Retailers’ relative performance in capital markets starkly demonstrates a pandemic-driven acceleration of ongoing industry shifts. This means those that wish to keep up need to speed up.
The seismic impact of the COVID-19 crisis on the retail industry continues to reverberate more than a year after the pandemic struck the globe. Forced to shutter stores overnight and rapidly escalate their shift to e-commerce, retailers have watched temporary effects, such as grocery hoarding and apparel overstock, gradually give way to new consumer behaviors and business practices that may permanently reshape the industry. As the dust from the coronavirus earthquake starts to clear, the retail landscape looks transformed, with the disruption giving some companies a massive performance jolt as others have been devastated.
A look at the industry’s performance through the lens of the capital markets is instructive. The first year of the COVID-19 crisis marked a dramatic acceleration of many trends already under way, propelling some industries to record heights of performance as others dropped even further behind. This growing divergence was highlighted in our recent research on capital market patterns through the pandemic’s first 12 months. While stock markets overall recovered quickly, the spread between the best- and worst-performing sectors grew, from 27 percentage points in mid-March to 80 percentage points a year later—the widest margin in recent history.
The retail industry outperformed many other sectors, with the average company delivering positive total returns to shareholders (TRS), but the trends that the pandemic amplified are accelerating an industry realignment that had started several years earlier. As in most other sectors, the gap between industry leaders and laggards has widened, with some companies dramatically increasing their market values (Exhibit 1).
As in most other sectors, the gap between retail-industry leaders and laggards has widened, with some companies dramatically increasing their market values.
The industry’s stock market performance demonstrates the powerful tailwinds that the pandemic provided to retailers with already strong omnichannel presence. The companies with tech-forward business models that were seemingly inches ahead before the crisis gained miles on the competition. The past year suggests the recipe for success in retail is changing, and those that wait too long to adapt may never catch up.
Confined indoors, consumers did not remain idle. Despite incomes shrinking significantly for many—especially in Asia, where government stimulus was limited—global shopping volumes overall increased, leading the retail sector to gain 35 percent 1 This includes platforms such as Amazon and Alibaba despite their broad scope of both B2C and B2B offerings such as media and web services. in market capitalization from late February 2020 through April 2021. Many used the time to renovate and redecorate homes; embrace new hobbies, clothing styles, and beauty routines; and care for families and pets, all the while splurging on products, services, and experiences delivered online.
Retailers that catered to those needs thrived—particularly those with strong digital footprints (Exhibit 2). However, the gains were far from uniform. Retailers reliant on office workers struggled more than neighborhood stores, and categories such as business apparel and cosmetics were hit hard. Additionally, there were significant regional differences. American and Chinese companies captured three-quarters of the retail sector’s market-cap growth, an exceptional performance that reflects the size of markets and more advanced digital business models of retailers in those countries.
In many cases, the strengths enabling some companies to surpass their industry peers—tech-forward and asset-light business models propelled by the tailwinds of growing demand—became even more important during the crisis. In our cross-industry analysis, we found a group of companies that rode those tailwinds to such massive valuation gains that they represent their own sector; we dubbed them the Mega 25.
A similar elite category emerged in the retail industry (Exhibit 3). The extreme outperformers included in our Super 25, most of which epitomize the powerful shift to digital, represent more than 90 percent of the sector’s increase in global market capitalization. Five American companies in our retail index 2 McKinsey’s capital market index is based on the top 5,000 public companies globally, based on market capitalization at the end of 2019. The retail index contains 190 retailers on this list. It excludes Amazon, luxury conglomerates, and consumer-packaged-goods companies with limited direct retail presence. Companies that went public in 2020 or 2021 are not included. generated more than 80 percent of all value created in US retail, with Amazon alone accounting for almost 60 percent of those gains. In China, meanwhile, four players drove a staggering 98 percent of gains in retail market capitalization.
In our analysis of the global retail industry’s performance, the fates of two categories not captured by the Super 25 merit special notice. Grocery’s stagnation and luxury’s soaring gains highlight the continuing bifurcation of demand around the price extremes.
