COVID-19 – Implications for the Global Consumer Landscape

The first section of this Sector Spotlight report – “COVID-19 Operational Impacts – Most Challenged Sectors & the (Few) Beneficiaries” – discusses the consumer sectors that have been most and least challenged by the coronavirus amid government containment measures. Our Interviews show the most heavily impacted are the leisure subsectors, which have limited auxiliary revenue streams to offset the loss of primary revenues due to enforced physical closure. Grocery retail has the benefit of absorbing spend deflected from the out-of-home channel and the rare ability to collect revenues offline and online. This section will also highlight shifting competitive dynamics in the sector where applicable. 

The report goes on to explore “Self Help & Damage Limitation”, in which we consider the key landlord-tenant discussion, labour flexibility and the likely postponement of CAPEX schedules as businesses look to preserve liquidity. We share various “Recovery Considerations” and themes that emerged across our Interviews, considering the likely restrictions businesses may have to comply with upon reopening and how consumer behaviour may respond, particularly with the likelihood of a global recession. Finally, we share “Potential Secular Industry Changes”, honing in on our experts’ views on the prospects of an acceleration in e-commerce migration, wider potential shifts in consumer behaviour and the scope for changes to the competitive landscape and supply chain structures.

Key Insights

COVID-19 Operational Impacts – Most Challenged Sectors & the (Few)Beneficiaries

Most Challenged Sectors

Our sample of Interviews, which span the global consumer sector, consistently highlight leisure subsectors – cruise lines, hotels, casinos, gyms, pubs and bars, travel retail and cinemas – as the most severely impacted through the onset of COVID-19. Most businesses across these categories are currently under full government-enforced lockdown in major economies. Even if they are not, they still face pressure due to consumer awareness of the importance of social distancing and changing attitudes towards travel. Although some revenues may have partially recovered as consumer markets reopen, most will be lost altogether during the shutdown, with limited ancillary
revenue streams or channel alternatives.

Consumer industries with limited online exposure have been marginally less impacted, including luxury goods and dining/QSR, although for the latter, primarily where restaurant delivery is deemed economically viable or there is a drive-through option. Industries with more advanced online penetration and capabilities – including apparel, general merchandise and online gaming – seem to have fared relatively better, given their ability to partially absorb lost purchases from bricks-and-mortar stores. Online gaming has benefited from sports betting substitution.

Demand has surged across certain lines of the fragmented consumer staples universe, including hygiene goods and traditional centre aisle packaged goods, with the latter experiencing a renaissance in demand. Grocery retail – online and offline – is assessed as the best-placed consumer subsector. It is absorbing spend deflected away from the out-of-home channel and benefiting from consumer hoarding to a certain extent.

Cruise Lines – With no ancillary revenue streams, the cruise line industry is expected to be subject to a total loss of revenues during this economic shutdown period. Although many other industries are exposed to a similar revenue dynamic, cruise lines are saddled with high fixed costs. In our Carnival Cruise Lines – Cruise Industry Outlook Interview, our expert estimates that 70-80% of costs are fixed.

Operators might save on fuel depending on how they choose to maintain their ships, but the alternative of anchorage costs can run high, with port expenses at roughly USD 100,000-150,000 per ship per day, berthing space at USD 50,000-75,000 and bunkering at USD 50,000-60,000, amounting to an average cost per ship per day of USD 200,000-250,000. Based on the costs associated with laying up vessels and contingent on each operator’s portfolio, our expert estimates monthly cash burn of approximately USD 100m-120m for Norwegian Cruise Lines, USD 210m-230m for Royal Caribbean Cruises and USD 300m-350m for Carnival Corp.

Meanwhile, our specialist in Coronavirus Impact on Cruise Line Industry – Norwegian Cruise Lines & Royal Caribbean explains that while there is scope to lower labour costs, he would be surprised by a reduced headcount aboard ships due to re-employment risk.
Our expert estimates that 75% of cruisers preferred to accept credit as a voucher for a future voyage in the early days of the crisis. However, a subsequent easing of cancellation policies due to escalated global contagion risks led to an estimated 80-90% of cash refunds requested over a 30-day period. As a consequence of this higher mix of
cash refunds, operators such as Royal Caribbean Cruises have implemented measures to potentially ease the cash flow burden, including extending refund windows to 30 days from 10 days.

