Bogin Report Q1 2021: "Normal" has changed and we aren't going back
Each quarter, I write about my personal observations on a subject related to business. This content is my own, not that of my employer or any other individual/company.
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When the COVID-19 lockdown came to the United States in March 2020, the first thing Americans did was hoard toilet paper and Clorox wipes, wildly emulating the behaviors seen in post-apocalyptic fiction. After a few weeks of staying indoors, everyone started asking, “When will we go back to normal?”. President Trump initially wanted economic reopening by Easter, then June, then September. And although we each harbored varying opinions about the likelihood of near-term normalcy, we secretly hoped that COVID would be destroyed by a combination of luck and American ingenuity. Now, the pandemic that started more than a year ago continues to impact each of our daily lives. It has forced us to adopt new habits with the family and at work, new social engagement approaches, and new personal interests. It has created a new normal. The COVID vaccine rollout seems to be going very well and as more of the populace gets fully vaccinated, we will see public life “open up” again. But what does open up mean? I believe that a meaningful percentage of American consumers have changed and will not be demanding the same mix of products and services as existed before COVID.
Before continuing, I want to provide a semi-quantitative example of a high impact market change. Since the mid-2000s until the late- 2010s, a trend of reurbanization occurred in cities all around the country. Revitalized neighborhoods became buzzing hotspots of food, nightlife, street art, and hipster chill, ushering in thousands of new restaurants, bars, coffee shops, doggie daycares, and fitness studios. The energy of many cities notably shifted into something younger and more lively. This seemingly massive shift was driven by low single digit population movements of ~2-4% from surrounding areas into their respective cities. That’s it! If such a meaningful impact on American city life happened from changes in 2-4% of the population, imagine what impacts COVID may bring.
Big Change #1 - Virus Risk Tolerance
COVID forced us each to determine our personal risk tolerance towards the virus and the resulting allowable activities. Some of the US population continued engaging in activities and behaviors with minimum interruption. However, a huge portion of the country greatly modified their habits, choosing to stay mostly indoors with those in their home instead of engaging in the range of social and public activities that used to fill their days. This second group is the one that needs to be closely analyzed when searching for 2%-4% shifts that could be lasting.
Even once people are vaccinated, I do not believe 100% of Americans will go back to the exact lifestyles they lived in 2019. Imagine if you were a classical music loving 84-year-old with multiple health issues and a suppressed immune system. In 2019, you had season tickets to your city’s symphony orchestra. Would you potentially not feel as safe in a packed symphony hall? Would your safety concerns lead you to cancelling your season tickets? This hypothetic situation can be extended to numerous other scenarios. On a more macro-level, I believe that tens of millions of Americans will be saying “I would rather not” to some of the activities they used to do. These millions of people will not always consciously acknowledge COVID risk as the primary reason for their decision to decline the 2019 activity. Often “new interests” or something similarly safe sounding will be the rationale provided.
How many people will no longer go to packed concerts, live theater, and movie theaters? How many people will go but wear masks? How many of those who wear masks will like the experience less and may not return? Is it worth it to go to a movie theater crammed between a bunch of loud chewing strangers when the same movie is on HBO Max and enjoyable from the comfort of your own couch? How many people will no longer go on cruises, ride on public busses, or dine in crowded and lively restaurants? How many people will choose an Airbnb for their group instead of booking rooms in a hotel?
If the reurbanization of American cities occurred due to ~2-4% localized movement to the cities, will any of the above changes in behavior drive away 2-4% of previous users? These seemingly small changes in demand will have massive ripple effects across the economy.
Big Change #2 - Greater Work Location Flexibility
COVID caused people everywhere to shift to working and learning from home. Once the CDC says it is generally safe to go back, many people will return to their offices and schools with the same rigid 2019 schedules. But tens of millions of others will have greater flexibility. I am not declaring that tens of millions will work and learn remotely 100% of the time. I am just saying that they will have greater flexibility than before. And when the rules in the game of life change, only a fool keeps playing with the same strategy.
For instance, if someone can work from anywhere with an internet connection and loves traveling, why wouldn’t they travel more? How many people will explore different cities for weeks or months at a time using short term rentals? How many homes will own one car instead of two cars, using ride share tools when a second transport is needed? How many parents will alternate work from home days to be more present with their children? How many companies will downsize their office space and shift to a hoteling model instead of having designated desks per employee? How many restaurants that depended on the corporate lunch rush will go under?
Some companies and industries will prove over the next many years that it is possible to drive strong, dependable growth with a primarily remote workforce. As it becomes clear that some industries are supporting greater workforce location flexibility, a new societal split will emerge. Imagine how frustrated your doctor friends are going to feel 5 years from now when your tech friends spend their winters skiing in Colorado? I have even been speaking with current undergrad students from top programs and they are consistently prioritizing location flexibility as part of their career planning. I think we will see more talented people pursuing careers in industries with greater location flexibility and moving away from careers in industries that bind people to specific places.
Looking Ahead
As some industries and companies fade during this period of change, others will emerge. American consumers are not going away, they are just spending their money differently. For instance, many Americans are purchasing larger homes with more rooms and bigger yards, often moving from urban to more suburban neighborhoods. No longer able to walk to the local authentic Japanese restaurants and speakeasy bars, these consumers will buy Traeger Grills and Masterclass subscriptions to learn how Aaron Franklin makes that perfect layer of bark on the outside of the brisket. And over time, these suburbs will see the emergence of more robust food, drink, and nightlife options with entertainment zones where local breweries and distilleries are clustered around New American restaurants and wine bars with mediocre pizza. The former urbanites who moved to the suburbs will welcome these options and a new macro-economic growth trend will emerge. This is just one example of many new trends that will come about as some of the big changes discussed above start to play out.
I hope I have convinced you that we are not “going back to normal” because normal has changed. We may not feel this change personally, but we will be able to quantify it economically because big changes occur due to low single digit demand shifts. I strongly encourage you to think about how the new normal can and does impact you. And I dare you to think, if the rules in the game of life have changed, will you continue playing with the same strategy?
Your Friend and Colleague,
Connor