Underperformance of food retailers. The Super 25 tells the story of demand and digital-capability tailwinds, but grocers have not managed to capitalize on these trends. Despite initial hoarding of essential grocery goods and many consumers embracing cooking during lengthy lockdowns, grocery chains on average grew their market valuations by a meager 3 percent. Some pure-play online grocers and platforms did thrive—Ocado and HelloFresh doubled and tripled their market caps, respectively—but when they are removed from the grocery category, the remaining companies lost 1 percent of market value. Why? The shift from in-store shopping to grocery delivery—combined with consumers’ increased price-consciousness, substantially higher store-operating costs due to COVID-19 protocols, and investments to support online fulfillment—created significant pressure on margins. Uncertain longer-term growth prospects, due to meal-delivery companies eating into grocers’ revenues and platform players using food as a source of consumer engagement rather than profit, have also likely played a role in the sector’s mediocre performance.
Big luxury splurge. While consumers tightened their belts at the supermarket, some indulged themselves in other aspects of their lives, leading luxury companies to outperform and reinforcing the barbell pattern in consumer demand we observed before the COVID-19 crisis. Unable to spend on travel, experiences, and dining out, consumers splurged on themselves. Leading vertically integrated luxury groups—LVMH, Kering, Richemont, Hermès, and Prada—collectively grew their market value by 42 percent, and upscale fashion platform Farfetch (one of the Super 25) increased its market cap from $3.8 billion to $17.4 billion. If included in our retail index, the luxury conglomerates would have contributed 11 percent of the global industry’s market-cap growth, and four of them would be part of the Super 25, with LVMH and Hermès in the top 10. LVMH would also comfortably make the pan-industry Mega 25 list, with market-cap growth of $126 billion since prepandemic peaks.
Which companies constitute these outperformers, and what do they tell us about the foundations of retail success during the pandemic? The first common element worth noting is their size: the Super 25 as a whole (excluding Amazon, whose magnitude puts it in a category of its own) had an average market cap of $84 billion in February 2020—9.5 times the average size of the remaining 166 companies in our index. Today, members of this top group are on average 12 times the size of the rest of the index, with an average market cap of $122 billion. This represents an average growth of 38 percent since the pandemic’s start, compared with 10 percent for the other 166 companies. When we include Amazon in the Super 25 calculations, the divergence is even more stark: before the pandemic, the top 25 retailers had an average market cap that was 14.5 times greater than the average company in the rest of the index, and by the end of April that multiple had grown to 19 times. (For more on the divergence of two categories not included in the Super 25, see sidebar, “The contrasting fortunes of grocery and luxury.”)
The Super 25 companies largely fall into four categories: home-economy players, value retailers, online specialists, and platform players. Their growth points to several trends that drove consumer spending over the past 16 months and are likely to persist.
The Super 25 companies largely fall into four categories: home-economy players, value retailers, online specialists, and platform players.
The draw of nesting. Locked-down consumers with time on their hands have been investing in their homes. Home-improvement champions Home Depot and Lowe’s and furnishings provider RH (formerly Restoration Hardware) are leading beneficiaries of the trend. These companies represented 11 percent of the market-cap gains for the global retail index. In fact, Home Depot, which increased its market cap by $84 billion, is the 22nd-largest gainer among all companies (not only retail) since the start of the pandemic.
An emerging focus on value. The pandemic has been a tale of two consumer groups, with some seeing their means significantly constrained as others amassed large savings. Whatever their circumstances, many households became more mindful and fiscally prudent consumers, prioritizing spending on the things that matter most. As a result, leading value-oriented retailers such as Costco, Dollar General, and the TJX Companies have been able to deliver top-tier capital-market performance. The seven companies in this group accounted for 10 percent of the gain in retail market capitalization.
The year of online shopping. Not surprisingly, the global lockdowns launched online players, many of which were already soaring, into orbit. The leading e-commerce specialists in the Super 25 grew their combined market cap by 192 percent and contributed 5 percent of the industry’s market-cap growth. They include regional online retailer Zalando and niche companies such as pet products supplier Chewy and crafts marketplace Etsy.
Beyond companies that profited from consumers’ shifts in focus, a group of outperformers reflects an increase in the blurring of retail-industry boundaries. These companies are benefiting from platform economics, using scale and the expandability of their business models to generate increasing returns. Through their inherent diversification and adaptability, combined with a focus on capturing a “share of life” beyond their traditional products and services, retailers in these categories are proving to be much less susceptible to economic shocks than their sector peers. (Companies that serve such e-commerce ecosystems have also seen huge gains, with Shopify and Square emerging as two of the greatest value creators, adding a combined $165 billion in market cap since February 2020.)
