We are now emerging from the phase of rapidly adopting new technologies, and growing accustomed to the new normal of life, and work, from home. While the fight against COVID-19 is not won, with a vaccine in sight, there is a glimmer of hope at the end of the tunnel. However, even if the battle is won against COVID-19, the next normal will be different. Here are some lessons learned and trends to look out for.
While the world lumbers along, so too, does the economy. New lockdowns and the rollout of the vaccine will show how economies perform, with spending recovering at the rate at which people feel confident about a return to normalcy.
Ordinarily during recessions, consumers lose confidence in a continued stream of income and restrict spending. This usually leads to a further contraction in the economy. But something different happened during the pandemic. As businesses scrambled so too did governments injecting cash to prop up the economy. In addition, those who did not lose their jobs found themselves with more disposable income due to less travel costs, restaurants closed, commuting costs reduced and so on. With many physical shops closed and lockdowns in place e-commerce boomed. In its third quarter report Amazon’s earnings surged 70 percent, up $5.8 billion from last year.
The economic recovery may unleash consumer confidence and create a further bump in spending. A report from McKinsey argues that a return in consumer confidence will result in “revenge shopping,” as pent-up demand is unleashed. For reference, Mckinsey turned to China, the first country hit by the epidemic and the first to recover. It appears Chinese consumers are relieved and spending accordingly. On singles day, November 11, the two biggest online retailers in China, Alibaba and JD, racked up record sales and consumer spending has remained strong. This has been buoyed by 80 percent of consumers in China resuming out-of-home activities.
In contrast however, America has had a slower recovery and small businesses were devastated by the pandemic. Many found it difficult to adjust to a new business model or lacked the resources to do so. As a result, US small business revenue fell more than 30 percent during 2020 and many were forced to close their doors permanently. As America gets COVID-19 more under control it is possible it will see the same “revenge shopping” significantly boosting the economy.
Adjusting to the “new normal”
While many businesses struggled adjusting to the “new normal,” some used the Co-vid epidemic as an opportunity to transform their business operations. There are the obvious examples of businesses thriving, like Microsoft and Zoom, who benefited from the shift to an at-home environment. Many software companies were well positioned to make the switch, and businesses focusing on digitization saw a boom.
Other examples provide a refreshing surprise at their adaptability including some restaurant chains and financial firms. Restaurants transitioned to a drive through, delivery and takeout model to bolster sales, and some major chains experienced a big jump in revenue. Papa Johns’ stock is up 32 percent this year with Rob Lynch, the chief executive, saying the company added over eight million customers this year.
Turning to the future, if the market is any indicator, Wall Street analysts are optimistic, projecting record highs in 2021 on the wave of nearly 80 percent of companies in the S&P 500 exceeding analysts’ expectations in the third quarter of 2020.
Trends to keep an eye on
Travel and hospitality
Leisure travel will bounce back as those who travel for pleasure will look to again get going. This has been the pattern in China with one major travel company reporting that by the beginning of the third quarter of 2020, business was “pretty much back to normal.” This trend was driven by domestic travel – with the international market closed – and there are reports that hotel occupancy and domestic flights were booked at 90 percent of their 2019 levels. As the international market opens back up look for a rebound in the hospitality and travel sector including amenities associated with tourism like accommodation and rental cars.
The picture is less rosy when factoring in business travel. With the emergence of video calls and collaboration tools we are left to wonder whether business travel is necessary. This is cause for concern in the travel industry as business travel made up 20 percent of total spending in the sector totaling $1.4 trillion.
Digitization and productivity accelerate the fourth industrial revolution
Disruption creates opportunities for innovation and entrepreneurs. During the crisis, everything from online services to remote working to the supply-chain has been disrupted. While the beginning of the pandemic was a mad scramble, it created a necessary situation for companies to reconfigure their operations with many reaping benefits in terms of increased efficiency.
For this reason, it is unlikely that business operations will return entirely to pre-COVID standards. While many businesses will keep a physical office, many will find it unnecessary to require employees return to the work place. This provides an added amount of flexibility in terms of hiring practices, with businesses no longer constrained by geographic proximity.
Of course the adaptation process was not smooth. In fact it was rushed and many businesses scrambled to adopt new technologies and implement security measures. Since then, executives report they are able to move much faster on issues like supply chain redundancy, improving data security, and increasing the use of advanced technologies.
In the United States, productivity rose for the second quarter in a row improving by 10.6 percent in the second quarter and 4.6 percent in the third quarter of 2020. This is the largest six-month improvement since 1965.
Retail has been transformed
One McKinsey survey found that two-thirds of consumers have tried new kinds of shopping and intend to continue to do so. In the United States, e-commerce penetration was expected to reach 24 percent by 2024. By July 2020, it had hit 33 percent of total sales. This is a trend that has played out in Europe as well where penetration is 28 percent in Germany and 25 percent in Romania.
Amazon has been one of the major beneficiaries of the shift to e-commerce, but it is unclear if the shift to e-commerce will persevere. One issue concerns branding, as loyalty tends to decrease among online buyers afforded the plethora of options provided by e-commerce.
Supply chains evolve
COVID-19 created a major challenge for companies with supply chains that stretch across countries. When one country, or even one factory was shuttered, there was a ripple effect along the entire supply chain.
As many organisations discovered, they often did not have a clear idea of what was going on in their supply chain. This presented challenges discovering the cause of delays or cancellations. With the development in new data mapping techniques like process mining, companies are learning they need to audit and trouble shoot their business operation and are adapting operations to do so.
When the pandemic hit, entire countries of people transitioned to working from home overnight, and this happened across industries. Most adapted quickly and found no major shock to operations. New technologies in automation and digitization made it possible and the use of these technologies have accelerated during the pandemic.
With the transition to work from home being so successful, many businesses are now facing a new dilemma: solving the role of the office itself. Offices have served as a symbol of the business and an expression of company culture creating a shared environment and a sense of belonging.
However, with employees saving on commute time and more effectively balancing work and life, businesses will be forced to make a decision about their real estate, as well as how to design an online workspace that fills that sense of belonging.
If businesses do move to a more permanent remote working approach, they will still remain tasked with adapting to digitization and new forms of communication technologies, but will also need to strive to create that community and sense of belonging that represents their company culture.
If businesses keep the physical space, how will they be forced to redesign it? How much space should between desks? What about shared areas? Returning to the office needs to be part of a reconsideration of what exactly the office brings to an organisation.
The scale of the response to the COVID crisis was unprecedented – three times bigger than the response to the 2008-09 financial crises. In the G-20, fiscal packages are estimated at more than $10 trillion. In February, Janet Yellen, the Secretary of the Treasury, was quoted as saying “the US debt path is completely unsustainable under current tax and spending plans.”
Since then the US government has allocated trillions in relief and many countries across the world did the same. In the UK, the debt is equal to GDP. In the EU, the combined budget deficits in October were 11.6 percent of GDP, compared with 2.5 percent in the first quarter of 2020. Making up these deficits will require raising taxes or cutting spending, or both. This could threaten the project of economic recovery, and may well result in political backlash.
COVID-19 has forced a dramatic restructuring of the economy and the way we do business. With vaccines beginning to roll out there is cause for tempered optimism. Many organisations have exploited these challenging times by digitizing their operations. This has provided increases in automation and productivity while demonstrating the success of a new business model, working from home. It is likely that some of this will remain as we look positively to the future expecting renewed consumer spending and a move to the Next Normal, but also tempering this optimism with the expectation that governments will need to tackle debts incurred from fiscal stimulus packages.