The past 100 years have presented several significant transition points in the economy that were triggered because of a crisis. The COVID-19 Pandemic is another one of those events that will permanently change the course of the economy. So, what changes can we expect? This article explores some of the possibilities.
There are numerous examples of dramatic events in human history that created indelible changes to society and the economy. Sometimes, these shifts initiated an “extinction event” that had devastating impact on certain industries. However, more often the event served to accelerate a trajectory that was already underway. Businesses that fight against the transition, holding on to old business models, end up in the graveyard. Others see opportunity in the change, and flourish. I believe that the events surrounding the COVID-19 Pandemic has triggered a similar inflection in our economy.
The Great Accelerator
Transition events for industries either look like the end of an era, or the beginning of a new one. I believe the transition initiated by the COVID-19 Pandemic will largely be defined as an accelerator. I also believe this acceleration will be inherent trait of the new economy; products and services that are not inherently connected to the pandemic event will be catapulted forwarded. All of this will be driven be an instinct by consumers to move away from what was the status quo before the event.
There will be direct, and relatively obvious, shifts that emerge extremely fast, such as the way work is conducted (more at home, increased use of virtual meetings and collaboration tools). There are others that will not be so obvious but will be equally transformative. Guessing how fast these transitions happen, and the degree of the transition, is speculative; however, I will do my best.
The Office
Technology that enabled virtual “face-to-face” meetings has been around for a long-time although it wasn’t really widely available until 2010 with launch of FaceTime®, Skype® followed shortly after by Zoom®. However, these platforms (and Webex®, GoToMeeting®, etc.) existed for nearly a decade before the pandemic event forced them into routine use by businesses. Instead of using the platform once or twice a quarter, people began using them daily and often multiple times every day. Almost overnight, the use video meeting tools went from a special occasion to ubiquitous.
Businesses also realized that web-based collaboration tools were essential to connect all these virtual employees, so adoption and usage of these platforms has exploded.
Work from Home
The need to keep employees separated drove companies that were culturally addicted to in-person office experiences to allow/require employees to work from home. Many business leaders that had strong beliefs against this practice have learned that with technology enablement, working from home not only is possible, but is proving in many cases to be MORE productive. The consequence of this shift in cultural attitudes will have permanent and dramatic impacts on the shape of offices in the next decade. I believe the fundamental notion of location and work will dramatically shift. After all, why relocate an employee if they can perform well remotely and you have the tools to enable their effectiveness. I also think the demand for office space is going to face an immediate drop in the next year or two. I think this change will be most dramatic in major cities with the highest office space costs. This includes cities such as San Francisco ($92/ft.²), New York ($85/ft.²), Washington, D.C. ($60/ft.²), and Boston ($41/ft.²). Austin, TX ($48/ft.²) may be an exception because of the high growth rate of the city will likely offset any short-term decline in demand.
Retail Sector
The death march has already begun for retailers that have held onto 20th Century business models. The new retail is characterized by leadership in convenience and experience. Price is already owned by Amazon, Walmart, and Costco; the category giants Home Depot and Walgreens can also be added to the low-price/scale list; but for the rest, the battle will be won on great experiences combined with convenience. Convenience is really about ease – ease of access, ease of finding the right product, ease of check-out, and seamless integration to web ordering, customer service and information. Experience goes way beyond purchasing goods; retailers that start thinking of themselves as lifestyle and entertainment venues will be the winners. If I were running a major retailer now, I might consider recruiting some top talent from Disney for my team. Also, retailers that have figured out the seamless integration of online and physical retail, such as Best Buy, have carved out a strong competitive position for the new economy.
The changes needed for survival of malls is even more dramatic. The quicker a mall owner realizes their investment is done, the sooner they can reinvent the real-estate. The new venues need to be lifestyle destinations, that are safe (i.e. casino level security), filled with restaurants, bars, and other entertainment options. It would be wise to integrate office and residential space into these properties. There are already some great examples that are thriving today, albeit “outdoor” malls. Any mall owner could learn a lot from walking through Avalon or Atlantic Station on any weekend.
