Acceleration of Key Trends – “10 Years in 10 Weeks”
The Covid-19 pandemic and ensuing health and economic crisis is, first and foremost, a humanitarian emergency. CEO’s and management teams of all organisations – consumer facing and more broadly – are rightly focused at the moment on the welfare of their colleagues, providing support where possible to the national response and local communities and, of course, focusing on a path to survival through the significant disruption. As crisis management moves into a new phase, however, it’s also critical to look to the future beyond this pandemic and define a strategy to rebuild and flourish in the new normal.
Whether from an investment perspective or advising retail and consumer corporates on their innovation strategy, assessing changes in consumer behaviour is fundamental to True. At this stage, we assess underlying causes of consumer change that are being driven by Covid-19, and some of the behavioural trends that we expect to accelerate as a consequence.
Taking a step-back: why will we see shifts in consumer behaviour on the back of Covid-19?
In years and decades to come, economists will no doubt look back at this period as one of profound change and a once-in-a-generation transformation. From a consumer perspective, this will translate into far-reaching and permanent shifts to how we live, work and ultimately consume.
Of course, at this stage there is still radical uncertainty about what the “new normal” will look like or when it will arrive and any predictions about consumer behaviour need to be caveated on that basis. Indeed, the primary focus at the moment is on the unprecedented fall in demand as consumers expect to cut back spend by around 40% across virtually every category other than grocery, household supplies and home entertainment. Nonetheless, this ongoing situation has forced consumers to change radically day-to-day life and purchasing habits on several fronts over a very short time period. These changes may not – at least entirely – revert as and when normality resumes and there are already several early indicators of how things might play out on a longer-term horizon.
Before trying to predict what these changes will be, it’s helpful to first reflect on why they are likely to occur in the first place. There are three crucial factors:
The human impact of the virus itself. Whether it’s a period of self-isolation, one of the many forms of lockdown or social distancing, almost everyone fortunate enough to have survived this pandemic will have had to change their day-to-day lives to some extent.
The ensuing economic recession. While the length of this downturn and shape of the subsequent recovery remains unknown, the GDP contraction of any quarter during the “Great Recession” in 2008/09 will most likely pale into insignificance when compared to the figures for Q2 2020. Despite the best efforts of governments around the world, we’ve already started to see the impact of Covid-19 on employment levels through recently released UK benefit and US jobless claims data. Indeed, the International Labour Organisation is predicting 38% of the global workforce will face some form of layoff or furlough. As with all previous economic downturns, this will be swiftly followed by a highly significant decline in consumer expenditure. While no two recessions are the same, an interesting comparison can be made to the rise in unemployment during 2008/09. In the US, a 19% increase in government transfers to households resulted in personal disposable income levels initially rising through H1 2008, before falling significantly in Q3. While personal consumption expenditure fell continuously through this period and beyond, the steepest contraction unsurprisingly coincided with the fall in income levels1. This is perhaps a stark warning for the months ahead when considering how consumer expenditure will be impacted long after any restrictions on movement are lifted.
The continued rapid adoption of new technology. Covid-19 will not put an end to the technology-led change that we have witnessed in recent years. Instead, technology will continue to underpin major transformation of markets and the businesses that are serving them.
Together, these will likely contribute to seismic changes that happen in time. Some will be entirely new and not yet apparent, while others will simply be an acceleration of those which we were already witnessing before the outbreak of Covid-19. In the interest of simplicity, and at this relatively nascent stage of the pandemic, this is our initial view on some of the most significant consumer behaviour trends as we see it.
Reduced discretionary spend, seeking value at all costs
As with any period of falling incomes, low consumer confidence and reduced discretionary expenditure, Covid-19 will trigger all consumers to reconsider spending priorities and seek value. Products and services that only a few weeks ago were considered by some as essential, will now be thought of as indulgences. Other more significant expenditure will perhaps be delayed for a period until necessary or deemed unjustifiable altogether. Above all, consumers will become more price-sensitive and less brand loyal at the point of purchase.
