Hard Stop on the Global Economy Means Steeper Online Discounting

By: Jharonne Martis, Director of Consumer Research, Refinitiv

 

The COVID-19 pandemic has caused retailers, manufacturers and businesses to close their physical stores around the world. It has disrupted the natural economic cycle and imposed a hard stop on the global economy, making it difficult to predict when we will see a restart.

As retailers close their physical stores, consumers are forced to shop online. To track the online trends, Refinitiv partnered with StyleSage Co., which analyzes retailers, brands, online trends and products across the globe. We tracked the average discount percentage retailers are offering and how much retail assortment is on sale since the coronavirus outbreak.

In the U.S. alone, consumer spending accounts for about two thirds of the U.S. economy. The amount of money consumers spent online continues to rise, but still only accounts for 11.4% of total U.S. retail sales. This means that the bulk of retail spending (89.6%) still happens in stores and profits will hurt given that retailers are incurring expenses as they pay employees while stores remain closed.

 

Activewear

One of the many challenge’s retailers face while brick and mortar stores are closed is moving their inventory in a time when shoppers are restricted to online shopping. As a result, they might resort to discounting their products to move the excess inventory.

As consumers’ health and wellness takes a front row seat, we analyze the active sportswear group first, including global retailers. Athleisure has been a popular trend for some time, and therefore those products haven’t been frequently discounted. The StyleSage data shows that there is definitely an ever-so-slight increase in discount penetration (how much of the assortment is on sale), but no real change in the average discount amount.

The amount of activewear clothing and the average discount are up globally vs. a year ago, while footwear is down. Notice how the discount penetration for the clothing rose to 31% this year from 29% in 2019, and the average discount in this sector remains the same as last year at 20%.

 

Most vulnerable – U.S. malls

Meanwhile, U.S. mall stores have been experiencing weak traffic and sales over the past year. Their profits are becoming more vulnerable to the coronavirus pandemic. The StarMine Combined Credit Risk (CCR) model systematically calculates the default probability (DP%) within the next 12 months for all companies by region. Currently, several mall stores are in the bottom quintile, including JC Penney, Macy’s, Gap, and Kohl’s. Their scores of 22 and under also correspond to model-implied credit ratings of CC or worse – below investment grade. The longer the epidemic persists, the worse the financial health of these retailers could get.

 

StarMine Combined Credit Risk

Similarly, the StyleSage data shows that since March 8, discount penetration and average discount are trending upwards for this sector. This is a red flag as peak winter sales season should have passed by now. As the coronavirus worries worsened in February, we can see discounting starting to pick back up since the end of February. When comparing U.S. malls during the month of March to the same time last year, it would also appear that clothing, footwear and bag sales aren’t in a good position now, as higher discount penetration and discount amounts rise. This is more prominent in bags where discount penetration rose from 11% last year to 17% this year.

 

The Luxury Sector

High-end retailers rarely discount their products to stay true to their brand image. They will likely be the last sector to make any major drastic moves on discounting

Coincidentally, StyleSage’s data shows that luxury bags have the lowest discounts now, since they are known to hold their value and can be considered valuable vintage items which can hold or increase in value. For some consumers, owning a vintage luxury bag might seem a better investment than the stock market at the moment.

Still, the luxury names are highly dependent on the Chinese consumer and have closed hundreds of stores in mainland China and across continents. Over 40% of Burberry’s revenue alone is generated in Asia, and luxury retailers have lowered their earnings guidance because of the coronavirus. The coronavirus pandemic is hurting the retail sector and economy globally. However, some will weather the storm better than others.

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