Operators have tapped several sources of liquidity to extend their ability to negotiate the crisis. This has led some to find relief through the debt and capital markets, which is said to have improved their financial positioning from 2-4 months to at least one year. Our expert expects Norwegian Cruise Line to have the most runway to weather the storm from a position of liquidity relative to cash burn, followed by Carnival Corp and Royal Caribbean Cruises.

Hotels & Hospitality – Most US hotel and casino resort operators experienced a precipitous RevPAR decline to zero in March, amid nationwide voluntary and government-mandated closures. Group business – including conventions, tradeshows and weddings – contributes an estimated one-third of hotel revenues. This revenue stream may be completely lost in 2020, according to one of our experts in our Hospitality Industry – Coronavirus Impact on Hotel & Casino Resort Operators Panel Discussion. Any group business that is postponed until late 2020 is still at the mercy of government guidance and consumers’ willingness to travel. Casino resort operators, whose group business thrives in March and October due to convention scheduling, may face a double-edged sword. Group business bookings postponed in March and rescheduled to an autumn date may face capacity constraints due to conferences and conventions that were scheduled for autumn 2020 before the coronavirus outbreak. Alternatively, businesses may trim travel budgets significantly if the US economy tips into a recession, which would likely lead to group booking cancellations.

While REITs and full-service operators such as independent hotel owners are most impacted in the short term, roadside and budget hotels are still garnering business from truckers, travelling nurses and construction workers. Rates will be under significant pressure this year, despite this sliver of life for the industry. Our experts estimate that 2020 pricing will be down by as much as 50% YoY, even after hotel operators are able to reopen. Pressure will persist through 2021, with rates expected to be down by 10% relative to 2019. OTAs such as Expedia and hotel brands such as Hilton and Marriott are better-positioned than hotel owners and REITs, despite their inability to generate revenues amid a stall in hotel bookings. According to our experts, this is because hotel brand and OTA exposure is limited to the franchise, management and booking fees they are foregoing during this period, while hotel owners face a higher degree of fixed costs associated with real estate OPEX.

Casino Operators – Casinos are in no better position than hotel operators as they are unable to collect revenues from rooms or their largest revenue stream, gaming. In our US Casino Operators – Coronavirus Impact & Long-term Outlook Interview on 25 March, our expert notes that reliance on revenue streams from taxes on gambling wins will likely put pressure on governments to not extend closures beyond 30 days. He highlights that April is a characteristically slow month, given US tax filing deadlines. If measures extend through May, our expert estimates that closures could have a 15-25% impact on 2020 EBITDA for operators such as MGM, which generates 70% of its profits from the US. While the closure overhang threatens liquidity for the industry, our expert suggests larger casino operators such as Las Vegas Sands, MGM and Wynn would be better-positioned as they have enough liquidity to survive for up to 6-9 months, given their relatively high variable cost structure across labour, slot machine rentals and participation-related fees. This might not be the case for smaller properties, including Native American-owned operators such as Seminole.

Gyms – Most gym operators have frozen billings due to enforced closures, which has left them with no revenue intake. Our specialist in our UK Budget Gyms – Coronavirus Update (UK Budget Gyms) Interview states that membership rates could have decreased by 30-50%, despite most operators enacting a fee freeze. The risk of membership churn is considered higher for budget operators who do not have membership contracts. Our
specialist in US Gym Operators – Coronavirus Headwinds & Long-term Outlook (US Gym Operators) notes that operators who have charged members through the lockdown period are likely to face higher-than-average attrition rates upon reopening.

Our US market specialist believes mid-tier gym operators – such as Town Sports International, 24 Hour Fitness and independent players – will be most negatively impacted in the US. These account for approximately 40-45% of gym membership holders. He draws parallels to the 2007-09 recession, during which the mid-tier category suffered from trading down to the benefit of budget operators. Planet Fitness and Retro Fitness are cited as potential beneficiaries upon reopening. Our UK specialist suggests the budget sector should be well-placed to pick up memberships trading down from the mid-tier and premium markets, but a return to pre-crisis conditions is unlikely until winter 2021.

Our US specialist believes there will be no significant long-term threat to gym operators, despite the rising adoption of at-home fitness routines and equipment during lockdowns. Our expert highlights that the trend of boutique and at-home streaming programmes and equipment is complementary to budget memberships, yielding a net-negligible impact for operators.

