The new “e-normal”
The coronavirus crisis has sparked a global structural shift from a physical to a virtual economy, altering consumer patterns to a new “e-normal”.
Cross-industry paradigm changes due to Covid-19 unleashed a new “e-normal”. This widespread adoption of digital tools and behaviours among almost all sectors occurred within a matter of days when, in the absence of a pandemic, it would typically take years to see such a shift.
And these changes are here to stay.
In a moment where, confined and isolated, the notion of time becomes blurry, it’s easy to assume these leap frogs are simply makeshift developments to help us get by now. Yet, our expectation at Cherry Ventures is that the Covid-19 pandemic will feature long lasting effects on consumer activities touching everything from our personal routines to much larger consumer values. Our assessment is supported by McKinsey’s global survey conducted between March 15 and April 6.
In this blog post, I first lay out macroeconomic observations before breaking down how Covid-19 has impacted the way consumers shop, eat, play and work. Naturally, this is a non-exhaustive analysis and there are — without question — many other interesting trends in areas like education and telemedicine that I am not currently covering in this post.
Consumers hit first
Consumers are at the forefront of today’s crisis, whereas banks were the first to take the hit in 2008. The following London Business School presentation effectively explains the basics of supply and demand dynamics in the context of Covid-19:
- Light blue arrow (AS0 -> AS1): The supply shock due to global supply chains disruption emanating from China and quarantine measures worldwide reduces aggregate supply.
- Orange arrow (AD0 -> AD1): The context of uncertainty around sanitary and economic policies coupled with short-term thinking in the midst of the Covid-19 crisis reduces aggregate demand. Households increase precautionary savings and non-permanent workers lose their income.
- Dark blue arrow (AS1 -> AS2): Due to the above, firms are seeing large drops in demand. The feedback loop further reduces aggregate supply. Firms more dependent on cash flow are heavily suffering from lack of liquidity to fulfill commitments and are forced to file for bankruptcies.
- Magenta arrow (AD1 -> AD2): The feedback loop further reduces aggregate demand. Firms closing leads to a huge rise in lay-offs and a further drop in consumption.
Overall, demand effects are expected to be much larger than the initial supply shock. Unemployment rates are reaching all-time highs. The US, which was at full employment only 4 weeks ago, just saw 22M Americans file for unemployment claims. Its unemployment rate could now reach 14.7%, the highest since Franklin Roosevelt. Consumer-facing brands are among the first ones to feel the pain as people zip their wallets.
It is thus not surprising that consumer discretionary spend categories — like travel, retail, fitness, etc. — dominate layoffs in the US and in the rest of the world.
Consumers are enacting more frugal behaviours when it comes to offline entertainment spending as they realise much of their necessary spending can be done at-home or by next-gen actors who have thought of their product for digital purposes first and foremost.
All eyes on digital
The underlying structural implication is that it makes us reconsider the physical and the virtual. Covid-19 has triggered a general assessment from both individuals and businesses regarding what values can be driven from digital practices and which ones need to be physical.
In the past month, we’ve seen virtually — pun intended ;) — every industry transition online. As a quarter of the world is now in temporary confinement, Covid-19 has shed new light on how online tools and services can be life-changing. Digital tools have enabled us all to stay more tightly connected to peers and access important information and necessary goods.
As Ben Evans recalls, the internet and smartphones have become the default presumption. ‘Everyone’ is online (e.g. 75% of the earth’s adult population has a smartphone, that is 4bn people) and software ate the world. This means when going online is the last resort, people can do it and adoption barriers are taken down.
Coronavirus also reminds us how adaptive human beings are. In the face of uncertainty and lockdown policies, digital transformation was massively adopted and individuals found innovative ways to make their time at home enjoyable and limit disruptions from their day-to-day life.
E-commerce reigns
Several charts have tried to capture those shifts and e-commerce, particularly for food, always stands out as the clear winner.
