What retailers should expect going into a holiday season during a pandemic

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Despite the massive unemployment rate nationwide and the worst economic climate since the Great Depression, holiday retail sales overall are still expected to increase this winter, albeit between a modest 1% and 1.5%, according to Deloitte. Analysts are projecting sales of about $1.15 billion between November 2020 and January 2021.

But with limits on the number of customers allowed in stores to accommodate social distancing, many shoppers will be turning to e-commerce more than ever before. Deloitte forecasts that e-commerce sales will grow by 25% to 35%, year-over-year, during the 2020-2021 holiday season, a great leap from the 14.7% uptick in online holiday shopping from 2018 to 2019. E-commerce holiday sales are expected to generate between $182 million and $196 million this season.

Deloitte analysts are predicting two possible scenarios for which retailers should prepare: one in which the entire holiday season remains relatively flat, and one that offers some hope for future growth going in 2021.

The first scenario calls for just 0% to 1% year-over-year sales growth, based on continued consumer anxiety over both personal health and finances. Analysts attribute this lack of confidence could to a variety of factors, including the expiration of the unemployment insurance benefit supplements, continued school closures, skyrocketing unemployment, and the ongoing wait for a COVID-19 vaccine.

The silver lining in all this—for the state of Americans’ personal finances, if not for retailers—seems to be a higher savings rate among consumers. The current savings rate is more than double what it was last year (17.8% in July, versus 7.4% in 2019). This scenario posits that consumers are less likely to spend on holiday gifts, instead shoring up emergency funds for whatever lies ahead in 2021.

The second scenario would see a much more positive result for retailers: 2.5% to 3.5% year-over-year sales growth. Consumer confidence is shaky at the moment, but analysts say that it could improve—especially should there be an effective federal pandemic relief bill with an unemployment insurance benefit supplements, or the approval of an effective COVID-19 vaccine. In the near-term, a more likely contributing factor would be that consumers would have redirected funds for holiday trips and travel to sending holiday gifts.

“Retail spending is highly bifurcated. While lower income consumers will likely spend similar amounts as in past years, consumers with higher incomes were not as heavily impacted by COVID-19 and are likely to spend more than they have previously,” says Rod Sides, Deloitte vice chairman and leader for the firm’s U.S. retail, wholesale, and distribution practice. “Because these higher income consumers are spending less on experiences and travel, they have more discretionary income available to shop this holiday season.”

Among the 1,000 small and medium-sized retailers surveyed in sectors ranging from home goods and electronics to fashion and cosmetics, only a small number (39%) are proactively preparing their businesses for the holidays.
Courtesy of PayPal

Christmas time is here

Retailers, large and small, have had a rough time in 2020, and amid shutdowns and mandatory store closures—even e-commerce sales haven’t been enough to save some of the biggest brands in the businesses from declaring bankruptcy in the months since the pandemic began.

Some retailers have already altered their store hours, including big box stores that as early as July started announcing their plans to close on Thanksgiving Day. Retailers will start promotions earlier, and they will go throughout the entire holiday season, Sides tells Fortune, and these Thanksgiving Day closures will only add more emphasis on Black Friday than in previous years.

“While it’s unlikely there will be long lines, and the nature of doorbusters will change, I think we will see consumers show up for the day after Thanksgiving sales. Black Friday will certainly look different this year, and, as they have previously, retailers will innovate to tackle this new normal,” says Sides. “Overall, retailers should focus on the last-minute shopper, when shipping guarantees are expired and consumers are in a ‘must-find’ gift shopping situation.”

And yet, even with the awareness that this holiday season will be unlike anything ever before, it turns out only a fraction small and medium businesses are proactively preparing their businesses for the holidays, according to a new report from PayPal this week. Instead, many small and medium-sized retailers are taking a “wait and see” approach.

Among the 1,000 small and medium-sized retailers surveyed in sectors ranging from home goods and electronics to fashion and cosmetics, 57% of business owners said they hadn’t started preparing for a holiday season during a pandemic—though one in five claim their future is dependent on this year’s holiday results. That includes adjusting staffing levels: 70% say they’re not planning to hire additional holiday help or bring back employees let go due to pandemic-related cutbacks. (The online study was commissioned by PayPal and conducted by Netfluential in August 2020.)

PayPal analysts suggest this is behavior is based on consumer uncertainty rather than a laissez-faire attitude, but it’s risky nonetheless.

“Our research found that 28% of U.S. merchants say that amidst all the uncertainty of this year, the primary reason they are delaying planning for the holidays is because they are waiting to see what consumer demand will look like later in the year,” says Greg Lisiewski, vice president of Global Pay Later at PayPal. “Among those that have started planning, our research found that more than half are prioritizing ordering holiday inventory while nearly 30% are also investing in digital marketing and advertising.”

While so much is still up in the air, Lisiewski says there are merchants expecting sales to increase by nearly 30% on Black Friday (November 27), Small Business Saturday (November 28), and Cyber Monday (November 30), like any other year. And despite the shift to working remotely, Lisiewski highlights cosmetics sellers, in particular, as taking the most advantage of promotional opportunities and are expecting to sell more on Black Friday (39%), Cyber Monday (36%) and Small Business Saturday (34%) than retailers in other industries.

‘Buy now, pay later’ payment options could be especially critical to sales this holiday season.
Courtesy of PayPal

Among the 39% of businesses that asserted they are proactively preparing their businesses for the New Normal holidays, the vast majority (81%) cited extra precautions being set up to keep shoppers safe. For customers who do choose to shop in stores this winter, those changes start with ensuring social distancing is possible, requiring employees and customers alike to wear face masks at all times, having hand sanitizer readily available, and ensuring physical contact is as limited as possible, which includes the increased offering of curbside pickup.

“Retailers will need to focus on the health and safety of customers and employees,” Sides says. “To support the business, retailers will need to reassess where they place their inventory so they are able to safely and conveniently fulfill in a timely manner for increased online orders, growing buy-online-pick-up in store, and for those who plan to shop in stores. Accurate inventory visibility will matter for those looking to make the trip to stores.”

Most critical to limiting physical contact is the improvement of retailers’ e-commerce channels. Thirty-nine percent of merchants are planning to sell products on digital marketplaces, and 31% will make products available for purchase through social media apps, according to PayPal These adjustments can help merchants replace diminished foot traffic with online traffic.

Having recently released a new “buy now, pay later” (BNPL) product of its own in August, PayPal says that more flexible payment plans are also going to be critical to securing sales during a period of economic uncertainty. The financial services company says 45% merchants who already offer BNPL financing options could see holiday sales grow by at least 5%, and and 42% of retailers say the additional payment option has proactively combatted “shopping cart abandonment.”

More must-read retail coverage from Fortune:

  • Slowed mail delivery is the last thing indie bookstores need right now
  • How scary will a COVID-19 Halloween be for candy companies?
  • Levi’s CEO on why it’s important to take a stand as a business leader
  • Buy now, pay later: How COVID-19 is aiding the payment model
  • Craft distillers have lost out on more than $700 million in sales because of the pandemic

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