The continued surge of Chinese e-commerce and ecosystem companies. Understanding the full impact of China’s ecosystem companies requires going back to October 2020, before new regulatory measurement released. Through the peak months of the pandemic, three Chinese companies—Alibaba, JD.com, and Pinduoduo—delivered 29 percent of the global retail industry’s market-cap growth. 3 From February 19 to October 23, 2020. The lockdowns accelerated their growth, which was already extraordinary, as strong supply-chain capabilities and business-model resilience enabled these companies to respond quickly to consumers’ shift to online purchasing.
China’s ecosystem giants were also quick to embrace online content such as short videos and live streaming to fuel sales. Their efforts in recent years to build omnichannel relationships with offline retailers became another advantage as traditional retailers sought to capture the accelerated shift online. Each of these platform companies had been investing in new business models, such as community group buying to attract high-frequency grocery shoppers, particularly in smaller cities. Although the recent pullback in regional capital markets has reduced these companies’ share of global market-cap growth to 15 percent, the longer-term trends favor their continued growth.
The expansion of global ecosystems and platform players. Of course, e-commerce ecosystems and platforms are also thriving outside China, including giants such as Reliance Industries and Mercado Libre. The latter’s shopping and payments platform is now the largest retail ecosystem in Latin America, having staged expansions into fintech (a business that now represents more than a third of its revenues) as well as advertising and shipping. Walmart is also extending its e-commerce platform with the Walmart+ subscription service, fulfillment, and media assets. Along with a number of other regional platforms, the companies in this category delivered 11 percent of the gain in market capitalization.
One platform company has had an impact larger than any other. Amazon, which boasted the second-largest valuation increase among the pan-industry Mega 25, also leads—by a big margin—the retail sector’s gains. To understand the sheer scale of the e-commerce behemoth, consider that Amazon added more market cap than the remaining top 13 of the Super 25 combined, and it is responsible for 42 percent of the industry’s increase in total market capitalization. While Alibaba, another large online ecosystem, grew its market cap by 6 percent during the COVID-19 pandemic, Amazon added 62 percent to its valuation.
Like other platform and ecosystem winners, Amazon is much more than a retailer. With its web services and media businesses, the company transcends the boundaries of a traditional industry structure, and its valuation multiples are more analogous to those of tech companies than those of traditional retailers. Consider that in 2020 Amazon Web Services generated 12 percent of the company’s global sales yet represented 60 percent of its profits.
If there is one message in the retail sector’s stock market performance since the pandemic’s start, it is that investors flocked to companies with strong technology capabilities. However, what propelled the Super 25 to surge so far ahead of the rest is more complicated, and the lessons embodied in their steep upward trajectory touch on the fundamentals of future retail strategy.
The capital markets suggest a strong expectation of an ongoing shift in purchasing and consumption patterns—changes very much in line with what we saw before the pandemic. As we explain in a recent report, the extent and permanence of these shifts will depend on how much value consumers gained from adopting the new channels or behaviors, how much they enjoyed the experiences, and whether they have had to make material investments in adopting new ways of consuming. However, the retail formula is changing. For those wishing to move into the lead—or stay there—the choices seem clear.
Investor expectations embodied in stock-market valuations provide crystal-clear directions for where retailers should head—and they need to get there fast if they hope to remain competitive. Most of the shifts in retail over the past year were evident to keen industry observers before the pandemic hit; the COVID-19 crisis has merely accelerated and deepened them, putting the sector’s gradual transition into overdrive. As such, the formula for success in retail has not been rewritten so much as reinforced, creating greater urgency around the strategic pivots companies need to make.
Chris Bradley is a senior partner in McKinsey’s Sydney office, where Thomas Rüdiger Smith is an associate partner; Sajal Kohli is a senior partner in the Chicago office; and Dymfke Kuijpers is a senior partner in the Singapore office.
The authors wish to thank Peter Stumpner, Kevin Wei Wang, and Lei Xu for their contributions to this article.