The interim period, that may last for 3-5 years, will be very dark for some retail. We have far too much retail space that is modeled on the “old” retail. Between traditional malls, and strip malls, there will be many empty spaces, often enough to take down the entire mall. There will be exceptions, in areas where the underlying total traffic is growing, but in any area where population growth is stagnant or declining, the effects will be noticeable.
Travel Sector
The entire travel industry is facing another 12 months of dark days, however, once a reliable resolution (i.e. widespread immunity supported by a vaccine) the industry will experience a big bounce. I think air travel will quickly return to, if not exceed, pre-COVID-19 levels. I think the cruise industry will bounce back quickly too, along with international travel. Everything for the travel industry is a survival game; those that remain alive 12 months from now will be the winners. Of course, now is a great time for consolidation for any player who can get the capital to make the deals.
Manufacturing Sector
I believe the stage is set for a big shift for manufacturing to move back into the U.S.A. The focus will be first on moving critical supply chain components back in the U.S., particularly if they are made in China. The Healthcare supply chain will top the list of priorities, with drug and key medical supplies; but critical technology used to manufacture a wide range of products will come closely behind. I am also expecting a growing consumer demand of “Made in U.S.A.” goods, however, this will be tempered by consumers ongoing demand for low-priced products. I think this shift will start impacting the Manufacturing sector as early as this year and carry through 2022. Suppliers of manufacturing equipment and technology are likely to see some significant upside.
The U.S. market is not the only country that will see gains as the “China Pandemic Backlash” unfolds. Countries such as India, Malaysia, Indonesia, and Mexico are likely to pick up a large portion of the China supply chain.
Education Sector
Major universities, including ALL the most exclusive schools, have legitimized virtual learning. While originating out of necessity, the consequence will be permanent; no longer is an education bound to a physical campus. The result of these changes will be a new competitive playing field that is fought on: (1) the quality of the content, (2) the quality of the online tools, and (3) the exclusivity of the selection process. Smaller schools, with less resources, are likely to perish or be consolidated with the more successful players. Schools will need to develop a highly focused specialization with a clear competitive advantage to compete. Schools will also need to develop workshop programs that bring remote students together for teambuilding, laboratory work, and other collaborative activities.
The escalating cost of higher education is also going to be challenged. The idea of students paying $50K+ per year for an education that is virtual (and arguably very scalable) is not going to be accepted for long. Efficiencies enabled with technology and scale are likely to drive this cost down dramatically in the coming decade.
College education is not the only educational environment to begin a transition; K-12 education is likely to see a surge in home schooling and increased pressure for school choice as parents have become more engaged with their children’s education. Technology that supports these trends should accelerate in both adoption and capabilities.
Financial Services Sector
The movement away from physical cash has been accelerated (some businesses have stopped accepting cash during the pandemic). Banks further accelerated the idea of “virtual” banking when they shut many branches in response to the pandemic. Consumers are becoming acclimated to virtual banking and electronic funds transfers (facilitated by apps and web-based access) which raises a big question about the need for bank branches. Simultaneously, these same banks sent thousands of office workers home to work (ironically increasing productivity) and are learning that all their office space may be a waste of money.
Given the financial pressures on these institutions due to low interest rates and increased competition, I think we should expect several waves of organizational restructuring and re-alignment that sheds a significant chunk of their real estate and people.
Conclusion
The darkest hour is before dawn. Every CEO who has been focused on survival, needs to start shifting their sights on growth opportunities. The marketplace is transitioning and accelerating; if you get ahead of this wave, you can take your business to new levels. This will take “out-of-the-box” thinking as the future will not look like the past. If you maintain your focus on your survival mode, you are likely to have a mediocre business a year from now.
The opportunities will be found on the leading edge of the market. Look for those transition trends, particularly technology-enabled, that were in the early stages of adoption. These are highly likely to accelerate dramatically and provide significant opportunities for growth.
What other shifts do you see coming?
Copyright © 2020 Douglas C. Fergusson
