Equity Research: How Consumer Behavior Is Changing
We are launching a new series of commentary from the Global Research team, highlighting our analysts’ insights into the long-term implications of COVID-19 on sectors and companies across the global economy. This first article looks at changing consumer preferences. Subsequent pieces will consider trends in business resilience and corporate behavior, and issues related to ESG (environmental, social and governance) and government policy.
As we all grapple with the effects of COVID-19 on how we live and work, our global research analysts have focused on thinking through the longer-term implications for industries and companies. Much will depend on when and how the pandemic ends, the depth and duration of the recession, and the pace of the recovery. While some new long-term trends will likely emerge as a result of this pandemic (for example, telemedicine), we think that the greatest impact will be an acceleration of structural change already underway (including e-commerce adoption, digital transformation and factory automation). There will be winners and losers within sectors, and our analysts are focused on differentiating between beneficiaries of shorter-term trends and companies whose long-term earnings power has changed.
In this first in a series of research reports, we highlight shifts in consumer preferences, focusing on three trends:
- Work from home, with increased demand for technology solutions and high speed broadband but less demand for office space and business travel
- Online alternatives, with increased e-commerce penetration, internet TV adoption and services such as telemedicine
- Increased consumer savings, potentially depressing discretionary spending and credit card usage while boosting demand for asset management, wealth advisory and insurance savings products
Hunkering down in the home office
Perhaps the most obvious theme to emerge as a result of this pandemic is the acceleration of the work-from-home trend as people and businesses become acclimated to working outside the office and more comfortable with flexible work arrangements. A recent Gartner CFO survey found that 74% of CFOs plan to shift at least 5% of previously on-site employees to permanently remote positions.
Technology solutions will be necessary to facilitate this trend. We think that the shift to the public cloud will ultimately accelerate, both from an application and an infrastructure perspective, as application availability becomes more important and managing on-premise equipment becomes less desirable. We forecast public cloud penetration to increase from 20% to around 40% over the next eight years. High quality broadband will become even more critical. Markets and countries that lack widely available, strong broadband infrastructure will likely come under increasing pressure to upgrade their networks. As a result, some broadband providers could see returns improve as demand for their products grows much faster than the cost to provide them. And as less frequent commutes make it easier to live farther from the office, where real estate tends to be more affordable, people may opt to live in larger homes. In housing markets that are currently supply-constrained, such as much of the UK, the work-from-home trend could give a boost to residential construction.
At the same time, demand for office space will likely decline. This trend has gathered steam for much of the past decade as businesses have looked for denser office space to keep their costs down. Post-pandemic, this scenario could become much less attractive, given fears of proximity to co-workers. Meanwhile, greater workplace flexibility could lead to reduced daily occupancy, allowing larger workforces to be serviced in even smaller quarters, further reducing demand for office space. This presents a clear challenge for office REITs, commercial construction sectors and various office service providers, such as catering and cleaning companies. We expect to see reduced business travel as companies realize that in-person meetings can easily take place using videoconferencing, as indeed they have done through the lockdown. In fact, companies have already started to speak to this in recent conference calls and meetings.
Fewer business trips and more working from home will further reduce demand for oil
EXHIBIT 1: US GASOLINE DEMAND
Source: Thunder Said Energy, US National Household Travel Survey
More work-from-home arrangements and less business travel should also accelerate the trend of structurally lower oil demand, with implications for energy and transportation, among other sectors. Exhibit 1 breaks down U.S. gasoline demand by source. Commuting accounts for one-third of demand, and shopping represents 20%. Fewer in-person meetings and more videoconferencing will also impact demand, as business represents 12% of gasoline demand and 15% of jet fuel demand.
Online alternatives across products and services
E-commerce will become even more entrenched in the post-COVID-19 world, challenging retail REITS and pure brick-and-mortar retailers. In fact, while it is still very early days, the real-time data that we track is showing very stable e-commerce growth despite the opening up of more brick-and-mortar retail locations. This further corroborates the view that this structural trend has accelerated.
The Amazons of the world are obvious beneficiaries of increased e-commerce, but so too are the multichannel retailers that were already strong internet sellers. Interestingly, multichannel retailers’ internet offerings may have actually benefited more than Amazon’s as consumers searched for specific products and sometimes found better delivery times at retailer websites compared with Amazon. Smaller retailers with minimal online presence have struggled, and that will continue.
Increased e-commerce generally hastens the secular shift from cash to card-based payments globally, which particularly benefits most of the payments sector, especially those most exposed to online commerce (for example, PayPal).
Internet TV adoption was a secular trend well before the pandemic, and we believe it is still in the early stages in most markets. We project that traditional TV viewing will decline at a 7% annualized rate over the next five years while streaming grows at a 10% annualized rate (Exhibit 2). The same trend is accelerating the decline of traditional advertising as TV audiences shrink while digital advertising continues to grow rapidly.
Internet TV adoption is still in its early days in most markets
EXHIBIT 2: VIDEO CONSUMPTION LEVELS
Source: J.P. Morgan Asset Management; data as of March 31, 2020.
In the wake of the coronavirus outbreak, the use of telemedicine increased dramatically, and we expect some of these behavioral changes will be sustained. Online education is another teleservice that may increase as a result of the pandemic as consumers become more aware of what’s available in the “e-learning” space and software is developed to facilitate the process. This trend may be more pronounced in developing countries, where teaching resources are relatively less advanced than those of developed nations.
Higher savings rates, greater risk aversion
Consumer balance sheets were in good shape pre-crisis, with the savings rate hovering around 8% vs. less than 2% prior to the global financial crisis (Exhibit 3). The U.S. household savings rate has increased significantly over the last few months, to 13% in March and 33% in April. It is much too soon to gauge whether the coronavirus crisis will cause a permanent shift in consumer behavior. But we expect people to be generally more risk-averse, saving more and spending more discriminately.
Should there be a secular shift to higher savings rates, we think consumer discretionary and credit card spending may fall while demand for asset managers, wealth advisors and insurance savings products should rise.
Will there be a secular shift to higher savings rates? It’s too soon to say
EXHIBIT 3: HOUSEHOLD SAVINGS RATE
Source: Bureau of Economic Analysis; data as of April 30, 2020.
As we’ve discussed, we think the pandemic will primarily intensify certain structural changes already underway while introducing some new trends. Some of the long-term impacts, particularly the emerging new trends, will be dependent on how deep the recession is, the shape of the recovery and how quickly new habits are formed. As we look to maximize returns for investors, we remain focused on differentiating between winners and losers, and identifying the companies that will benefit from these long-term structural shifts.