We welcome other perspectives and feedback and hope that this may spark a conversation from which all can benefit. Note – we plan to revisit certain topics in the future that we feel merit deeper discussion.
1) Consumer spend is shifting online
One of the biggest trends in the consumer space should be no surprise – consumer spending increasingly shifted online as the pandemic took hold. In response to COVID19, governments implemented shutdowns impacting many physical retail locations, and consumers became wary to venture out to the few that remained open (such as grocery stores). Indeed, there was a 30% YoY increase in online retail during March/April, which is double the typical yearly growth (Rakuten Intelligence). Notably, this was also true for groups that were previously slower to adopt online, such as Baby Boomers. Our portfolio companies felt this online spending bump effect, with Mori (premium baby clothing provider) already exceeding its total 2019 revenues by June 2020.
We expect that while the surge in demand may temper as the pandemic recedes (whenever that may be), some level of increased online spend will remain. Many consumers may remain nervous about crowded stores even post-COVID, but the larger impact we see will come from the habits formed during the pandemic. People will realize that buying online is a viable and more convenient alternative in many instances to shopping in person and will continue to do so. Further, brands that ran a strong online game and gained customers during the pandemic will enjoy the fruits of converting a portion of those into repeat users. Brands that missed out will need to double down on building their online channel to retain market share, or risk losing relevance over time.
2) Certain categories are benefiting
While retail as a whole has taken a big hit in the wake of the pandemic, some subsectors survived – and even thrived – following stay at home orders (especially within online). Categories such as grocery and products like masks, hand soaps / sanitizers and toilet paper made headlines for being in high demand. However, the pet industry, known for its recession-proof nature, also saw growth with some NYC shelters experiencing a 10-fold increase in application numbers. This trend translated into higher interest in pet food and products with online pet retailers such as Chewy marking a record quarter, estimating an increase of $70m in sales due to the pandemic.
Another online subsector that strongly benefited from the shutdown is Home Furnishing, highlighted by Wayfair’s ~7x increase in share price from its bottom. Chief Executive Niraj Shah believes that demand was boosted both by people adjusting to spending more time at home and the rollout of stimulus money in mid-April. Other online home retailers that have seen an uptick include LD Shoppe, The Sill and Sixpenny as consumers are paying more attention to their home environments. Health & wellness products, especially immunity boosters, were also in high demand. “Vitamin C and vitamin D top the list, anything with immunity is up three, four hundred percent,” said the CEO of NOW Foods. Demand in these nutritional supplement categories pushed InBloom – a Kate Hudson backed body-nutrition brand and JOBI portfolio company – to advance their launch to August 2020.
We believe that some of these categories will continue to experience growth in the near to medium term. For example, the shutdown showed that remote work can be a viable alternative, and even once virus concerns melt away, we expect that remote work will persist to some degree. Those working from home will continue to improve their home / home office environment. Similarly, pets and H&W were already trending pre-COVID – the pandemic has only crystalized consumer focus on their furry companions and personal well-being.
3) Consumer expectations of convenient delivery are increasing
As consumers increasingly shift spend to online, they are bringing with them expectations of fast and convenient delivery. One of the biggest advantages to shopping in person is the instant receipt of purchased goods – online retailers are realizing the importance of offering rapid delivery options (e.g. on-demand, same-day, etc.) to compete. This is especially evident in categories such as online grocery. Online grocers struggled to fulfill orders as demand surged from 3%-4% of total grocery sales to 10%-15% during the pandemic (Bain & Co.). Indeed, our portfolio company, Quiqup (UAE-based last mile logistics), saw a huge uptick in demand for on-demand delivery services from retailers (grocery, pharmacy, apparel, etc.), a category that had previously been slow to offer rapid-delivery services to consumers.
We believe that the desire to receive online purchases rapidly is something that will last post-pandemic and will only become more important. What really began with Amazon Prime’s two-day delivery is now moving toward more-instant gratification. Sure, some consumers may be willing to wait for longer delivery times for selected goods. However, in general, we expect that as online retailers compete against each other and against physical retail, those who can get their goods to consumers faster will be better placed to win. The major barrier is being able to offer these delivery options with viable economics – a challenge that a new breed of last mile logistics companies is working to solve.
