The coronavirus has changed the way we shop, in some cases forever. Here are three Covid retail trends with staying power.
The arrival of Covid-19 on U.S. shores early this year (or perhaps late last year) ushered in significant changes to how we all live our daily lives. The effect was widespread, although certainly not uniform, as the pandemic spread across the country, starting at the coasts, before moving to large population centers in the nation’s heartland, and ultimately pervading every part of the country.
The early stages of the pandemic prompted high levels of volatility in the stock market, cratered equity prices, and shut down huge swaths of the economy. Consumer discretionary spending was hit hardest, as service sector employees found places of work shuttered and varying state and local regulations effectively closed restaurants, bars, gyms, non-essential retail, and the majority of entertainment options.
The swift and subsequent recovery in equities was driven largely by growth stocks that digitized employers, and allowed employees to work from home and, frankly, do everything else from home. Vaccine news from Pfizer (PFE) and BioNTech (BNTX) has recently driven those same growth stocks lower as the market begins to price in expectations of life returning to “normal.”
In all likelihood though, “normal” does not mean we’ll be living exactly as we did pre-pandemic. Retail shopping has been changing for years, and the pandemic has only added fuel to that fire. So while the market struggles to price in a return to “normal,” what can we expect, as investors, from the new normal?
The question is not, “How has Covid-19 changed the retail space?” Instead, it’s “What changes to the retail space have been accelerated by Covid-19 and are now here to stay?”
Covid Retail Trend #1: The Rise of E-commerce
E-commerce as a share of retail sales has been steadily growing for years, rising from about 7.5% in 2015 to 12% at the end of 2019, and spiking to over 16% in 2020 (partially due to the pandemic), per the Department of Commerce. In fact, a recent report from eMarketer predicts that online holiday sales this year will more than offset holiday retail sales lost to the pandemic.
This Covid retail trend does not look like a short-term blip, but more like the clear path for the economy, regardless of whether the vaccine allows some restoration of normal shopping behaviors. Amazon (AMZN)is clearly a market leader and is broadly considered a consensus buy, despite recent price stagnation, as it commands a roughly 40% market share of online retail sales. Even if online competitors are in position to gain market share, Amazon owns a big piece of a growing pie.
E-commerce is increasing globally as well due to a combination of the pandemic, a growing middle class, and changing consumer behaviors. Alibaba (BABA) is responsible for 56% of Chinese e-commerce sales, and while that segment is also likely to grow, BABA has been dogged by claims of product counterfeiting, which has opened the door for JD.com (JD), the second largest Chinese e-commerce retailer, which also happens to enjoy a much stronger reputation for product quality and authenticity. JD recently hit all-time highs before selling off about 13%, but still looks technically strong as it continues to set higher lows and higher highs.
Covid Retail Trend #2: Sinking Mall Anchors
The death of the American mall is another trend, years in the making, that seems to have been finally brought to fruition by the arrival of Covid-19.
J.C. Penney, which had long been kept afloat by its real property holdings, has recently been purchased out of bankruptcy by a joint venture between Simon Property Group (SPG) and Brookfield Asset Management (BAM), which could save thousands of jobs but an unknown number of stores. Macy’s (M), another struggling mall retailer, is trading at all-time lows and appears to lack the runway needed to pivot to a sustainable online-first position. While Brookfield (and the subsidiary Brookfield Property Partners (BPY)) have diversified portfolios which include other retail and office spaces, and which could allow them to weather the storm, Simon Property Group seems intent on doubling down on a failing model as it continues purchasing bankrupt retailers (see Brooks Brothers, Aeropostale, Lucky Brands, and Forever 21).
Simon Property certainly has the cash on hand—and the motivation—to populate its vacant mall storefronts with legacy brands purchased for pennies on the dollar, but the real question is whether propping up storefronts is sufficiently sustainable in the intermediate term to allow Simon Property to transition to development of alternative spaces.
Shopping is no longer a destination activity. The arrival of “un-mall” malls, which tend to feature higher-end dining options, entertainment, lifestyle options, and social media-oriented art and experience spaces, is an acknowledgment that the bulky behemoths of the ‘60s, ‘70s, and ‘80s no longer reflect today’s consumer interests. There are bullish analysts out there that see SPG getting out of the doldrums, but growth prospects appear significantly limited, and mall traffic has been declining steadily since 2018, even before the pandemic accelerated retail closures.
Covid Retail Trend #3: What We Buy
Not only has Covid-19 been an accelerant for how and where we buy things, but it has accelerated changes in what consumers choose to buy. With consumers spending more time at home, expenditures for at-home fitness equipment (see Peloton (PTON), Nautilus (NLS)) and entertainment (see Netflix (NFLX)) have skyrocketed. Those are two Covid retail trends that do not appear sustainable as consumer preference may revert back to shared fitness spaces and will certainly revert back to shared entertainment spaces once consumers are comfortable again. One segment which is likely to continue performing well, and which goes hand-in-hand with the increasing prevalence of working from home, is home décor.
Wayfair (W), Bed Bath & Beyond (BBBY), and At Home Group (HOME) all recently reached levels 10x higher than their March lows before retracing 30%-40% of those gains. Of the three, Bed Bath & Beyond is most susceptible to incursion by online sellers due to its reliance on the sale of home goods. At Home Group and Wayfair, however, are better positioned moving forward as Wayfair has reported two consecutive profitable quarters for the first time ever while HOME has shown year-over-year same-store sales growth of roughly 40% for the same period.
These three stocks are trending down slightly and are likely consolidating recent gains, but could be poised for an upside breakout.
Continue to follow the above Covid retail trends, and you’ll likely spot more future stock winners in the weeks and months ahead.