Markets & Research
The information superhighway has been gaining speed for years. Not only is it faster and more dependable, it’s more accessible than ever. Today, even rural areas have high-quality broadband internet. What was once an academic toy has become a vital and ubiquitous part of everyday life.
It’s hard to imagine anything changing the internet’s trajectory from here. It’s already in our computers, our televisions, our pockets — even our thermostats, refrigerators and ovens. It tells us how to get to our destinations, suggests entertainment we might like and connects us to stores and delivery people. But just a few months ago, it was also hard to imagine that we’d all be sheltering in place. COVID-19 — perhaps more precisely, our efforts to stem its spread — gave a real boost to online companies and likely accelerated trends toward more and more-varied digital interaction.
Several sectors benefited from the shutdown, from digital payments to online video games. As we’ve sheltered in place, we have been spending our time and money on online pursuits. As one technology company CEO said, “We saw two years of digital transformation in two months.”
Even before COVID-19, online retailers found great success in selling items like books, electronics and toys. However, they struggled to gain traction in household goods. Those day-to-day consumables remained a major untapped market, says Jon Keehn, an equity analyst at Capital Group. But people started looking for household goods online after stores closed and certain items became scarce.
“For many customers, this might have been the first time they realized they could order some basic goods online,” says Keehn, who covers retail in the U.S. and software in the U.S. and Europe.
The surge in popularity caught online retailers by surprise. Normally, the first quarter is a seasonal low period for online retailers. But suddenly, “every day became Black Friday for months,” Keehn says. They hired aggressively and prioritized high-demand items to keep up with consumer needs. That ability to provide selection and delivery-to-your-door convenience could pay dividends for years to come.
“I think the e-commerce stuff will stick. Some people will go back to buying from the store, but this has been an ongoing, slow march upward for the last 20 years,” Keehn says.
Online grocery delivery still faces some hurdles. Food and household staples are low-margin products, and they pose a big deliverability problem. Many of them are perishable and temperature sensitive, like milk and frozen vegetables. “Packaging groceries is not like packaging a book,” Keehn says. “It’s a big challenge, but it’s a big market. I think the big players will continue to refine their offerings.”
Working from home has shown benefits for businesses. Handling work from a home office has helped boost videoconferencing and cloud services companies, but it’s also had another bonus: Many employees have been more productive.
“Without travel, Capital Group is seeing more meetings, more investment notes, more meetings with companies and more formal conversations with each other, and we’re not alone. Businesses will want to capture some of that productivity,” says Carlos Schonfeld, a research director and equity analyst at Capital Group Private Client Services with research responsibility for U.S. business services, IT consulting, chemicals and consumer finance companies.
And while business travel can be a wonderful tool, it’s not without costs. There’s the actual price to move employees across countries and oceans, but there’s also a cost in terms of time and missed work. And teleconferencing “is very powerful” as a replacement for face-to-face meetings, Schonfeld says. “You’re not losing much by using it.”
But working from home does offer new challenges. “The hardest part is integrating new people into the company,” Schonfeld says. “How do you make them feel like a part of the team? So much of what we do is informal.” As a result, he doesn’t think shared workspaces will disappear. “Even in businesses where people primarily work from home, I imagine we’d come into the office once per week.”
One of the truisms of the entertainment industry is that people generally turn to activities they enjoyed as children and young adults. Baby boomers juiced broadcast ratings for decades, and Gen Xers did the same for cable. Millennials? Many of them play video games.
And when millennials were locked away at home with plenty of time on their hands, many opted to pour that time into franchises like Call of Duty and World of Warcraft instead of television. As the U.S. reopens, that free time will be squeezed, but there are good reasons to think that video games will still enjoy higher engagement, says Capital Group Private Client Services Equity Analyst Nathan Meyer.
“Games are more social now. Online play has always been important, but games are now built to be played with other people for hundreds of hours instead of alone for dozens. And that’s caused these online games to all become their own social network,” says Meyer, whose coverage area includes U.S. media and video games and European satellite and media companies. “The lockdown gave people a chance to reconnect with friends through video games, and that’s likely to stick around for a while.”
While the Chinese market isn’t a perfect analog to the American market, gains in the market there have proven to be sticky, Meyer adds. “Spend has been going up. Every third-party data source shows spending continuing to be strong, even after China ended its lockdown.”
And, in other media, streaming video services have seen an explosion in use. That’s critical for those services — subscriber fees pay for new content, which in turn keeps customers around and attracts new viewers.
“The most powerful flywheel is a tight relationship between the business growing and the service improving,” says Capital Group Equity Analyst Brad Barrett, who covers media, cable and satellite, advertising-driven internet companies and telecommunication services in the U.S. “When a streaming service chooses to reinvest into entertainment, that’s what they have.”
The shift to online means that we’re making more payments online — a boon to payment processors. While overall payments were down, purchases over the internet not only grew, they grew at a faster pace in March than they did in January.
That shift goes beyond convenience. “There’s a reluctance to accept payment with cash now,” Schonfeld says. “Some businesses require app payments before entering the store to pick up a purchase.”
Shifting consumers to purchases in apps provides other bonuses for companies. There are business streamlining and customer service gains to be made, for example: An order can be assembled and bagged while the buyer is commuting to the store, saving time for everyone. And apps allow businesses to capture valuable customer purchasing data, which can help streamline inventory and better target buyers.