4) There is a shakeout in physical retail
While many financial crises prove to be tough for retail, COVID19 was especially brutal for physical retail due to the shutdown measures implemented across many markets. Many of these smaller businesses survive month to month and do not have the cash stockpiles to weather low-revenue environments, even with government aid packages. Indeed, data starting to emerge is highlighting just how deep the effects go. For example, figures from Yelp show that 176,822 businesses had closed by mid-April. Of these, a staggering 41% were marked as permanent. Restaurants were hit hardest, with 53% of restaurants that shut down becoming permanent closures. The shopping & retail category was also hit hard, with 35% of closures being permanent (beauty & spas and fitness were around ~25% permanent closures).
We believe this trend will have a significant impact on the market. In fact, as months continue to pass without a full return to normalcy, it is highly likely these numbers will increase as more businesses go under (especially if government aid packages are not renewed on similar levels). While many smaller businesses (and even some larger ones) will lose out, there will be opportunities emerging in the medium term for companies in a position to take advantage of the situation. For example, there will be a variety of attractive locations available for those seeking to grow their footprint. With reduced demand and competition, it is highly likely that rents will come down or landlords seeking to fill vacancies might offer favorable terms.
Larger chains can benefit from this – but so, too, could DTC startups that are looking to open pop-ups or their first few permanent units. We also want to flag that we think what units are desirable may change slightly – for example, locations near corporate offices may not be as in-demand in an environment with increased remote work. Additionally, smaller units that do not offer a chance for retailers to provide distanced shopping may be less appealing. However, we see this as a smaller effect more on a near to medium-term horizon – over the longer term, we think many traditional areas will come back.
5) Investors are focusing on financial resilience
2019 proved to be a year in which many startup darlings (e.g. Uber, Lyft, WeWork,…) faced a reckoning when reaching public market scrutiny. Additional high-profile startup failures followed, such as Brandless and Zume from the Softbank portfolio, prompting VC backers to begin rethinking the growth-at-all-cost mindset in favor of underlying healthy economics. In the consumer space, startups and investors began to talk of optimizing marketing spend, reducing cash burn, and focusing on reaching profitability. With the onset of COVID19 in 2020, this trend has only accelerated. While DTC especially has seen sales increases, most of retail has taken a hit, forcing companies to dramatically cut costs and figure out how to optimize spend on essentials.
While reckless VC funding and growth objectives have led to unsustainable startup models, private equity ownership in retail has also caused challenges. PE backing typically comes with significant debt burdens and aggressive strategies for their portfolio investments – something retail companies are often not well positioned to manage should realities differ from projected forecasts. J. Crew, Neiman Marcus, Fairway, Sur La Table, and others have all paid the price in recent months and filed for bankruptcy.
We believe that investor focus on profitability vs. growth at all costs will continue in the near to medium term, especially as COVID19 continues to cause significant disruptions to consumption. Indeed, startups are learning they can operate with much less than previously thought (e.g. fewer people, less physical office space, smaller but more efficient ad spend, etc.). Ultimately, this should be a healthy development and help rein in unreasonable valuations while supporting more sustainable business models. In fact, several of JOBI’s portfolio companies have reached EBITDA breakeven for the first time during the pandemic and are aiming to maintain these levels even post-crisis.
In the long term, we think lessons from the current era may slip into memory (just as many lessons from 2008/2009 were nowhere in sight in recent years). Competitive dynamics between VC firms and between startups will lead to pressure to outspend, outfund, and outvalue one another. We are similarly somewhat pessimistic about private equity ownership in retail. In the near term, GPs & LPs will be wary of potentially aggressive retail deals, but in the medium to long term, PEs will likely again cave to temptations to expand aggressively, push leverage up, and utilize dividend recaps to return cash to LPs instead of de-leveraging and building cash reserves to weather future crises.
6) Virtual experience economies
The merger of digital and live events through virtual experiences is a theme that gained a lot of traction in recent years. The pandemic has accelerated its shift from a nice addition to a necessity. We have seen that trend manifest in most entertainment related industries ranging from sports, concerts, and live events to travel. In sports, major football clubs like Manchester City and Juventus have already toyed around with VR experiences by creating apps within the Oculus. Furthermore, Esports, which had already grown into a global force in 2019 with a market surpassing $1Bn, saw a considerable jump in viewership as other competitive sports tournaments halted. Video game streaming platform Twitch’s viewership rose 23 percent in March alone.
