We have been focusing on the thoughts from the Gordon Brothers over the past few weeks regarding the future of retail.
The Pandemic has changed the game significantly and has created some winners and losers. Below is the reproduction of an interview conducted with Alex Sutton: MD and Head of Research at Gordon Brothers to find out his thoughts on this topic.
There is quite a bit of information out there about which industries are hugely impacted by the coronavirus. What about industries that you see possibly benefiting from the crisis in the short and long term?
Retail grocery stores will likely see a short-and long-term positive impact from the pandemic. As the quintessential “essential” business, it has done well during the crisis, and the number of Americans cooking at home have increased as many have been given no choice in the matter. The likely end result will be a long-term shift in consumers eating at home more often. Additionally, I have seen forecasts that 11% to 30% of the restaurants in America will not survive this crisis. If that bears out, people will likely be doing a lot more grocery shopping in the future.
E-commerce is another winner. Beyond the big names in the space like Amazon, EBay, and Walmart, lesser-known brands such as Instacart have been thriving in this COVID-19 period. All the big retailers with robust omnichannel capability have seen strong E-commerce growth so far. We also see the expansion of online grocery shopping as a big pickup for e-commerce, as those who had never tried this avenue may use it more in the future now that they have tried it. Other segments that are performing well include liquor, trucking, and hospitals.
Were any of these industries uniquely positioned to succeed before the worst of the pandemic hit?
Well grocery for one was not. The industry was struggling a bit prior to the crisis due to labor issues, shifts in consumer preferences, and there had been a long wave of consolidation that started with some of the bigger names in the space like A&P several years ago and had been ongoing through early 2020.
E-Commerce has obviously been growing at a rate outpacing brick-and-mortars for years, and this will just accelerate that market penetration.
Trucking has been weak for a while, having a lot of issues last year, because of wet spring weather and the US-China trade war weighing down on volumes. Now at least in the dry van and refrigerated space, due to COVID-19, we are seeing high volumes, relaxing of rules related to driver hours for medical shipments, and higher shipping spot rates. While this will not last forever the short term impact has been positive.
Which industries do you see, if any, facing severe volatility or possible collapse from the economic effects of the pandemic?
The cruise ship industry is one that seems most vulnerable today, and given some peculiarities of the industry such as most employees being somewhat disenfranchised expats and the vessels being registered in offshore tax havens, it seems unlikely that any one government is going to step in and organize a rescue for the industry.
Oil and gas tops the list right now in terms of severity. Oil and gas had been struggling a bit in the last year due to excess worldwide supply concerns, price concerns, and longer-term issues related to environmental issues.
Ironically beer has not been as positively impacted as other alcohol sectors. While off premise sales were up about 40% in the last few weeks, keg sales, athletic events, bar volumes, and special events volumes have cratered. This has caused several major breweries, including Anheuser Busch and Coors, to pull back their 2020 forecasts for the year. In addition, craft breweries and small wineries that sell roughly 70% to 80% of their volume on premise have been severely impacted.
Surely there is no universal recovery solution, but what could a recovery plan entail?
The current targeted stimulus and broad support of the financial system as currently structured is generally a good approach. The Cares Act mortgage payment deferral programs and restrictions on evictions is going to put mortgage servicers out of business shortly if they don’t provide a fix for that, which I imagine they will.
It is important to continue to provide corporate support with carefully structured loans or grants, but it is also important to keep the support from being a pure bailout. While the employee protections have been good, certain sectors such as restaurants and retail businesses seem to have been somewhat left out of the plan in many ways. The projections about how many restaurants that will survive through this are concerning, and if they come true, it will have a big negative impact on GDP and unemployment rates.
Major, well-capitalized regions and countries will take care of themselves, but the rest of the world will need help. It is likely that one of the outcomes of this whole experience will be a shift back to onshoring not further offshoring, and that will adversely impact the third world. Those impacts will likely be felt in areas like Bangladesh, Kenya, and Latin America most cruelly.
Is there an inkling as to what the economic environment will be in Q4 of 2020 and Q1 of 2021?
It’s difficult to foresee how this will play out. Consensus numbers talk about an unemployment rate of 8% to 10% in the US and an annual GDP shrink of about 5% to 8% in 2020.
By Q4, if these expectations hold, growth is strong coming back from lows reached in Q2. The big question marks in Q4 are how much social distancing still needs to occur, are we able to have large social gatherings again including professional, collegiate, or interscholastic sports, and has travel materially rebounded.
Are there any major trends such as e-commerce or BOPIS that will have gained even more momentum as a result of the pandemic?
I think it is clear that e-commerce has gained a leg up from the virus’ current impact. We are seeing companies from grocery stores to lawn and garden distributors and restaurants to pharmacies increasing their e-commerce share of sales by multiple factors. BOPIS has seen similar trends, and I would assume that Amazon’s Go store concept will gain traction from this as well. Perhaps less obviously, this takes us a lot further down the road to a cashless society, and I think the POS terminal technology will accelerate the transition to a pure tap and pay system more rapidly as a result of this whole crisis.
Are there any industries whose obsolescence will have been vastly aided by the virus’ effects?
I’m not sure I can think of a whole industry that will go away as a result of this. It is possible that in person voting systems might go away entirely as some point, and I think the increase in absentee ballot voting we will likely see in the fall will accelerate that. There are clearly individual companies that will not make it through this untouched. There are a whole host of retailers, primarily in the department store sector that will likely be in trouble and were not doing well prior.