10 Mar 2022 3 min read

The state of the consumer (part 1): online retail & reopening dynamics

By Camilla Ayling , Jarrett Brotzman

As consumers, companies and economies adjust to life post-pandemic, LGIM's Consumer Global Research and Engagement Group (GREG) members recently gathered to share their views on the key trends that we believe will impact the sector in 2022 and beyond. This series of blogs will summarise the conclusions from our debate, with contributions from our equity, credit and investment stewardship teams in London and Chicago.

Ecommerce warehouse parcels packages shopping retail.jpg

Online retail is here to stay

Camilla Ayling, Equity Research Analyst

The pandemic caused a sudden bounce in online penetration levels, which moderated back somewhat when economies started re-opening, as observed in the chart below.

Consumer GREG blog 1.1.png

Unsurprisingly, however, we are not seeing a full return to pre-pandemic online penetration levels, with many industries settling at a higher online penetration rate than we might have had otherwise, given both consumer and business behaviour have adjusted to this new norm. One particular category to highlight is grocery, within which online penetration is now almost double the level it was pre-pandemic, according to the ONS.

Going forward, we expect online retail penetration to continue ticking upwards. Compared with the store channel, the online channel faces challenges such as higher return rates, and (on average) lower margins due to higher fulfilment costs. Therefore, we believe that scale matters and logistics flexibility will be key for consumer companies. We favour multi-channel operators that can leverage their well-invested store estates for click and collect services, marketing, and speedy inventory management.

In addition, the direct-to-consumer trend was turbocharged during the pandemic. This was supported by the growth of social commerce platforms, which enable brands to interact with customers seamlessly and directly. This is leading to a shift in power, in our view, away from retailers and towards brands themselves. Hence we prefer retailers with strong first-party brands over aggregators reliant on third-party brands.

Reopening dynamics and changes in spending patterns

Jarrett Brotzman, High Yield Analyst

While some changes to consumer behaviour are permanent, there are some that we expect to revert to pre-COVID status quos. For example, while spending on food away from home fell during 2020, this almost fully reversed by the middle of 2021, when the economy reopened, as we see in the chart below.

Consumer GREG blog 1.2.png

Similarly, we expect the pre-pandemic trend of consumers shifting their spend on “experiences” versus “goods” to return as society reopens and consumers seek out the experiences missed during the pandemic. Of note, we expect discretionary consumer travel spending to continue recovering in 2022 and expect consumer travel spending to reach 2019 levels by 2023-24.

Within the US consumer universe in credit, we view discretionary leisure travel as an attractive sector given the strong demand for consumer travel (particularly in the US), strong US household balance sheets that were boosted by stimulus and have been strengthened by recent wage gains, and the receding impact of COVID-19. Within this subsector, we view hotels, cruise lines, outdoor entertainment and timeshare properties as potential investment opportunities given some of the favourable tailwinds discussed above.

Camilla Ayling

Equities Analyst

Camilla is an Equity Research Analyst in Active Strategies in London at LGIM. Camilla joined LGIM in 2019 from Rathbones, and prior to that she worked at Barclays. Camilla was featured in Citywire’s 2019 ‘Top 30 under 30’ list and was awarded Investment Analyst of the Year at the 2020 Women in Investment Awards. Camilla graduated from the University of Bath with a BSc (Hons) degree in Economics. Camilla is a CFA charterholder and also holds the Investment Management Certificate, the PRI’s Foundations in Responsible Investments qualification and the CFA Certificate in ESG Investing.

Camilla Ayling

Jarrett Brotzman

Analyst - High Yield

Jarrett joined LGIMA in 2018 and supports the high-yield group by analysing investment opportunities in both the primary and secondary markets. He conducts due diligence, industry research, and financial modeling for existing and new investment positions. He covers consumer-oriented industries including beverage, food & drug, hotels, recreation & travel, and restaurants. Prior to LGIMA, Jarrett was with PPM America as a Credit Analyst covering investment-grade and high-yield companies in the technology, media, and telecom (TMT) and transportation industries. He currently serves as a Captain in the U.S. Army Corps of Engineers, United States Army Reserve. Jarrett earned a BA in Economics, American Politics, from Washington & Lee University.

Jarrett Brotzman