Pubs & Bars – There are very limited online opportunities for pubs and bars to offset lost revenues due to closures. Assuming an estate of 1,000 sites, rent and beer margin losses for lease tenanted operators could reach up to GBP 6.5m per month, according to a former Punch Taverns executive in our UK Pubs – Coronavirus Update Interview. These losses could total GBP 15m per month for a managed estate such as JD Wetherspoon. The specialist predicts a slow recovery, with revenues expected to remain down 50% YoY for the first 12 weeks following reopening and down 25% for the 12 weeks thereafter.

Travel Retail – According to our expert in Airport Retail – Coronavirus Impact & Industry Outlook, the global travel retail market moved into standstill from the start of Chinese New Year due to the timing of events in China and the global significance of this holiday. Another expert expects air travel to decrease 25-30% YoY over March and April in Europe and North America. He notes that aviation tends to rebound very quickly, and travel retail with it. Assuming some recovery in H2 2020, industry revenues could be down 10% for the year, compared to a low-to-mid single-digit decline in the s for past crises such as Sars and 9/11. Growth is expected to normalise in 2021.

Operators’ concession fees can total 25-45% of revenue, depending on the contract or size of the retailer. These have a fixed element, the minimum annual guarantee (MAG), which typically accounts for 70% of the total concession fee. As such, a 30% revenue decrease would still lead to the MAG requiring payment in normal circumstances. Rent relief appears to have been offered in some cases, with our European travel retail expert noting Kai Tak airport in Hong Kong and Incheon airport in Seoul doing so.

Cinema Exhibitors – Cinema closures are resulting in a near total loss of box office, concession and subscription service sales revenue streams, with very marginal ancillary revenue streams, including streaming services and on-demand platforms. In our US Movie Theatre Industry – Coronavirus Impact & Long-term Outlook (US Movie Theatre) Interview, our expert suggests 30-40% of revenue lost during the period of closure is irrecoverable, with 60-70% potentially delayed.

Several factors surround the timing and magnitude of exhibitors’ recovery. The coronavirus crisis has cornered studios that had already invested in marketing ahead of their releases’ unfortunate timing. This is likely to result in studios testing a model of bypassing exhibitors and going direct to home screens. The wallet and mindshare grab from SVOD players such as Netflix and Disney+ during the lockdown may persist to an unknown degree when cinemas reopen. Studios may also be averse to releasing titles immediately after exhibitor reopenings to avoid product cannibalisation and due to the risk of a slow ramp of consumer demand amid safety fears.

Our specialist believes it may take 12-18 months for box office levels to stabilise, given some of these challenges. Cinemark is deemed best-placed to weather the storm in the US due to its relatively low level of indebtedness. In UK Cinemas – Cineworld, Odeon, Vue – Coronavirus Update, our specialist cites Odeon as most vulnerable or “worried for survival” in the UK, due to its high leverage.

Luxury Goods – In Prada – Greater China Growth Challenges on 28 February, our specialist notes a 90-95% decline in China’s domestic offline luxury market demand in February due to store closures and reduced mall footfall. This assessment of the magnitude of the decline in February is also shared by a former Bottega Veneta executive in another Interview.

Differing views on the performance of the online channel in China have been shared. While a former Bottega Veneta executive believes there has been no sales uptick, an executive at LVMH suggests e-commerce sales increased 130% in February in Kering – Gucci China Recovery (Kering) on 31 March. The online uplift will offset less than 10% of offline revenue losses, given the low online penetration of luxury goods in China. Brands engaged in third-party partnerships with Alibaba and JD.com are expected to benefit.

Dining – In our Casual Dining Industry – Coronavirus Headwinds Panel Discussion, our experts estimate 50-80% revenue declines for US casual and fast casual dining operators, depending on the size of their takeaway business (15-20% of the mix to dining-in pre-crisis). Average ticket values are also being challenged by a 15-20% reduction in on-premise alcoholic and non-alcoholic beverage consumption, which is typically a significant margindriver. Our expert notes that although casual dining operators that have relationships with third-party delivery platforms may be positioned more favourably to capture lost dining-in sales, service fees of up to 20% in the US are likely to pressure already-thin margins.

One of our UK casual dining experts notes that the restaurant model struggled to manage the complexities of an initial surge in delivery demand. With this demand subsequently tapering off due to consumer safety fears, he expects the unsustainable economics and PR risks would likely result in restaurants electing to pull out of delivery service during the lockdown period. He estimates that the UK casual dining market could experience a 25-30% LFL industry sales decline in 2020, with H2 remaining down 10-20% – a 15-20% profit decline for FY 2020. Brands such as Byron, Belgo and Café Rouge were identified as most at risk of being put into administration.

