The COVID-19 pandemic is disrupting the lives of people
around the globe and changing consumer behavior in real time. While the
long-lasting impacts of this pandemic are yet to be seen, we believe the virus
is rapidly accelerating several big-picture secular shifts within certain
industries that have been developing for years.
The Rise of
E-Commerce and Digital Payments
The demise of traditional retail has long been predicted.
As the COVID-19 crisis unfolds, more consumers are now shopping online,
primarily due to the shutdown of nonessential brick-and-mortar stores amid
government shelter-in-place policies and fears surrounding the spread of the
COVID-19 virus. The easing of shutdown orders is unlikely to curtail this
shift, which we now expect to occur at a faster rate than we were previously
anticipating.
We believe the increased
adoption of e-commerce will continue as the convenience and comfort of online
shopping will likely result in a permanent shift in consumer behavior.
Additionally, some smaller retailers may not survive the extended shutdown,
resulting in fewer traditional shopping options, and many consumers may remain
reluctant to return to physical stores due to fears of contracting the COVID-19
virus.
Some traditional retailers operate through multiple
distribution channels, including both e-commerce and brick-and-mortar stores,
allowing them to benefit from the accelerated shift to e-commerce. However, as
more consumers shop online, in-store sales are likely to remain muted, putting
pressure on the margins of many traditional retailers that operate
brick-and-mortar stores throughout the country.
We expect select leading traditional retailers with loyal
customer bases and large existing e-commerce operations to successfully
navigate the shift. As expected, major online retailers, as well as companies
that provide e-commerce infrastructure to other companies, are positioned to
tremendously benefit from this shift.
Similarly, the use of cash as a payment method has been
declining for decades amid the popularity of credit cards and digital payments.
Currently in the United States, more than half of the transaction volumes are
completed using credit cards.
Globally, however, that percentage is lower as the use of
cash is much more prevalent. We see that poised to change, as concerns about
contracting COVID-19 are likely to prevent people from carrying and handling
cash and the growing popularity of e-commerce will likely spur the increasing use
of digital payment methods.
The Shift Away
From Linear Television
The use of linear television has been on the decline as
video-on-demand (VOD) services and digital media are gaining popularity. The
COVID-19 crisis is likely to accelerate this shift as shelter-in-place orders
have kept people indoors with fewer entertainment options.
New content production and sports programming, which we
view to be the primary advantage of subscribing to linear television, have also
been put on hold as a result of COVID-19. We believe these factors will
accelerate the shift toward VOD services as consumers may begin to realize the
cost savings associated with these types of services, particularly in the
absence of sports programming and advertisement interruptions that come with
traditional programming.
Additionally, as linear television continues to lose
viewers, we expect advertising dollars to shift toward various online and digital
channels, furthering the demise of linear television. Roughly 20% of the U.S.
population has already cut the cord, and we believe another 20% will follow
suit over the next few years.
The Rapid
Transition to the Cloud
Corporations have traditionally run their own data
centers and invested in the necessary employees and equipment to do so.
However, over the past few years, more companies have shifted to using
enterprise cloud computing services for at least a portion of their software
and processing needs.
The strategic benefits of cloud computing are
plentiful—enhanced data security and optimization, scalability, reduced capital
expenditure and operating costs, and improved mobility, which has quickly
become a critical factor in the wake of the COVID-19 pandemic.
Efforts to contain
COVID-19 have forced many companies to transition their employees to a
work-from-home environment, which has prompted those that do not have the data
center infrastructure necessary to support such a transition to outsource these
needs. Companies that provide cloud computing and migration services have
become instrumental in allowing businesses to transition to the cloud quickly
and seamlessly.
We believe this experience is likely to force companies
to acknowledge the importance and benefits of using the cloud and reevaluate their
technology infrastructure.
It is estimated that about 15% of corporate processing
needs, otherwise known as workloads, currently occur in the public cloud. While
we expected that number to grow to more than 50% over the next few years, the
pandemic has rapidly accelerated this transition over the past couple of
months. As this trend continues to accelerate, well-established, dominant
players in the enterprise cloud computing space are poised to benefit as they
are able to provide the ample security, vast reach, significant cost savings,
and required infrastructure.
An Increasingly
Remote Workforce
Working from home is not a fad, in our view. As we
previously mentioned, the COVID-19 crisis has forced many companies to
transition their employees to a work-from-home environment. As a result of
this, we believe corporations have discovered that employees who work from home
can be just as effective and productive as they would be in the office, if not
more so.
From a technology standpoint, previous obstacles that may
have prevented companies from allowing employees to work from home will likely
no longer be an issue as enterprise cloud computing services have enabled a
smooth and seamless transition to a remote work environment.
We believe remote work is here to stay in some form or
another, even after shelter-in-place orders have been lifted.
Companies are likely to be cautious in bringing employees
back to traditional offices, at least until there is a solution to the COVID-19
dilemma, for fear employees could contract the virus during commutes or in
crowded offices. Staggered schedules that reduce office density—where groups of
employees alternate which days they work from home—will likely become common.
Additionally, cost savings associated with a reduced need for office space will
likely further motivate employers to shift to an increasingly remote work
environment.
Supply Chain
Diversification
We believe some companies had already started to rethink
their supply chains and manufacturing sources heading into the COVID-19 crisis.
As the U.S.-China trade war intensified, companies began
restructuring their supply chains to rely on multiple sources, including
shifting a portion of manufacturing to other regions, rather than relying on a
single source such as China. We believe this trend will accelerate, as the
COVID-19 pandemic has highlighted the risks associated with the absence of a
diversified supply chain.
This risk has been
especially evident in healthcare. There have been shortages of critical
personal protective equipment, a significant amount of which is manufactured in
China, along with many basic pharmaceutical drugs. In an effort to be more
prepared for future crises, we believe the U.S. federal government is likely to
encourage U.S. healthcare companies to shift at least a portion of their
manufacturing back home and to help set up a more robust U.S. medical testing
infrastructure.
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