How retailers can ‘stress test’ the impact of lockdown

18 June 2020 / Ben O'Brien

As the Bank of England revealed last week that the UK economy shrank by the largest monthly contraction on record in April, how can retailers plan and prepare using lessons learned from other sectors?

Pandemics are an extreme version of business disruption. And COVID-19 is the latest prompt that companies need to use analysis to better prepare for the future. The Bank of England have made  predictions about the contraction in 2020 and a rebound in 2021, but admitted that significantly divergent paths could face the UK economy.

Furthermore, the combination of impacts from several factors — including social, economic, environmental, technological, political, legal and ethical — had already placed pressure on retailers to transform business models. COVID-19 is now compounding these impacts and exposing already weak spots among all segments and sizes of retailers.

But retailers can minimise current and future business impacts by ‘stress testing’ the impact of COVID-19. In the short term, it’s key to identify and optimise existing technologies and business models. In the longer term, the focus should be on evolving business models and enabling transformational change with new and emerging technology, such as AI.

The exact timing of each phase of economic slowdown and recovery will differ for different sectors and different retailers. This is why using the methods that the Bank of England has had in place for nearly two decades in the banking sector can be of strategic value to retailers now.

What is stress testing?

A stress test, in financial parlance, is a way to make sure financial institutions are strong enough to withstand future financial stresses, like the one we are currently in. The Bank of England sets banks ‘stress tests’ to find out if Banks are prepared for the worst and assess how they can cope with severe economic scenarios.

Did you know? Jaywing has been performing business continuity modelling and stress testing for banking clients for almost two decades.  We’ve performed modelling for more than half of the high street banks and all the top nine building societies. With a proven model structure, we are relevant to all business sectors that combines macroeconomic models with business judgement.

Five key areas stress testing can help retailers

Today, retailers face questions that need to be carefully addressed:

1. What is the impact of COVID-19 and lockdown on sales performance?

2. What if the economy begins to struggle and consumer discretionary income drops? Could your business maintain a drop in customers? How much by?

3. How do we most effectively treat different customer groups?

4. How do we drive operational efficiencies?

5. How do we set ourselves up to be the winners in the recovery period to come?

To help retailers address them, stress testing can be used to model the impact of the lockdown and the recovery on customer shopping behaviour. It can model realistic scenarios of future economic and lockdown re-introductions/partial lockdowns. And apply scenarios to the models to create predictions of potential impact on product lines, requirements for shopping preferences among different customer groups. And much more.

Evolve and transform into the long-term

While The Bank of England has provided specific information that may require credit institutions to review and evaluate their ability to maintain operations against shocks caused by COVID-19. Retailers can proactively respond to the crisis, by testing their resilience under various circumstances too.

The key takeaway is ensuring customers feel that they are treated fairly during these difficult times. That’s why the popularity and prevalence of emerging technologies like AI may start to rise as a result. For retailers, responding to and mitigating the negative impacts of coronavirus can be done alongside coping with changes in consumer buying behaviours and other market-related factors that continue to occur.

To find out more about stress testing and our work with retail clients, please contact us here.