The drive-through capacity of the US QSR sector positions it favourably compared to casual dining. Drive-through sales account for an estimated 60-70% of sales for most major QSRs, according to our specialist in Fast Food Industry Coronavirus Headwinds & Long-term Outlook. Players including McDonald’s, Burger King and Wendy’s – that are more digitally agile and who have invested in drive-through technologies such as mobile ordering and pre-ordering – are expected to be best-positioned. QSR home delivery contributed 10-12% of industry sales prior to lockdowns. He expects those with a first-mover advantage to fare better during the coronavirus containment period, highlighting the strong relationship between McDonald’s and Uber Eats. According to our specialist, indications at the time of the Interview suggested that US QSR same-store sales were in 30% YoY decline, compared to growth of 4-5% immediately before the outbreak.

Sports Betting vs Online Gaming – In our UK Sports Betting & Gaming Sector –Coronavirus Update, our expert notes that online sports betting is expected to decline 70-80% due to the reduced sporting calendar. Conversely, online gaming is experiencing a 20-30% increase, benefiting from retail sales diversion and product substitution from sports betting into the category. Flutter Entertainment is least likely to benefit from this trend, as it is weaker in gaming compared to GVC and William Hill.

Apparel & Clothing Retail – UK high street footfall declined by as much as 90% YoY in the run-up to eventual store closures, according to our expert in our UK Fast Fashion Retail – Coronavirus Update Interview. Positivity remains around trading once restrictions are lifted, but the expert notes that 2020 UK sales could decline 10-20% YoY. This view is supported, albeit more optimistically, in UK Department Stores –Coronavirus Update (UK Department Stores), with the expert forecasting a 10-12% FY 2020 sales decline. A similar trading scenario has unfolded in Germany, with an industry executive noting that sales declined 60-70% YoY in the lead-up to the country’s lockdown. FY 2020 sales in the German market will likely decline 20% in a best-case scenario, which could increase to 40%, depending on the duration of the lockdown.

Retailers with no online capability, such as Primark, clearly face the greatest disruption. Those with omnichannel capabilities – such as New Look, M&S and Next in the UK and H&M in Germany – are better-placed to capitalise on enforced high street closures and are said to be benefiting from online sales increases of over 50%. These brands are also benefiting from category shifts towards loungewear and sportswear from “going out” categories. This view is supported in our UK Online Fashion Retail – Coronavirus Update Interview, in which an online executive notes flat LFLs for fashion-focused online pure players such as Asos and Boohoo throughout the lockdown period as loungewear and sportswear gains are marginally offsetting losses in traditional high-volume categories.

Least Challenged Sectors

General Merchandise – According to our UK Department Stores Interview, sales of electrical goods such as refrigerators, freezers, bread makers and soup makers have benefited from an initial demand surge due to consumers spending more time at home. Similar trends have been noted for home furnishing.

Consumer Staples – Many of our experts highlight hygiene products such as hand sanitiser, disinfectant wipes, antiseptic surface cleaners, toilet paper and tissues as clear winners. CPG categories deemed overshopped include frozen foods, canned foods, rice, pasta, meat and eggs, as well as longer-life products such as UHT milk. One specialist refers to buying habits across food categories as “revenge of the processed foods,” with consumers buying canned goods for the first time. He notes that this should favour traditional large CPG centre aisle suppliers that have been struggling due to generational consumer taste shifts. The specialist cites General Mills (noted for its particularly high stock levels), Conagra, Kraft-Heinz, Nestlé and Unilever as beneficiaries.

Grocery Retail – Our expert in Morrisons – UK Update on 20 March indicates LFL growth in some grocery stores in the UK was up in the triple digits. Availability is expected to improve from 65% empty shelves at the time of the Interview to 20-30% empty shelves over the coming 2-3 weeks. The expert notes that market share shifts are not expected unless there is a “catastrophic supply chain failure.” Convenience formats are likely to marginally suffer as growth is centralised around bigger formats. A similar trend is referenced in our Dia 2020 Performance Challenges Interview, in which the expert comments that Spanish hypermarket formats are benefiting from short-term customer behaviour shifts, including their prioritisation of larger stores due to their increased SKU breadth and depth.

