Why Axis

Pandemic e-commerce boom came with costs, but retailers are banking on them paying off

A man walks out of a Canadian Tire in Toronto in March 2020. The Canadian Press/Frank Gunn

VANCOUVER — In early March, Canadians started shopping the way retail executives had projected they would years from now. The spread of COVID-19 prompted more consumers to navigate websites rather than stores, and for some of the country’s publicly traded retailers and grocers, e-commerce sales surged by up to fivefold.

In advance of the upcoming earnings season, The Logic compiled pandemic e-commerce figures from major Canadian retailers and grocers. The sudden growth in online shopping caught retailers off guard, and saw them scrambling to boost their infrastructure to meet a level of demand they hadn’t expected for years. The speed of the change has come with a cost to those companies, but while many retail executives have said they expected growth to slow as physical stores reopened and the caseload curve flattened, they are banking on the changes in shopping habits outlasting the pandemic.

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Talking Point

The spread of COVID-19 prompted a consumer behaviour shift that major retail and grocery executives didn’t expect for years. As stores shuttered and people avoided crowded spaces, shoppers turned to websites to shop en masse. Major retailers and grocers saw their e-commerce sales double, triple, quadruple and even grow fivefold at the peak of the pandemic. That sudden growth came with an added cost, but while executives expect the rise to moderate in the upcoming earnings season, they believe the changes to shopping behaviours will last.

Before the coronavirus, analysts often described Canadians’ adoption of shopping online—especially for perishable items such as meats and fruit—as lagging, low or limited. 

Once the pandemic hit, retailers “went from zero to 60 in literally no time, and so it was a tremendous pressure put on them,” said Doug Stephens, founder of retail industry consulting group Retail Prophet and author of the upcoming book Resurrecting Retail: The Future of Business in a Post-Pandemic World.

In January, online retail sales in the country made up 3.7 per cent of total retail trade, according to Statistics Canada, or $1.7 billion on an unadjusted basis—up 9.8 per cent year over year.

American e-commerce sales, by comparison, made up 11.4 per cent of total sales in the fourth quarter of 2019—the most recent not to include the impact of COVID-19—according to the Census Bureau of the Department of Commerce.

Canadian companies accordingly planned to take their time in creating more robust online shopping options for consumers.

“There didn’t seem to be a rush,” said Robert Carter, food industry expert and managing partner at the StratonHunter Group.

Empire, for example, which owns the Sobeys and Safeway grocery chains, signed an agreement with U.K.-based robotics company Ocado in early 2018 for a multi-year plan to build several automated warehouses for online-order fulfillment. They expected construction of the first one in the Greater Toronto Area (GTA) to take about two years; as consumer habits changed in the early weeks of the pandemic, the company rushed the launch of its corresponding Voilà e-commerce delivery service in the GTA. It plans to accelerate building its two remaining fulfillment centres and announced it will use Ocado’s technology for an in-store fulfillment option in an effort to reach more Canadians sooner.

Many of Canada’s major publicly traded retailers reported their online sales grew between 100 and 400 per cent in their most recent quarters.

Lululemon benefited from a shift to working from home and the corresponding quest for comfortable work clothes. The Vancouver-based company reported a 155 per cent jump in online sales for its second quarter ended August 2. Online sales made up 61.4 per cent of its total revenue compared to 24.6 per cent in the same quarter the previous year.

Roots online sales grew 100 per cent for its second quarter ended August 1, while women’s clothing retailer Aritzia saw a more than 150 per cent bump in e-commerce net revenue during its first quarter ended May 31. Indigo Books & Music reported its online revenue grew by $61.5 million, or 214.1 per cent, for the first quarter ended June 27 compared to the same time the previous year.

Canadian Tire outpaced them all, with online sales at all its banners, including Mark’s and Sport Chek, growing 400 per cent to $600 million in its second quarter ended June 27, “far exceeding” online sales in all of 2019.

Though grocery stores mostly remained open throughout the pandemic—deemed an essential business by many local governments—their sales tell a similar story of rapid online sales growth.

