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

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.

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.

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.

• In forthcoming posts in this series, we will focus on sustainability and consumer choice, grocery price inflation and consumer incomes, supply chains, and digital fashion.