The specialist expects retailers to maintain margins, but there are many moving parts to this dynamic. Margin benefits include reduced promotion levels, volume leverage and business rate holidays. Headwinds include labour inflation (temporary workers), logistics, sick pay (possibility of government support) and potential raw material cost inflation, with the latter perhaps leading to modest retail price inflation.

Online grocery orders have experienced a similar demand surge, according to our Online Grocery Retail – Ocado, Tesco, Sainsbury’s – Coronavirus Update Interview on 25 March. The specialist highlights that online penetration is above 10%, relative to around 7% typically. Growth is primarily being driven by increased average basket size (ABS), which appears to be up 40-60%, also creating more favourable economics. Despite this, the shift to onlinecould impact the profitability of omnichannel grocery retailers. The expert notes that margins are always better when customers shop in store, but there is a broader fixed cost benefit due to significant LFL increases across channels, as both grocery retail experts highlight. Our UK Department Stores expert explains that UK grocery retailers could seek to build out their higher-margin general merchandise offerings to help offset margin dilution from the online migration.

Our Amazon’s Grocery Business in 2020 (Amazon Grocery) Interview shares similar insights on the dynamics brought to the online grocery channel by COVID-19. According to our expert, the Amazon Fresh business was experiencing an uptick in revenues of around 80% above its baseline, while margins were temporarily under pressure due to overtime labour costs.

Self Help & Damage Limitation

This section highlights key measures that consumer industries and businesses are seeking and implementing to mitigate the bottom-line impacts of the COVID-19 pandemic and maximise liquidity, given the subsequent revenue shortfall.

Tenant-Landlord Negotiations & Franchise Agreements

Rents typically account for just over 10% of revenues across the subsectors covered in our cited Interviews – these are usually the largest individual fixed cost for many businesses. Budget business models that operate with lower costs elsewhere in the OPEX line are outliers. Our specialists broadly expect some form of rent deferral to be agreed
upon across various structures.

The force majeure nature of COVID-19 and the absence of government intervention regarding leases has resulted in many businesses seeking to halt rent payments for stores they cannot operate. Our Interviews repeatedly highlight a lack of consistency in approaches to tenant-landlord discussions and solutions. Some tenants have been seeking to negotiate a rental deferral, some have publicly claimed they will withhold rental payments, while others have been cutting off direct debits. Some experts note that some landlords will have the resources, economic foresight and good nature to offer varying degrees of flexibility. Others may be less forgiving, perhaps because they are not in strong positions themselves, with potentially high levels of indebtedness. Landlords may utilise the circumstances to act opportunistically towards underperforming tenants. As a general rule in our Interviews, large commercial landlords tend to be more supportive, while smaller and independent landlords are typically less accommodating due to their financial circumstances. In addition, landlords that have recently been asked to take cuts due to recent trading difficulties – such as Company Voluntary Agreement in the UK – are less likely to support additional tenant relief due to the coronavirus outbreak.

Our Coronavirus Impacts on US Mall Foot Traffic & Economics Interview outlines how a rent reduction may be negotiated. The specialist believes tenants asking for free rent will largely be declined, but could be offered the opportunity to defer, perhaps in 30-, 60- or 90-day increments. Retailers are primarily requesting 90-day rent deferrals, with developers accepting 30 or 60 days. Some agreements could include a landlord contributing to a future refurbishment programme. Repayment is also subject to negotiation, which could include amortising payments for the period of closure across 12-18 months post reopening.

Franchisee-franchisor relationships also bear consideration. Specialists refer to the potential for reduced franchise fees. In our Interviews on the US fast food and casual dining industries, our specialists note partial (Dunkin’ Brands discounting two points for March) and entire royalty relief for limited periods, the latter scenario in reference to the more heavily impacted casual dining sector.

Labour Costs (Mostly) an Easy Win

With labour, particularly non-contractual workers, comprising a high percentage of the leisure OPEX cost line and retail facing store closures, redundancies are likely to provide significant short-term liquidity relief. That said, reemployment risk requires employer consideration in some cases and will likely differ by sector, specialist skill levels and competition for labour. Our Interview Coronavirus Impact on Cruise Line Industry – Norwegian Cruise Lines & Royal Caribbean Interview draws on an interesting example. Our specialist explains that while there is scope to lower costs, he would be surprised if headcount reduced aboard ships. This is because it is largely international skilled labour, which has traditionally attracted high competition for places among competing cruise
lines.