In the travel space, companies like Airbnb are doubling down on their online experiences via Zoom as the pandemic kept their customers at home, offering activities ranging from cooking classes with Michelin star chefs to guided whiskey tastings to magic lessons. That quickly became one of the company’s fastest growing products, offering hosts an important economic lifeline. We have also seen the rise of virtual experiences in the retail space. For example, some pop-ups have gone virtual, with hosts living streaming the event to an online audience. Similarly, there has been a rapid growth of live streaming ecommerce, especially in China. According to a report from iMedia, the industry got a considerable boost from the pandemic and is projected to surpass $129B globally in GMV in 2020 (more than double 2019). Wirewax – one of JOBI’s portfolio companies – could potentially be one of the direct beneficiaries of that trend with its leading interactive video technologies facilitating clickable virtual shopping experiences.
Going forward, we believe that isolation is only speeding up and shedding the light on an existing trend that has been evolving in the last couple of years. While we see some of the virtual experiences being short-term alternatives to keep the wheel going for some businesses (e.g. Airbnb’s Online Experiences), others are a part of a long-term trend that has been accentuated by the pandemic. Virtual pop-ups will likely remain to some degree and have a permanent place alongside physical pop-ups (which we believe will come back in a major way post-pandemic). Another catalyst we foresee having a major effect on the digital shift in certain industries is Gen Z’s purchasing power stepping up as they grow older. We view their consumption of entertainment as completely different to the generation before – the exponential rise of esports is a case in point. Shopping live-streaming is something that will also likely continue to accelerate as part of the younger generation’s obsession with social media.
7) Re-imagining of physical retail
Emerging from the shutdown, physical retailers are exploring ways to adapt to consumer preferences more oriented toward health & safety. In store, this means changing layouts to support a more socially-distanced shopping experience, as well as applying more rigorous sanitization processes. More interestingly, there is a trend toward increased adoption of technology to enable reduced personal interactions, e.g. contact-less payments and self-checkouts. Indeed, while Amazon Go was a pioneer in contact-free checkouts, even Walmart now offers customers a way to check out contact-free at registers. Further, hybrid forms of physical-online retail have taken off – for example, buying online and picking up in store (BOPIS) or curbside. Major retailers like Target, Best Buy and Kohl’s were offering these types of options at many locations, and curbside pickups were up 200%+ YoY in April (Adobe Analytics). Finally, VR/AR is also being explored as a hybrid option, where consumers can either enter virtual shopping environments (still early days) or see augmented reality versions of products in their own home, mirroring the in-store experience of seeing products in 3D (Wayfair and IKEA both offer this).
We feel many of these changes to physical retail will be permanent as both the consumer and retailer side of the equation benefit. On one hand, consumers will continue to value the convenience offered by self-checkouts (and BOPIS). On the other, once retailers have made the investment to implement the technologies, it would make little sense to roll them back, especially if they help to reduce labor costs. Similarly, VR/AR will continue to grow as the quality and availability of the technology advances. On the VR side, we believe it will be a long-term trend but slow growing (currently it’s mostly being used in real estate), while AR will experience more adoption in the short term – the basic form of the technology is already fairly advanced and doesn’t require additional hardware beyond what most mobile phones offer.
8) Pent up demand for in-person experiencesKey trends in shift of consumption to online and desire for virtual experiences notwithstanding, we do see a strong pent up desire for in-person experiences. The arrival of summer and beginning of relaxed restrictions brought a surge of in-person gatherings, which was on display everywhere from the parks of NYC to the bars of Florida and Texas (the latter of which came with a cost for those states). Younger people, especially, seem more prepared to brave social interactions – likely because their COVID19 mortality rates are significantly lower vs. the elderly. In fact, according to the CDC, only 3,000 people under the age of 45 have died from the Coronavirus in the US – just 2.3% of total mortalities (as of early July 2020).
