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Consumer retail: What we saw in 2020

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By Hellen MbuguaESG Senior Research Analyst, Calvert Research and Management

This is the first of a two-part series examining consumer retail in a Responsible Investing context.

Washington - At the start of 2020, global markets were focused on protectionist measures and geopolitical tensions, resulting in a synchronized slowdown in manufacturing and continued economic uncertainty. The resilient U.S. consumer, supported by a healthy job market, was one bright spot. As the novel coronavirus, COVID-19, swept across the globe in Q1, the market's focus quickly changed. At Calvert, our focus changed as well as we expanded our thinking about the repercussions of a viral global pandemic on the consumer retail industry.

COVID-19 elevated investors' focus on the social, or "S," ESG factors that have a financially material impact on companies: Supply chain management, human capital, and the health and safety of employees and customers. Simultaneously, we saw an uptick in companies shifting from the shareholder primacy model, moving to place more weight on the plurality model. Generally, the CEO of a company is required to do two things well, run operations efficiently and deploy cash generated from these operations. Companies that had shifted to the plurality model, by investing in their employees, suppliers, customers and communities, were generally more agile and adaptable and were, therefore, better able to weather the systemic shock of the pandemic.

With the renewed investor attention on the "S" pillar, several related themes came into focus:

  • Employees: As scrutiny on the treatment of employees increased, the issue of labor management came to the fore. To keep their workforce motivated, companies bumped up hourly pay and paid bonuses to employees who could not work from home. At the end of 2020, some companies had doled out billions in special perks and incentives, with some of the hourly pay increases becoming permanent, adding to fixed costs.
  • Supply chain: The pandemic unmasked the complexity of global supply chains fueled by globalization. The interconnectedness and interdependencies across supply chain networks caught some companies unprepared due to underinvestment in supply chain labor, facilities and/or systems. Most companies adhered to safety protocols and rules instituted by the various government, but a few exceptions exposed their workforces to unsavory working conditions. Failure on this issue brought the topic of modern slavery1 to the fore, with affiliated companies witnessing an upward momentum in the stock price driven by the higher revenues, but coupled with a higher-than-usual volatility as the controversies unraveled.
  • Customer: An acceleration in e-commerce growth was evident where QoQ growth numbers following the pandemic were in the 30%-40% range.2 Companies that had invested in this trend benefited, but those that underinvested either scrambled to catch up or lost market share to the competition. BOPIS (Buy Online Pick Up In-Store), a hybrid e-commerce model saw its adaptation increase, with consumers "clicking and collecting" approximately 75% more than they were prepandemic. Tail winds in this shopping channel were driven by customers who did not have to wait for orders to be delivered or deal with delivery delays, and retailers who reduced costs by not paying for last-mile delivery. While investments in e-commerce helped to boost productivity and efficiency, a combination of the increased online orders and technological systems put pressure on workers to work harder and faster, affecting workers' health, safety and morale. At the end of 2020, complaints around this issue started to emerge.
  • Community: A focus on the underserved communities was precipitated by the inequalities uncovered during the pandemic. Issues revolved around people who did not have the optionality to work from home, children who did not have the necessary hardware or broadband to continue their education from home effectively, and communities underinvested in health care and healthy lifestyles that were more susceptible to the virus. George Floyd's death brought the racial issues to the surface, and forced society and corporations to look deeper, nationally and globally. For companies that got the messaging right, this was an opportunity to engender brand loyalty from customers and/or employees.

Bottom line: The COVID-19 pandemic saw an elevated focus on social factors that have a financially material impact on companies. We expect that to continue in 2021.