In the wake of COVID-19, consumers around the globe have been forced to change their buying habits.
For many, ecommerce has become the preferred—or only—way to buy goods, a change that will likely accelerate the adoption of ecommerce by 2-3 years.
As a framework for evaluating change, we use the following categories: temporary changes, more permanent cultural shifts, and accelerated changes. In our view, growth in ecommerce as a percentage of overall retail sales is one example of a change that was already underway and will accelerate due to coronavirus and the related stay at home measures.
- Our survey of 245 US consumers suggests 72% of consumers are buying more online, driven by groceries and sales of other home staples.
- Ecommerce is nascent and growing slowly, at just 11.4% of all US retail in Q4 2019, up from 10.1% in Q4 2018.
- Q2 2020 will be very different for two reasons: 1. We estimate that overall retail sales (excluding gasoline) will be down 30% to 40% due to car dealership and other retail closures beginning in March; 2. Demand for ecommerce will be up as consumers stay home, avoid stores, but need groceries and other staples.
- Based on our survey and a category-by-category analysis of US retail sales, we expect ecommerce to represent as much as 32% of retail sales in Q2 2020.
People are using ecommerce in new ways during this shutdown, which will create new habits and accelerate the trend toward buying goods online. Online delivery of groceries and household goods under index overall ecommerce, leaving even more room for growth. We expect Amazon, Walmart, Target, Uber Eats, Doordash, Instacart, and others to see new and long-lasting demand for their ecommerce services.
The bull case vs. bear case for ecommerce
Ecommerce as a percentage of overall retail is a function of both overall retail sales and ecommerce usage. Overall retail sales will be negatively affected by retail store closures in March, April and beyond, particularly due to auto dealers closing and big box retailers closing in-store sales. Instead, the retailers that are staying open are asking customers to order online and pick up in-store. As a result ecommerce usage will be positively affected by increased demand for pickup and delivery, particularly groceries and other staples, as consumers avoid going to the store.
As we modeled overall retail sales for Q2 2020, even in an attempt to be generous, it’s challenging to envision anything more optimistic than a 30% to 40% decline. As a result, the denominator in question is meaningfully reduced when compared to a “normal” quarter for US retail sales.
The numerator, ecommerce sales, won’t see as dramatic of a decline. Some categories, like groceries and personal health products, may even see a lift. To be clear, we expect even ecommerce sales in Q2 2020 to be down q/q, but ecommerce sales as a percentage of overall retail sales will be up.
By how much will ecommerce benefit? And how much of that activity will stick?
Based on our survey and a category-by-category analysis of US retail sales, we expect ecommerce to represent as much as 32% of retail sales in Q2 2020. This number will decline sharply as car dealerships and other retailers open their doors again in Q3 and Q4, but we also expect some consumers to stick with ecommerce as their new preferred way to shop for groceries and other staples.
Our thesis is that ecommerce growth will continue somewhere between its pre-CVOID-19 growth trajectory and the new growth trajectory, the bull and bear cases outline above, as we return to “normal” in 2021. The changes we are seeing today will likely accelerate the adoption of ecommerce by 2-3 years.
COVID-19 ecommerce survey results
To test our hypothesis, we surveyed 245 US consumers about changes in their shopping habits. We found that 72% of consumers have opted to buy more online in light of recent store closures.
63% of respondents indicated that they are buying more online and that they were satisfied with the experience; 9% indicated that they are buying more online but were not satisfied.
An acceleration in ecommerce adoption is most likely to come from the group of consumers that are buying more online and were satisfied or 63% of all survey respondents. Ecommerce needs to be 10x better to change a habit like grocery shopping.
So, when stores re-open, will shoppers that were forced online flood back to the stores, or will some of their new habits stick? Our survey indicates that a majority of people will increase their online shopping going forward. 47% of respondents said they will return to buying most things in stores but plan on buying more online; an additional 13% said they plan on continuing to buy most things online.
We also asked what products consumers have tried purchasing online for the first time in the past month. Unsurprisingly, the most popular categories were home staples (paper towels, soap, and toilet paper), followed by groceries, then by cleaning supplies. Meal delivery underperformed vs. our expectations.
The trend in groceries is confirmed by a study cited by Axios, which shows that 41% of consumers are shopping online for groceries more than in previous months – an indication that heavy investment in fresh grocery delivery from Amazon, Walmart, Instacart, and others has been the right long-term play.