While a challenging time for any consumer facing business, brands that have a differentiated proposition or message, and are able to reinforce this to their existing customer base, are likely to be those in the strongest positions as and when the economy returns to growth.
A pause or even reversal in the trend towards globalisation of supply chains
On the back of rising labour costs, the ongoing trade war, and risks of business disruption, businesses have already been reducing supply chain dependency on China. Factor in the challenges that were exposed in the early days of Covid-19 – when the primary threat of disruption was one of supply rather than demand – and rapid diversification of supply chains is all but guaranteed. However, this won’t all be supply-led, as consumer demand for more locally sourced product and greater transparency of supply chains will also increase, encouraging some supply and manufacturing (particularly for food) to relocate back to much nearer the point of consumption.
Technology – in the form of robotics and automation – will also play a role in this trend, as it brings about further labour efficiencies thereby reducing the cost differential that caused the original shift from West to East.
Accelerated shift to online and greater demand for more frictionless experiences
With all bar essential stores closed for business, and governments around the world asking consumers to shop online rather than in physical stores, there has of course been an immediate spike in online penetration across almost every category. Consumers from all ages and demographics have increased digital adoption and literacy, and with it their online spend. As an example, 13% of consumers across Europe are now browsing or shopping online for the first time, a third are buying products online they would have previously acquired in stores and 14% state they will buy less in physical stores after the crisis2. As well as being introduced to the increased convenience of shopping online, consumers may also start to feel more comfortable about some of the barriers to life on the internet. Take data privacy as an example – set against a new benchmark of Covid-19 tracking on phones, inputting personal information to a trusted retailer may suddenly become much more palatable. It’s therefore highly plausible that a significant portion of this behavioural change will remain beyond Covid-19 with a consequent acceleration of the ongoing structural change in the role and value of physical retail.
It’s important to note that in some cases – particularly grocery – the experience in recent weeks hasn’t made a particularly strong case for the online proposition (think website queues and high levels of substitutions) which may dampen the long-term shift slightly. However, as and when physical stores reopen, it’s likely they will need to evolve at pace to address consumers’ enhanced expectations regarding frictionless retail and convenience. With the continued shift to online it’s also likely that some excess space in store will continue to be converted to automated warehouses to fulfil local online orders. The proximity to the end customer makes this more efficient than large out of town fulfilment centres but this model is also more flexible to meet sudden changes in demand – a challenge faced by Ocado in recent weeks for example.
The last few weeks have also seen a huge surge in demand – and corresponding pressure – on last mile delivery operators. This was already an area attracting significant technology innovation in recent months which we expect to accelerate as retailers and consumer brands invest heavily in their online operations.
Increased focus on personal health and wellbeing
While consumers across the world are on lockdown, the increased focus on health – both physical and mental – that has been present in recent years has most certainly continued. New exercise habits are being picked up by necessity – yoga, cycling, running, in-home workouts – causing an immediate, and likely sustained, increase in demand for fitness products and digital services. For example, Zwift – an online indoor training platform for cyclists and runners – has seen an unprecedented level of new subscribers in the last 6 weeks.
From a mental health perspective, the implications of the Covid-19 pandemic (the emotional effects of the disease itself on individuals and loved ones, periods in isolation, financial pressure, the huge additional physical and emotional burden on every NHS worker etc) are likely to have had a direct or indirect impact on virtually everyone. While the long-term impact of this shouldn’t be underestimated, it has been encouraging to observe several examples of leaders and organisations place increased focus on mental health in the wake of this pandemic. One immediate example from a True portfolio company has been the rollout of Unmind, a workplace mental health platform, across the NHS.