Postponing CAPEX Schedules

Many of our specialists agree that all non-essential H2 2020 consumer discretionary CAPEX plans will be halted until 2021. Projects that were underway before government-enforced lockdowns could be recommenced upon reopening, with anything beyond bare maintenance frozen.

To cite examples, the specialist in our UK Casual Dining – PizzaExpress, The Restaurant Group, Azzurri Group, Prezzo – Coronavirus Update (UK Casual Dining) Interview suggests the UK casual dining industry will experience a 40-60% decline in CAPEX spend in H2 2020. Similarly, our US Movie Theatre specialist believes CAPEX levels could fall to 3-5% of sales, from 9-12% pre-crisis, with companies opting to preserve cash to the possible detriment of long-term business performance.

Recovery Considerations

Many of our Interviews highlight a likely level of pent up consumer demand, which could lead to overcompensation for time spent at home as they return to life as normal once restrictions are lifted. Concurrently, a number of our specialists caution that a resumption of pre-crisis consumption patterns will likely take some time, reflecting ambiguity over the scope of and timing of the recovery across various geographic regions. The following dynamics may avert a more rapid recovery: businesses operating under social distancing requirements and consumers potentially maintaining self-imposed distancing behaviour; the impact of a likely recession on discretionary spend; potential lingering supply chain constraints.

Social Distancing Requirements & Self-regulation Continue to Impact Revenue…

Although there was no consensus across our specialists as to how long government enforced partial economic shutdowns in the US and across Europe will last, there was common ground that when businesses under lockdown are permitted to open their doors, required social distancing measures would likely be imposed, which would
continue to impact revenues and potentially incur costs. Our experts note that gyms, for example, on reopening are likely to do so on a restricted basis, with limitations imposed on the number of machines and the number of people allowed in at any time. This could mean it may take months for a return to a normal revenue trajectory. Experts also note that theme park operators will likely need to invest in superior queuing technologies to quell customer fears and enhance the customer experience. Our specialists suggest it would be unlikely that consumer behaviour would immediately voluntarily normalise until governments have issued an “all clear” notice based on the availability of ubiquitous testing or availability of a vaccine, etc.

…At a Time of Reduced Discretionary Spending Power

Our specialists widely believe the longer the period of economic lockdown, the greater the impact on discretionary spending following the lifting of restrictions. For example, our US QSR specialist suggests that with no long-term erosion of trust in QSRs, a quick bounce back would be likely if doors reopen in 8-10 weeks. However, a 3-4 month lockdown would likely cause higher unemployment levels, resulting in a longer recovery. Similarly, our UK Department Stores expert suggests any immediate return to business would be a slow build, with consumer confidence impacted by unemployment and the hit to the stock market leading them to be more considered in their purchases.

Our expert in our Kering Interview notes that China’s luxury market consumption has traditionally depended heavily on millennials, who make up 80% of shoppers. This demographic is believed to have been particularly vulnerable to loss of employment during the coronavirus crisis, so the resulting unemployment skew is likely to impact the market’s recovery trajectory.

The depth of a recession will also likely drive shifts in some sectors, as noted by some of our experts. Our Private Label Grocery Q1 2020 Update (Private Label Grocery) expert expects private label penetration to increase heading into a recession, as consumers look for better value. Similarly, our UK Budget Gyms and US Gym Operators Interviews suggest an expected trade down from mid-tier and premium gyms to budget gyms.

Potential Supply Chain Disruption

• Our Interviews highlight various examples whereby supply chain disruption may slow the pace of post-lockdown recovery, notwithstanding an assumed demand recovery:
• Large clothing retail supplier networks may face disruption due to factories being deemed unsafe, which could entail widespread supply chain capacity constraints. Air freight and sea freight capacity presents a medium-term risk for similar reasons.
• Cinema exhibitors are unlikely to witness a sharp ramp up in demand, nor a flood of initial supply upon reopening. The suspension of Hollywood content production –including the sequel to Avatar – could cause some of the 2021 pipeline to be pushed into 2022.
• As our specialist notes in Carnival Cruise Lines – Cruise Industry Outlook, being 70-80% reliant on air travel for bookings, the cruise line industry’s recovery is heavily conditional on recovery in aviation and consumer willingness to travel.
• One of our UK grocery specialists believes there has not been a supply risk due to a shortage of factory labour, but notes this could be subject to change due to sickness-related absence.
• While sports betting demand may seem well-placed to recover aggressively given the lack of safety concerns, it will take time for sports teams and horses to train for competitions once social distancing measures have been relaxed.
• Labour supply/reemployment risk? Some of our experts have highlighted risks associated with periods of longer-than-expected closure. For example, one of our gym experts suggests reemployment of specialist staff should not be problematic for up to six months as long as communication is strong between employers and staff. Impacts could be more meaningful after six months, as workers may look for alternative employment. This also accounts for retention benefits associated with the UK government’s furlough scheme.