The shift to ecommerce is a slow, steady, undeniable truth
Even a 2 to 3-year acceleration in the shift to ecommerce leaves our long-term investment thesis in ecommerce intact. We continue to believe that over the next few decades, ecommerce will stabilize at around 55% of all retail sales, as we’ve outlined in our piece on the future of retail. This massive shift creates hundreds of billions in unrealized opportunity for innovative retailers and retail service providers alike, driving convenience for consumers, especially in times of need.
The Nikkei Asian Review reported that Apple “is preparing the ground to possibly delay the launch of the first 5G iPhones … with a worst-case of delaying the launch until 2021,” given engineering and supply constraints. We have a different view and believe it’s likely Apple will host a fall iPhone 5G launch. Our thoughts:
- It’s a misunderstanding that an iPhone is designed in a year. Johny Srouji, Apple’s head of Hardware Technologies has commented that engineers and designers can work on iPhone features for years in advance of the launch.
- We estimate that it typically takes 3-4 years to take an iPhone from concept to launch. That implies that by the end of March in a given year, the vast majority of work on an iPhone design and planning with the supply chain is already done.
- China manufacturing and assembly, including some of Apple’s most important partners like Taiwan Semiconductor (TSMC), are beginning to ramp production. Taking the view that China production will remain stable (which can quickly change), the supply chain should be positioned to supply several million iPhones by the end of September, in line with supply for previous launches.
- Demand for the upcoming iPhone will likely be muted initially, as it will reflect overall consumer demand in the fall which we expect to be soft.
- We remain optimistic that, over the next five years, 5G’s impact on our lives will exceed its hype, and Apple is one of the best ways to invest in the transformation driven by 5G.
Decade Planning’s Competitive Advantage
In the midst of 5G iPhone delay rumors, it’s important to keep in mind that Apple plans its business in terms of decades, not years – an under-appreciated long-term competitive advantage. At the core of this advantage is the company’s balance sheet, which allows it to survive the unexpected; everything from COVID-19, to a financial crisis, or weak initial demand for a new iPhone. Having the luxury to plan beyond the unexpected is one reason why we remain confident in Apple’s ability to maintain and extend its tech leadership in the years ahead.
It would be easy to get overwhelmed by the fact that everything has changed for a time. But, in an attempt to understand the new trajectory of our world, we resolve to push through and try to separate what we know—or, at least, can reasonably anticipate—from what we don’t know. To that end, we’ve been appreciating the following quote from Ray Dalio:
“Sincerely believe that you might not know the best possible path and recognize that. Your ability to deal well with ‘not knowing’ is more important than whatever it is you do know.” – Ray Dalio
Patience, conviction, and humility have become a mantra at Loup in recent days because these tenets have served us well, especially when things are moving fast.
We analyze our portfolio, the world, and potential investments with a new lens. How does the world live, work, and play differently in a post-coronavirus world? And for how long? Most analyses of COVID-19’s impact on the world miss a critical element to be considered: duration.
Exhibit A: Movies
Take, for example, theatrical movie releases. Universal Pictures recently announced that it would make its latest movies available at home on the same day as their theatrical release. In doing so, Universal has finally broken the theatrical window—perhaps the last unbreakable rule in the movie industry. For $19.99, movie watchers will get a 48-hour rental starting with three Focus Feature titles and continuing with Trolls World Tour, which debuts on April 10th.
Is direct-to-download movie releases just a temporary change while we’re all stuck at home? Or is this a shift to a new norm? One could also argue that this simply accelerates a change already underway, as studios continue to experiment with profit maximization in a streaming world.
In our view, this is an acceleration of a change already underway, and that major blockbusters will still be released in theaters for the foreseeable future. The magic of the movie theater experience can’t be replicated at home. This truth supports demand from moviegoers that will eventually return. Regardless, the example of theatrical movie releases provides a helpful framework to consider the various changes we’re observing today.
A Framework for Analyzing Change
First, let’s devise a model for considering the duration (and thus the associated absolute impact of) various changes that will come about due to the shutdown we’ve just begun. I propose the following categories for assessing the duration of a given change:
1. Temporary Change
We don’t go to the bathroom any more today than we did a few weeks ago, but we stocked up on toilet paper for an anticipated shut down, causing a temporary spike in toilet paper sales. We may use the bathroom at home more frequently under quarantine than we used to when we were free to go to out, but the spike in sales is temporary. Temporary changes are measured in weeks or even months, but not years. These changes are the ones that profiteers jump on, not long-term investors. That said, temporary changes can still have disastrous even fatal impacts on a business.
