have to adopt an attacker mindset by deciding on a customer’s specific needs and times that can provide an opportunity they can compete with. Super 25 member Chewy offers some inspiration: while their primary advantage is the convenience of pet food delivered,
Diversify operating channels. Most brick-and-mortar retailers come from a world where network stores are more profitable than e-commerce. Rapid change online is challenging that traditional equation. Increasing the profitability of online sellers requires retailers to use all available levers, from increasing customer value and basket size to optimizing inventory and delivery efficiency. , and offer smart incentives to drive customer loyalty. Over time, standard delivery will achieve the same profitability as in-store sales, but retailers need to continue to invest in newer models, such as instant delivery, to remain competitive. Simultaneously, brick-and-mortar retailers have the opportunity to use their legacy investments. Despite the rise of e-commerce, nearly 80% of U.S. retailers’ sales are still generated from traditional sales. Identifying new opportunities to maximize the value stores create — potentially with fewer visitors than they did before the pandemic — will be critical to ensuring profitable expansion.
Rethink portfolios for an ever-expanding world. Many of the biggest winners of the past year were those that benefited from foundational economics, able to generate ever-increasing returns at scale and scaled their business models to exploit multiple price groups. treat. As retailers make digital investment a top priority, some are looking to build their own ecosystems. However, any ecosystem needs partners. The key is to identify which part of the ecosystem in which companies can beat the competition and duplicate it while relying on partners to complete the part they cannot win. In some geographies, the absence of existing companies with a dominant winning platform gives retailers an opportunity to lead the ecosystem.
Consider creating new values. Issues of market trends and momentum; Since the start of the pandemic, rising categories such as housing, value and luxury, along with highly developed geographies in Latin America and Asia, have been key factors in operations. of Super 25. Those who do not benefit from such favorable conditions may need to reposition their businesses by eliminating lagging categories or significantly increasing the resources allocated to them. trends are strongly beneficial.
Capture the moment — the imbalance won’t last. While the long-term consequences of the COVID-19 pandemic remain unclear, previous research suggests that crises can reshape market dynamics. Those who act boldly to come out of this economic crisis forcefully can maintain their edge for a decade or more.
Investor expectations expressed in stock market valuations provide clear directions on where retailers are going — and they need to get there quickly if they hope to stay. competition. Most of the changes in the retail industry over the past year were obvious to those with a certain interest in the industry before the pandemic hit; The COVID-19 crisis merely accelerated and deepened, accelerating the industry’s gradual transition. As a result, the formula for retail success has not been rewritten so much to reinforce, but to create greater urgency around the strategic goals that companies need to accomplish.