The global COVID-19 pandemic has dominated headlines across the world for months now, and the impact it has had on several industries, including travel, hospitality and restaurants, has been devastating. The retail industry is no exception. 

This pandemic has upended the retail industry, forcing the closure of physical stores and causing uncertainty for the future of the in-store experience. Such unexpected and abrupt shifts have left many retailers scrambling to effectively serve customers through other channels. Digital oriented retailers have pivoted more easily, but retailers that prioritised physical stores and face-to-face engagement over digital strategies have struggled to respond.

The truth is that the coronavirus outbreak has significantly reduced global customer volumes over the last two months, putting cash-flows under pressure, and plunged many businesses into operational difficulties.

With struggling economies and increasing emphasis on personal safety, we have recently seen drastic changes in consumer demands, spending style, saving patterns, shopping habits and buying channels. 

Physical interaction has dramatically changed or been replaced by digital engagement, and early indications suggest that much of this shift may endure in the long-term. Recent studies and surveys demonstrate that e-commerce sales in apparel, department stores, and beauty products have drastically increased over recent months. 

The aforementioned arguments may be strengthened through the Q1 2020 results publication of the Inditex Group, being one of the largest fashion groups in the world, and also being the owner of the Zara franchise. 

As anticipated, the Group’s results were materially impacted by the COVID-19 outbreak, with the Group’s turnover declining by circa €2.6 billion to €3.3 billion on a comparative basis (Q12019: €5.9 billion). Through their results publication, the Group also announced that online sales during Q1 2020, increased significantly by 50%. In April alone, the Group also announced that online sales have risen by 95%. 

It is important to highlight that in light of the current pandemic situation, the Inditex Group has updated their strategy and enacted a new strategic direction which is expected to run from the current financial year till 2022. 

The Group further explained that over the next few years, Inditex will be very active in developing its unique and fully integrated store and online model. This plan includes a digital investment of circa €1 billion spanning over the next three years. 

The three main pillars stemming from this new strategic plan include: digitalisation, integration between actual stores and online sales, and sustainability. Stores are expected to play a stronger role in the development of online sales due to their digitalisation and capacity to reach customers from the best locations world-wide. Furthermore, online sales by 2022 are expected to reach more than 25% of the Inditex Group’s total sales. 

As part of this strategic plan, the Zara franchise is expected to open new online studios by the end of 2020, in a robust attempt to further assist their focus on online sales and combat the implications brought about by the COVID-19 pandemic. 

Surprisingly, Inditex has decided to absorb between 1,000 and 1,200 stores world-wide during 2020 - 2022. The initiatives of a higher quality network or better located stores in conjunction to the ‘online sales’ enhancement, are expected to result in higher levels of profitability and lower capital intensity.

In terms of the local context, PG plc, which is responsible for the operation of the Zara franchise in Malta, is also in agreement with the aforementioned ‘online sales’ strategy. The recent investment in their store in Sliema, should prove to be pivotal in enhancing ‘online sales’ and be prepared to continue operating at normal levels should another catastrophic event takes place again. It is crucial to highlight that the Zara stores in Malta are not affected by the anticipated shutdown of Intidex’s 1,000 – 2,000 stores. 

In a post COVID-19 world, it is expected that we will witness a surge in digital buying and online interaction with calls for continued social distancing are expected to remain in place for the foreseeable future. This makes perfect sense as to why business leaders must continue with their plans of transformation.

Disclaimer: This article was issued by Andrew Fenech, research analyst at Calamatta Cuschieri. For more information visit www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.

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