We believe that while this desire for in-person experiences has already begun to become evident, it will really play out and have an impact over a medium to long-term horizon. Especially once a vaccine or treatment has become available, people will seek to take advantage of opportunities to see and experience new things after months of being cooped up in houses or relegated to curb-side / park meet ups. Interesting pop-ups, desirable restaurants, and immersive / interactive experiences (e.g. Artechouse, ZeroSpace,…) that survive the slowdown should be especially well-placed to benefit.
9) Rise of celebrity brands
Those watching the consumer space will have noticed a rising trend with the emergence of celebrity brands. This isn’t exactly a new idea as Martha Stewart and George Foreman both had successful brands back in the 90’s. However, with the increased power of social media, there is renewed interest as celebrities & influencers realize they can use this strategy as an additional monetization opportunity for their follower base. The Kardashian clan (including Kanye) are at the forefront of this with brands such as Kylie Cosmetics, Good American, Yeezy, and now a Kim + Coty tie-up in the works.
However, many other celebrities are also major players – Kate Hudson, for example, has had massive success with her athleisure line, Fabletics, which is reported to do more than $400m in sales annually (Glossy.co). Now, she is doubling down on her positioning in health & wellness to offer InBloom, a nutritional supplement company (and part of the JOBI portfolio), expected to launch in August 2020. Some celebrities are focusing on broad offerings, such as Ellen DeGeneres’ and Gwyneth Paltrow’s multi-category lifestyle brands, EDbyEllen and Goop, respectively. Others are more focused, such as Michelle Pfieffer’s unisex fragrance line, Henry Rose (launched in late 2019).
We believe these celebrity-brand models will become even more common in the future as they make a lot of sense in today’s consumer landscape. The consumer marketplace has always had significant competition – millennials and gen-z consumers are becoming increasingly savvy and discriminating, making it harder and harder for brands to establish and maintain relevance. Leveraging the goodwill from a popular celebrity can really help brands accelerate growing trust and developing relationships with potential customers.
Further, with online customer acquisition costs rising significantly over the past decade (especially pre-COVID), being able to utilize a celebrity’s social media following for marketing purposes can add significant extra oomph to advertising efforts if handled well. Indeed, there have been significant exits that seem to prove the model – Kylie sold 51% of Kylie Cosmetics to Coty for $600m in 2019. Even smaller influencers have had success, e.g. celebrity-hairstylist Oribe’s eponymous brand was sold to Kao for ~$400m in 2017 (wwd.com). However, we think not all celebrity brands will succeed. There are several key factors that should be considered to maximize chances of success – we plan to explore this topic further in the future.
10) Brands’ increasing support of social causes
Consumers have been increasingly favoring brands with which they share core values. Key events in the last couple of months (BLM, etc.) have accelerated this effect and triggered brands to shed light and take stands on social causes to stay in tune with their customer base. For example, large CPG companies began publicly boycotting Facebook for not doing enough to combat hate speech (sacrificing an effective advertising channel). This is a great example of the lengths some brands are willing to take to go to convey and back up their values. Beyond Facebook boycotts, many companies publicly entered the discourse on Black Lives and pledged to play a bigger role in combating systemic racism across the United States. Walmart, for example, pledged $100m over five years to create a center for racial equity.
Aside from BLM, sustainability remains a major social cause for younger generations. With 73% of millennials willing to pay more for sustainable goods (Nielsen 2015), brands are taking note and incorporating these values into their business models. Further, many consumer brands made efforts to show awareness of the devastating impact that COVID19 has had on individuals and the economy, often making efforts to highlight how they take health concerns very seriously and are supporting their employees and communities.
Although corporate America’s track record shows that corporates have repeatedly aborted major overhauls in the past, we believe that consumers’ increasing focus on companies’ stances and values will push them to take those topics much more seriously, even at the expense of marginal profits. We also view millennials’ and gen-Z’s stress on authenticity and values as a disruptor to traditional advertising. By being willing to place a premium on values and CSR efforts, millennials and younger generations are contradicting Milton Friedman’s view that companies best serve society by making products efficiently and offering them at affordable prices. We believe the game is no longer just about great products and prices, but also about communicating the story and values behind the great products.