Increased take up of flexible working conditions
This period continues to be the world’s biggest experiment for home working for any role where that is an option. While much of the workforce will revert to office-based working when the worst of the pandemic is over, many of the practical – and potentially more significantly cultural – barriers to flexible working will have suddenly been removed. We fully expect this to drive a permanent change in the working habits of a large proportion of workers with increased flexibility and more jobs shifting away from traditional locations and formats. The potential implications of this stretch beyond commercial property landlords and anyone selling home office furniture. For example, it’s difficult to see the recent sudden shift in ‘share of stomach’ from food service to grocery fully reversing, and home delivery for online shopping across all categories will become much more convenient for dual-worker households, further accelerating the shift to this channel. When combined with ever increasing concerns about the environment, could we see mandatory “Work From Home days” in certain industries and/or a dramatic reduction in overseas business travel to reduce carbon emissions? And perhaps locational disparities caused by WFH could trigger far greater flexibility across a multitude of other areas – gym memberships, energy plans, home schooling (through e-learning) etc.
The growth of gaming and e-sports across the world has been well documented. The development of the online gaming industry, together with improving user experiences and adoption of new technology, has contributed to an estimated global market of $120bn. More than 50% of this revenue is generated through mobile devices, unsurprisingly resulting in tech giants Apple and Google making strategic moves through their own gaming platforms.
An enforced period of isolation at home has acted as huge catalyst for this trend – Verizon has seen a 75% increase in gaming traffic across its network in recent weeks and gamers in China faced periods of downtime as servers failed to cope with the spike in demand. This compares to social media platforms where engagement levels have been broadly flat, suggesting a potentially transformational change in the way consumers interact, connect, socialise and transact online. Some of this rapid change may be short lived as restrictions are lifted and physical interaction returns. However, what was once considered a niche platform is now a becoming a highly effective way to capture a very broad demographic of consumers.
Greater focus on community
One of the few positives that has arisen from amongst the difficult news recently has been the many examples of people coming together to help and support those most in need. Whether nationally (e.g. 750,000+ people signing up to be NHS volunteers) or at a local level (e.g. communities coming together to help with shopping for isolated neighbours), there has been a renewed focus on the community across the UK. There are several potential implications of this beyond Covid-19 but two in particular worth highlighting are i) the likely continued focus on buying locally and ii) the role that online forums and communities will play in the future having seen such a significant and rapid rise to prominence in recent weeks. Retailers and brands that can adjust their proposition to address the second of these may benefit not only from increased sales but also simpler delivery routes and efficiencies in final mile logistics costs.
Continued drive to sustainability and purpose driven brands
Another notable by-product of the coronavirus pandemic has been the dramatic reduction in carbon emissions as economies around the world have been brought to a halt. At the same time, in recent weeks purchasing decisions by consumers have suddenly been driven more by panic and convenience than purpose and sustainability. While there is some debate on the impact of the crisis on the international response to climate change, it’s only a matter of time before consumers return to seeking brands that help them make better, more responsible choices – a significant trend in recent years. Indeed, it may be that there is a further shift in mindset from ‘sustainable’ to ‘regenerative’ in the months and years ahead.
Perhaps unsurprisingly, 46% of consumers continue to appreciate when companies communicate honestly and show social purpose2. With this in mind, brands and retailers that can demonstrate a positive contribution to the environment and society – and communicate this message authentically – will likely continue to be at the forefront of consumers’ minds in the future. Specifically in relation to Covid-19, brands that have been seen to be supporting meaningful causes and using their influence to do the right thing (whether out of goodwill or out of necessity e.g. getting rid of perishable stock) will reap brand advocacy benefits well beyond this period of disruption.
Overall, there is no doubt that Covid-19 will trigger some longer lasting changes in consumer behaviour. Perhaps the most interesting time will be when all non-essential retail and consumer outlets open their doors again and observing the degree to which consumers “bounce-back” relatively quickly or maintain some of the new behaviours that have formed while in lockdown. Either way, while it’s too early to make a firm call on significant long term changes, it’s equally important not to forget many of the trends that were happening at pace only a few weeks ago, and could in all likelihood be accelerated on the back of this pandemic.
US Bureau of Economic Analysis (BEA), National Product and Income Accounts (NIPA)
McKinsey & Company Covid-19 Consumer response, Edition IV