Empire reported its e-commerce business in Quebec and B.C. saw a roughly 370 per cent jump in the first quarter ended August 1. Metro, meanwhile, saw online food sales almost quadruple in its third quarter ended July 4 “albeit from a very small base last year,” said president and CEO Eric La Flèche during the company’s quarterly call.

Loblaw, the country’s largest grocer, reported a 280 per cent jump in e-commerce for its second quarter ended June 13. That pushed the retailer’s total online sales to $1.2 billion for the first half of the year—already $200 million more than the $1 billion for all of 2019.

Retailers and grocers faced little choice but to adapt to their new reality. “All plans are accelerated,” said Carter.

Canadian Tire focused on the customer experience online, investing in “software that helps us diagnose customer pain points” to build a seamless experience, said Greg Hicks, president and CEO, on the company’s quarterly call.

Loblaw did not expect this run rate of sales for years, said president Sarah Davis on that company’s most recent earnings call. The firm worked to scale all aspects of its online offerings, adding labour, technology and smaller so-called micro-fulfillment centres.

Beefing up its online offerings years ahead of schedule came at a premium. It “brought incremental costs for the business,” said Davis. “All of these costs were anticipated; they just weren’t expected so soon.”

That headwind wasn’t limited to Loblaw. All retailers and grocers likely incurred added costs as they pushed plans forward on a truncated timeline, said Stephens of Retail Prophet.

“I think most of these companies were probably looking at sort of a five-year horizon in terms of building up their capabilities in e-commerce, and so now you’ve basically reeled in five years of capital expenditure into one year,” he said.

The increased capital expenses, though, weren’t a bad thing necessarily, assuming the retailers also benefited from a sales boom, perhaps by being deemed an essential business and remaining open, like many grocers. That increased revenue would help offset the costs, said Stephens.

Loblaw’s Davis called it “a short-term headwind with long-term promise.”

“These are costs that we are willing to bear, as we know this is and will continue to be an area of competitive advantage.”

After the initial boom, executives say that explosive growth seen in the early days of the pandemic has moderated, but they expect consumers to continue shopping online for the long term now that they’ve started to do so.

At Indigo, for example, online sales moderated once stores reopened, the company said, “but remained significantly stronger than historical trends.”

The same holds true at Aritzia—despite moderating after it reopened the majority of its boutiques, e-commerce sales are still  “currently trending 50% to 100% higher than last year,” depending on the region.

Overall growth still exceeds pre-pandemic levels, as well. In April, online sales peaked at 9.5 per cent of total retail trade, according to Statistics Canada. That’s up 120 per cent compared to the same time last year. In more recent months, growth slowed. In July, retail sales composed 4.8 per cent of all trade, still up more than 63 per cent year over year, according to the agency’s most recent numbers.

It’s likely consumers will maintain these habits going forward, said Carter, calling the phenomenon a “habit-loop disruption,” where even those resistant to online shopping previously found themselves forced online and realized the benefits, like convenience.

Estimates suggest it takes weeks to months for humans to cement a new habit. The pandemic will likely endure longer than the largest of those estimates, said Stephens, creating lasting change. He compared it to the SARS outbreak, which in China saw the breakout of Alibaba and JD.com as a response to help people shop during quarantine.

Both men say it behooves retailers to capitalize on this shift beyond just beefing up their e-commerce infrastructure.

“The new opportunity is subscription,” said Stephens. If a customer buys the same bag of dog food weekly all year, he hypothesized, why isn’t the grocer sending it to them via a subscription service focused on replenishing goods people frequently use?

Loblaw launched a subscription service for its loyalty program members a few years ago based on earning more points and extra savings. It doesn’t currently offer a replenishment service, wrote spokesperson Catherine Thomas in an emailed statement to The Logic, “but we’re always listening to customer feedback and it’s something we’re looking into.”

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Carter sees an opportunity for grocers in particular to expand into new online offerings, such as prepared food delivery and meal kits. Loblaw, for example, expanded its meal solutions unit during the pandemic. In September, it started offering 15 different menu items through kits prepared by various restaurants for next-day delivery in the GTA, with plans to grow to more cities in the future.

“That e-comm channel allows them to open up more business areas or revenue streams,” Carter said.