The Real Economy: Industry Outlook
INSIGHT ARTICLE |
In a matter of months, the coronavirus and ensuing government responses deteriorated consumer spending, a critical component of economic growth in the United States. Fueled by a strong labor market and rising wages, household consumption was a resilient driver of U.S. economic growth despite headwinds presented by slumping manufacturing and geopolitical turmoil throughout 2019 and heading into 2020. With restaurants and retailers shuttered and consumers sheltering in place while facing depression-like levels of unemployment and uncertainty, spending quickly eroded in the second quarter. Despite this erosion, consumer spending will be a critical part of the recovery. An important focal point of the existing stimulus has been getting cash in the hands of consumers and will continue to be a key factor in policy decisions going forward.
While household consumption is expected to increase in the third quarter, behaviors developed during the height of the pandemic will likely reshape how consumers are spending. Before the pandemic, experiential and leisure purchases were taking a growing share of discretionary spending. However, awareness of social distancing could significantly alter that trend as consumers trade restaurant purchases for grocery purchases and travel budgets are reallocated to home improvements. Shifts in such behaviors will be critical to business leaders as they guide their organizations through the survival period and emerge with new short-, intermediate- and long-term plans to thrive in the continuously evolving consumer ecosystem.
If the United States experiences a resurgence of rolling outbreaks, or worse, a second wave that is equivalent or more severe than the first, retailers should be prepared. There is no way to completely eliminate the economic fallout, but being prepared can make the difference between closing doors permanently and emerging on the other side.
Restaurant owners will look to find ways to manage cash flows and survive the reopening period on pent-up demand and cost increases, with hopes of returning to profitability if and when a vaccine is found, or we reach herd immunity. Middle market restaurants that have strong unit-level management to navigate these headwinds have the best opportunity to succeed and return to profitability on the other side.
As we begin a global economic recession, food and beverage is projected to be the only consumer products sector to have growth in 2020, according to market research firm Euromonitor. This unprecedented time of record unemployment and pandemic conditions will shape consumer spending and put pressure on food manufacturers and distributors already operating on thin margins. Supply and demand disruption and rising operating and transportation costs will translate into higher prices. As companies continue to manage through the crisis and plan on the road ahead, it will take resilience, innovation and transparency to succeed.
Businesses in the fashion, beauty and home furnishing sectors have been particularly susceptible to the disruptions brought about by the COVID-19 pandemic due to complicated global supply chains and dependence on consumer discretionary spending. While the leaders of these organizations had to adapt to challenges brought about by both supply and demand shocks during the most critical times of the pandemic, adapting their businesses to be resilient to these types of changes will be critical to their recovery and long-term success.