VISITORS TO a big supermarket in America these days could be forgiven for feeling disoriented. From one angle, all-American consumerism is on full display as in normal times: throngs of people struggling to steer overflowing trolleys in a straight line. Retail sales (excluding cars) rose at a seasonally adjusted rate of 1.8% in August, compared with July, the fastest monthly rate since March. Other images, however, look distinctly unAmerican. To their horror, some shoppers discover empty shelves where their favourite brands of biscuits, detergents, pet food and loo roll typically reside—the result of supply-chain disruptions as outbreaks of the infectious Delta variant of covid-19 shut factories and ports around the world.
Unlike in the early days of the pandemic, when shops were stripped bare by panic-buying, America’s consumers mostly have alternatives to pick from. But the shortages are a sign that things in the country’s $5.6trn retailing industry are not back to normal. If the supply shock were not enough, retailers must simultaneously deal with demand from shoppers once again keen to stroll around aisles rather than scroll through apps. Having survived the initial pandemic upheaval, they are now in the throes of another.
Start with the bottlenecks. Congestion in ports from China to California has pushed shipping costs to record highs. Domestic trucking costs are up, too, as a result of the surge in online deliveries. This is less of a problem for expensive things like iPhones than it is for the sort of cheaper wares peddled by most big retailers, where shipping constitutes a bigger slice of the list price. Walmart went so far as to charter vessels directly to ensure steady supplies.
At the same time, companies face a shortage of labour. Depending on whom you ask, this is down to workers being spooked by Delta, coddled by generous pandemic-era benefits or re-evaluating their lives and careers in the wake of the pandemic. Whatever the reason, the result is the virtual disappearance of customer service at large stores. Helpers that normally direct shoppers to the right shelf are nowhere to be found. With many cash registers closed, long queues form at the few that remain open. In-store placards that used to promote products are now soliciting employees.
In August Walgreens, a chain of chemists, said it would raise wages, matching a move earlier in the month by its main rival, CVS. Target raised wages earlier this year. Walmart has done so multiple times over the past 12 months. As with higher shipping costs, this puts pressure on margins. And additional expenses might be coming in the form of federally mandated covid-19 tests for employees who refuse to get vaccinated. This month the Retail Industry Leaders Association, which counts Target among its members, warned about insufficient testing capacity in the country to meet this requirement.
The shift back to bricks and mortar presents a second set of problems. E-commerce, which shot up from 11% of American retail sales before the pandemic to nearly 16% in the panicky second quarter of 2020, has fallen back to 13% of the total. Target’s comparable digital revenues grew by just 10% year on year in the three months to June, down from nearly 200% in the same period last year. Meanwhile, offline sales shot up by a third in the second quarter, compared with a year earlier, to $1.4trn, handily outpacing e-commerce (see chart 1). Coresight Research, a firm of analysts, reckons that so far this year shop openings have exceeded closings (see chart 2). If this trend continues, it would be the first time since 2016 that America has added new outlets.
The retailers’ investments in online capabilities will not go to waste. Once seen as a costly mistake, Walmart’s $3.3bn takeover in 2016 of Jet.com, an e-merchant, gave America’s mightiest conventional retailer a platform on which it built a successful digital business. Some 3,000 of its 4,700 domestic stores now offer same-day deliveries. Similarly, Target’s $550m acquisition of Shipt, a same-day delivery platform, a year later formed the basis of an integrated technological network that now stretches from a data centre in India to its 2,000-odd stores in America.
Even Amazon seems to recognise that the future is “omnichannel”, mixing digital and in-store experiences, as it plans to expand its relatively piddling physical footprint, possibly with a chain of department stores. Consumers’ rediscovery of the pleasures of in-person shopping helps explain why the online giant no longer looks unstoppable; its share of American retail sales actually declined from 7.8% in the first three months of 2021 to 7% in the subsequent three (though it remains above its pre-pandemic level of under 6%). In principle, Target, Walmart and their brick-and-mortar peers stand to benefit more from the move back to bricks and mortar than the beast of Bezosville. But shoppers’ stampede to their outlets requires another reallocation of resources, before the retailers’ foray into cyberspace was complete.
Investors have faith that the biggest firms can withstand these pandemic aftershocks just as they did the original covid-quake in March 2020. The combined market capitalisation of the three largest bricks-and-mortar generalists—Costco, Target and Walmart—has swelled to around $730bn, from $520bn or so at the start of the pandemic (see chart 3). In the past year Costco’s and Target’s share prices have outperformed even that of Amazon, by a factor of two and nearly four, respectively.
Look beyond the biggest retailers, which have more or less maintained their market shares throughout the pandemic, and the picture is one of wreckage. As in many sectors, covid-19 put struggling merchants out of their misery. Last year nearly 9,600 shops shut for good, while fewer than 4,000 opened, according to Coresight. Casualties include such venerable names as Neiman Marcus (a department store for the wealthy) and JCPenney (one for everybody else). Targets and Walmarts may be buzzing with activity. But derelict shopping malls marooned amid the cracked concrete of empty parking lots have replaced rustbelt factories as the poster children of creative destruction’s toll. ■