Pricing & Promotion Required to Stimulate Demand

With the likelihood of businesses reopening in a difficult economic backdrop, price discounting and promotion will likely be widely adopted to spur demand, at the expense of margin. Some inventories will also need to be managed down. Examples from our Interviews include:

• According to our specialist, cruise lines typically demonstrate a sharp recovery in 12-14 months following an event such as a recession, a ship incident or an occurrence such as H1N1. This recovery is, however, usually associated with depressed pricing of 10-18%.
• Commentary from our specialists suggests the clothing industry is not currently subject to discounting. This will likely change in May or June, with high discounting levels expected through to August to clear warehouses for autumn/winter ranges.
• Luxury retail has historically avoided discounting to enhance brand equity, but it could increase its levels of promotion through invitation-only and family sales or through the outlet channel. One specialist suggests revenue generated via the outlet channel could increase 3x due to excess stock levels. Supply constraints could provide some relief as less inventory builds up throughout the trading period. The consensus among our luxury and clothing experts is that retailers should be able to cut back on future supply by up to 30%.
• Our Interviews indicate that budget gyms may experience a limited amount of initial pricing pressure to drive customer acquisition and reactivation. This could lead to mid-market operators seeking more aggressive pricing strategies.

China – An Early Precedent

Mall foot traffic in China has experienced a minor surge – albeit still down 70% YoY – according to our expert in our Kering Interview, with restrictions in the country being lifted across the last two weeks. Based on this recovery trajectory, our specialist estimates that traffic could return to 70% of pre-crisis levels by the end of May and reach 2019 levels by the end of June, before mid-to-high single-digit growth resumption in H2 2020. Our specialist also notes that although consumers are slowly returning to malls, no regional travel is taking place in mainland China.

Potential Secular Industry Changes

Our experts have offered many opinions on how the coronavirus may lead to sustainable changes in consumer behaviour and structural industry shifts. Similar to the view that the longer the lockdown, the greater the impact on consumer sentiment, many of our experts believe the longer the lockdown, the more consumer habits will change, encouraging secular industry change.

Accelerating the Online Migration?

The closure of non-essential bricks-and-mortar stores and consumer safety fears have driven an uptick in e-commerce transactions where channel substitution has been possible. Examples from our Interviews include:

Our expert in our Kering Interview suggests that online growth in China’s luxury market during lockdown will translate into a permanent increase in online penetration. He believes luxury houses will learn from the experience and look to cushion the risk away from mall traffic reliance, with some brands now likely to view online as important a channel as bricks-and-mortar. This will likely lead to an increase in online engagement
with millennials, with brands such as Gucci and Louis Vuitton likely to reconsider their online strategies and potentially partner with third parties such as Tmall and JD.com.

• Online grocery retail penetration growth in the UK has been slow, reaching only 7% pre-crisis. Online share has accelerated to 10% amid high demand since the coronavirus outbreak. Although our specialist believes penetration will ease from current levels, he nonetheless expects penetration to increase to 8-9% YoY in 2021, representing an underlying uptick in the trend to online shopping.
• In our Amazon Grocery Interview, our specialist suggests that US consumers might continue doing more online grocery shopping when stores reopen. He believes this would translate into volumes settling at a 20-30% rate above the previous baseline, down from the current 80% volume uplift.
• One of UK clothing retail experts believes enforced measures will have made some consumers more savvy online shoppers, meaning they may not feel the need to return to bricks-and-mortar stores. Others will, however, continue to prefer the in-store experience and return to the high street.
• Our expert believes that every month of trading in the period of enforced betting shop closures will accelerate the underlying shift to online activity – potentially the equivalent of one year’s worth of underlying annual channel shift.

