What is the effect of the pandemic on consumer trends?
Pam: The COVID-19 pandemic is profoundly affecting the global economy and consumer markets. It is accelerating many of the existing trends in the consumer sector.
Since the pandemic began, we have seen, with the exception of e-commerce, underperformance of stocks in the retail, restaurants and leisure sectors relative to consumer staples (i.e. consumer essentials, cleaning/disinfectant products, basic foodstuffs). This of course reflects the impact of the lockdown in many regions of the US.
With consumers not going into shops, not dining out in restaurants or travelling, spending has shifted online. In addition, the stimulus checks distributed to US citizens by the government in mid-April boosted consumer spending. Companies are telling us that the trends in May show an improvement over April.
When we look at the combined numbers for April and May, we see that e-commerce has grown by 60% relative to the same period in 2019. The pandemic has pulled forward e-commerce penetration by two years. Consumers are ordering online and having goods delivered. We think this is a permanent acceleration of the shift online. There will be no going back.
Which consumer themes do you favour in the phase from lockdown to reopening?
Pam: Our analysis suggests the declines in sales and traffic caused by lockdown are of the same order across the non-essential retail, restaurant, hotel and entertainment sectors. However, we expect significant divergence during the reopening phase.
From now on, for a company to be well positioned in this new social distancing world, it will have to offer the consumer a contactless, uncrowded shopping and leisure experience. Consumers are going to avoid crowds. They will be less inclined to book cruises, travel abroad or by air. Consumer spending will shift from these sectors into other areas.
In addition to e-commerce, we see several consumer trends as beneficiaries:
- Companies offering digital games and streaming entertainment content did extremely well during lockdown, as did online publishers of games. We expect this trend to continue.
- Health & wellness is a sector that did well during the pandemic. We expect it to be even stronger coming out of the lockdown. COVID-19 has reinforced the importance of being healthy with a good immune system. Providers of goods and services in mental health could also do well.
- Sporting goods retailers have seen an increase in sales of equipment for golf, biking, fishing and home fitness.
Our strategy is to stay focused and diversify our holdings across our secular growth themes, namely:
- Health & wellness
- Digital games/streaming of films/social
- Bare necessities
- Chinese millennials
- Experiences over things.
What about longer-term consumer trends and themes?
Pam: Companies must go the extra mile to deliver products, services and experiences that are entirely relevant to the consumer, while at the same time being good corporate citizens. We believe environmental, social and governance factors (ESG) will be even more important from now on.
Today, technology is clearly the primary accelerator for consumer companies seeking to develop their relevance and scale. One trend to watch out for is the ability to blend both physical and digital experiences in personalised solutions.
Here are the principal areas we see benefiting over the long term from technology:
Consumerisation of artificial intelligence (AI)
AI is ubiquitous and is undergoing vast improvement. For example, object detection, where a smart oven camera detects a frozen pizza, knows the exact time it needs to cook with no human interaction. Another theme is smart home tech: creating intelligent living spaces (that take care of us) for consumers who want to spend more time at home.
Consumers will have even more choice. The range of content we currently watch will get even more granular. We expect further growth in consumer spending on streaming.
Historically, digital games have set the pace for innovation in the broader tech sectors. We expect this to continue. An example of this is the rapid rise of e-sport, which is already a USD 1 billion industry.
More generally, companies are focusing on the democratisation of gaming on the internet. That means it is not just about owning a console or a high-end PC, there will be a lot more options to access the games. By removing the need to own a PC or console to play the latest, most demanding blockbuster games, the medium as a whole could become more accessible.
Digital health has become a lifestyle industry that includes areas such as sleep tech and baby monitoring. The pandemic is making us all focus more on health.
Advances in artificial intelligence and 5G are leading to a shift from symptoms-based to evidence-based telemedicine, where evidence-based medicine is the integration of the best research evidence with clinical expertise and patient values for the best possible patient management. In practice, it means integrating the individual clinical skills of the doctor with the best available clinical evidence from systematic research.
Our Consumer Innovators strategy focuses on the sectors I have mentioned to identify the companies that will lead the field in the future.
Further reading on US healthcare stocks:
Also, listen to the Market Weekly podcast with Pam Woo ‘Consumer innovators in the post-pandemic world’
Any views expressed here are those of the speakers as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients.
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