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Article17 Apr 2020

Consumer Demand

Locating Areas of Permanent Demand Destruction from COVID-19
April 17, 2020 - The COVID-19 crisis has effectively shut down economies around the world. Stay-at-home mandates have shuttered businesses, closed schools, and driven millions of workers into unemployment. The shutdown has effectively forced many economies into recession with consumer spending falling in almost every category outside of food & consumer staples as people are forced to stay home, cash flow is limited, and the future feels uncertain. The primary determinant for how bad the economic recession will be is time and is dependent on how fast a treatment or a vaccine can be developed to battle the virus, how quickly economies can be re-opened, and the effectiveness of fiscal and monetary policy measures.

Once things restart, it would be naive to think the economy will bounce right back to ‘normal’. Many businesses, especially small & medium businesses, may not survive the lockdown as they tend to have very little cash on hand yet still were responsible for fixed costs throughout the shutdown period. Some spending habits will also likely be altered in the post-crisis economy as the crisis likely accelerated trends like non-travel eCommerce and online grocery which had started to take hold prior to 2020.

Looking at the recovery path and duration of demand weakness we assume 2021 will be when we see trends of relative ‘normalcy’. Because the demand deceleration patterns associated with today’s pandemic response is different than anything we’ve seen in recent history, comparing demand recovery trends to periods like the global financial crisis isn’t helpful. Whether there will be permanent demand destruction depends on the sub-sector of business category with some seeing spending shifts vs. spending declines and others seeing delays in recovery. How much of the consumer demand lost during the shutdown will be permanent? In our analysis, business categories such as travel, entertainment & sports, and retail will likely see the most permanent demand destruction or a disproportionately slower return to prior levels of demand. eCommerce plays a significant role here but we note that all eCommerce is not created equal – growth trends vary between travel and consumer-staples-related eCommerce, for example.

Consumer demand has a direct effect on payments companies as demand drives transactions which drive revenue. Companies skewed towards business categories most at risk from demand destruction will likely see a reduction in transaction volumes. The divergent performance of eCommerce will also directly affect payments companies as the merchant category matters as all eCommerce is not created equal. Finally, against the backdrop of widespread and sudden demand weakness, certain exposures have been called out as being particularly risky, including exposure to travel & entertainment, small & medium businesses, mall traffic, and sub-prime consumers.

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