Other Potential Changing Consumer Habits

• Growth in US grocery private label penetration? Beyond the impact of recessionary or unemployment fears, our specialist from our Private Label Grocery Interview believes the impact of the coronavirus on consumer shopping habits could lead to more sustainable private label adoption. Stock shortages of national brands may force substitution and trial of private label brands. He also notes that private label penetration in Europe is approximately 20%, while US penetration is closer to 10-12%.
• Death of the cinema? With the likelihood of studios experimenting with going direct to consumers’ own screens during this lockdown period, our expert in our US Movie Theatre Interview acknowledges that if the model proves compelling, there could be some risk to the longstanding studio-cinema ecosystem. That said, our expert points out that it is extremely challenging for studios to meet hurdle rates under direct-to-home distribution for bigger titles, which favours exhibitors. Healthy studio-exhibitor dynamics become increasingly important, especially for tentpole titles, which tend to command higher average ticket prices through exhibitors.
• Increased at-home coffee consumption? Working from home may change consumers’ routines, leading them to consider cheaper at-home caffeine alternatives. Models such as Keurig may experience significant medium-term adoption at the detriment of players such as Starbucks, as explained in our Starbucks Coffee – Coronavirus Impact & Coffee Industry Outlook Interview.

Changes to the Competitive Landscape?

• Budget gyms and home exercise to take share from the mid-tier? Our gym experts believe that trading down will lead to budget gym operators gaining share from the mid-tier and premium market due to lower-than-available levels of discretionary income. However, given that boutique and at-home streaming fitness programmes are increasingly seen as complementary to budget gym memberships, this may limit the scope for trade up back to mid-tier gyms with any improvement in the macro economic environment.
• Branded hoteliers to consolidate the boutique market? Our specialists suggest that distress caused to the hotel industry due to the coronavirus may result in independent hotels seeking branded owners to manage their properties. Many of these properties have sprung up recently and are likely ill-prepared for such an event. This should enable greater financial security with the brands also helping debt negotiations.
• Excess restaurant capacity to exit, opportunities for businesses that survive – Our UK Casual Dining specialist suggests that 20% of capacity could exit from across chains and restaurants. This was seen as helpful in addressing a market that was previously oversaturated, while also providing opportunities for those that survive through the greater availability of sites.

Changes to the Supply Landscape?

In our Fashion Retail Supply-Side Challenges – Coronavirus Update Interview, our expert highlights a likely drop in smaller suppliers in Bangladesh due to liquidity constraints. This should help curtail excess capacity that has built up in recent years. The expert suggests capacity in Bangladesh could decline by 15-20%. Larger suppliers might, therefore, benefit from a more consolidated market in the longer term, which should, in turn, benefit larger volume clothing retailers.

Retailers are seeking measures to manage inventories more efficiently due to tighter liquidity restraints brought on by coronavirus impacts. As a result, retailers are expected to increase their usage of air freight to around 10-15% of goods over the next few years, an uptick from 3-4% prior to the crisis, notwithstanding the higher rates compared to sea freight. Similarly, the need for increased flexibility around lead times will likely increase sourcing demand from countries such as Morocco, Portugal, Turkey and parts of northern Africa.

Cheaper High Street Rents?

Following a sustained period of rising high street rents, coupled with declining footfall and corresponding retailer margin compression, many of our specialists across multiple industries – fashion retail, pubs, betting and gambling – suggest that recent events could catalyse reconsideration of the landlord-tenant rent model. Some indebted landlords are likely to exit the business, while landlords entering the market may be inclined to offer more affordable high street rents or introduce more flexible payment terms, such as a move to monthly rents from three-month upfront payment.

What Forum Will Focus on Next

As the COVID-19 pandemic continues to unfold globally, Third Bridge Forum will expand its breadth of consumer coverage across subsectors, infilling various geographic gaps at this still-early stage of lockdown across the US and Europe. We will also address new challenges and opportunities in the consumer sector as the crisis evolves.

We intend to explore cost mitigation actions further as rent negotiations as well as plans to contain labour, CAPEX and other fixed costs become more apparent. We will monitor liquidity risk situations across asset classes.

We also plan to host an Interview with a consumer psychologist to help our clients gain insight into how the lockdown period may influence consumer behaviour and shopping patterns, potentially leading to longer-term structural change.

In China, we will continue to track how consumer markets and industries recover as economic activity begins to normalise. We will monitor consumer spending patterns and behaviour changes, including bricks-and-mortar reengagement, notably with shopping malls and restaurant chains. We will also track online behaviour and dynamics, which may have been altered permanently. We will monitor the performance of domestic and
international companies in China, given the importance of the country as a long-term growth source. We intend to incorporate our learnings from China in our approach to monitoring US and European consumer markets as they reopen.