Our lists don’t attempt to be exhaustive, but we consider the following observed changes to be temporary:
- Restaurant closings – If they can survive the shutdown with takeout food offerings, restaurants will eventually return to normal. If not, new restaurants will start up to meet consumer demand.
- Gym closings – Similarly, if gyms can survive with virtual classes and loyal members, gyms will fill up again.
- Manufacturing plant shutdowns – Manufacturing plants enjoy a relatively high variable cost model that will help them weather this storm. As an example, we outlined the case for Tesla’s production shutdown argue that, despite the temporary production shutdown, Tesla’s future is still bright. Read more here.
- Spike in sales of essential products – Groceries, including meal kits, paper products, and other essentials have seen a temporary spike in sales that will not sustain.
- Remote working – We see the sudden spike in remote working as temporary. Productivity is down, and this work-from-home period will be correlated with economic decline. So, there is a hidden headwind to this trend that will motivate employers to encourage employees back to their desks.
- Transportation – Subways and busses are empty. Uber drivers are transporting meals not people. As the spread of COVID-19 slows, people will return to Uber, Lyft, and even public transportation. The ramp will be slow but evident.
- Live sports and entertainment – The magic and energy of a live crowd is hard to match. Viewing parties offer a temporary solution, but The Tonight Show: At Home Edition without an audience just isn’t the same Jimmy Fallon. And college hoops reruns just aren’t March Madness.
2. Cultural Shift
Once-in-a-generation events like this one can cause wholesale cultural shifts that permanently change how people live, work, and play. Think of Depression-era kids that have grown old always eating everything on their plates. These examples are few and far between. Humans’ ability to adapt — and then forget — is powerful.
It’s hard to believe today but life will go back to normal. Our habits and practices around hygiene will change for a while, but we view nearly all of the changes that we see today as largely circumstantial, not fundamental.
3. Accelerated Change
Under new circumstances, we may see the value of an existing product more clearly. Online video streaming, digital learning tools, telemedicine—for each, the value proposition is more obvious today than it was a few weeks ago. The adoption curve is accelerated because users are forced to start something today that they likely would have adopted eventually.
We considering the following to be accelerated changes that were already underway:
- Digital learning tools – Education already lives online. For those teachers and students that have been slow to adopt, now is the time.
- Telemedicine – The convenience and safety of texting, calling, or video chatting with a doctor is so obviously superior in most use cases, the telemedicine trend will certainly accelerate during and after this pandemic.
- Digital health – Coronavirus has brought with it a heightened awareness for personal health and wellness. Wearables like the Apple Watch that help us understand our own health now have a more obvious value proposition.
- Ecommerce – At just 10% of all US retail, ecommerce is still nascent. People are using ecommerce in new ways during this shutdown, which will create new habits and accelerate the trend toward buying goods online.
- Grocery and prepared food delivery – Online delivery of groceries and prepared food under index overall ecommerce, leaving even more room for growth. Uber Eats, Door Dash, Instacart and others will see new and long-lasting demand.
- Retail closings – As more goods are bought online, the trend of large retailers closing their doors will also accelerate.
- Esports and streaming content – Consumers are enjoying content in new and different ways while they are staying at home. Twitch, Netflix, and YouTube usage has spiked, but will eventually stabilize at a higher level than before.
A Word on Community
How will our collective understanding of community change? Temporarily, there’s a fear of the other as we pass each other at the grocery store, or a gloved hand delivers takeout. But a smile changes that feeling and reminds us of the human connection that we share.
Loneliness is an epidemic that preceded the COVID-19 pandemic. There is a grim outlook that would suggest it will accelerate under these all too isolating conditions. A more optimistic outlook suggests that we’re learning the cost of loneliness the hard way. Perhaps that tide turns toward a collective gratitude for each other, a new understanding of the value our relationships bring to our lives.
Much has changed temporarily, and not much will change permanently, but here’s to hoping that we’re learning just how much we matter to one another. I can’t think of a more powerful cultural shift.