But e-commerce is also changing in several ways: (i) contactless delivery (ii) digital payment methods (iii) new supply chain dynamics. Once implemented, one can expect those new measures and partnerships to stick around. For instance, Stuart (acquired by La Poste in 2017) enriched its delivery solution with a partnership with iZettle to facilitate remote payments, particularly for pharmacies and local shops. Food delivery firms Postmates, Instacart, Deliveroo, Glovo and others have introduced contact-free deliveries during the pandemic. Logistics softwares — such as Bringg, which saw a 24% week-over-week increase in customer delivery volume — support more efficient planning, measuring and tracking of the entire delivery process are also of crucial help in supporting other businesses to stay afloat.
Although the coronavirus generated a huge spike in e-commerce transactions, not all players will benefit. In a closed-frontiers world, brands with highly fragmented supply chains are being forced to reconsider the interdependence of their models and find ways to move resources closer to the end consumer.
As exposed in this 2PM article, coronavirus appears to be altering the relationship between digital media and commerce. “Seemingly overnight, COVID-19 altered the symbiosis between publishers and the brands and marketplaces that need its demand generation. In some cases, the symbiosis was ended altogether”, the author writes. DTC brands that were focusing primarily on buying up media partnerships and pumping money into digital advertising will not survive a 2020 world in which consumer spending will significantly shrink if they have nothing to amortise the losses.
This crisis also reveals the truth about a brand. Not only has social responsibility become the core judgment value of a brand, but the coronavirus also exposes brands’ organisational, operational and managerial strengths and weaknesses while challenging their creativity in finding new monetisation routes. “Even if consumers are not spending at the moment, they still seek acknowledgment, inspiration, advice, guidance, education and entertainment from brands. What once was a value-add is now a brand’s lifeline”, Ana Andjelic writes.
Get cooking
The spike in online grocery shopping and food delivery illustrates how technology is fundamentally changing the way we eat. While people are stuck at home, they’re rolling up their sleeves to cook more meals. According to Nielsen, sales in France of flour surged by 160% year-over-year in March, ranking it among emergency essentials such as rice (160%), pasta (200%) and soap (220%).
Widespread caution going into public spaces, like grocery stores, has driven the demand for online grocery shopping. In turn, this requires some adaptation on the supply side. Supermarket chains’ inability to meet surges in online demand suggests that their digital transformation efforts have put a focus on the customer-facing front and overlooked the logistics and inventory challenges. This has forced stores to put in place partnerships with food delivery players such as UberEats and Deliveroo. But this comes with some problems. Delivery players maintain their 25% commission and exercise a certain control of processes, while supermarkets are left with sourcing stock and picking items.
“Pick and pack” order fulfillment is the strongest bottleneck in supermarkets’ value chain. Demand and delivery are not the real concern.
- Demand is such that user experience doesn’t really matter in a situation of crisis: whatever works will do, as long as it’s scalable and can handle the surge in traffic.
- On the other hand, delivery has almost become a commodity: fleets of drivers are now unemployed due to the closure of restaurants and transport restrictions and are looking to redirect their activity in the grocery space, where the demand is.
- Pick and pack — or order preparation — is the most challenging part and the least scalable one. It still requires human labor and is taking place in the physical space (i.e. supermarkets) which means it is subject to social distancing and other covid-19 related measures.
This situation has shed the light on emerging players that have been conceived since Day 1 to provide stellar customer experience and user interfaces, personalised to each customer, while leveraging digital technologies to enhance supply chain efficiencies. Such players are also much more agile by nature and able to quickly implement innovative solutions to address blocking points.
Instacart is the most popular grocery delivery app in the US and has seen its demand increase by more than 300% year-over-year last week alone (first week of April). In March alone, the Instacart community grew to 350,000 active shoppers from 200,000 two weeks ago. As a result, the company announced their plans to hire an additional 300,000 full-service contractors to help it delivery groceries to people during the coronavirus pandemic. They’ve doubled their care team over the last two weeks, from 1,200 agents to 3,000 agents while they’ve already hired an additional 15,000 agents (!)
New demand, new models
As covered above, food delivery leaders had to adapt to the new demand and partner with supermarkets as restaurants close. However, our take is that this is not a sustainable move that will survive the crisis. User experience is ill-designed for this specific need. Inventory is limited and pricing is very expensive.
Instead, we believe the future of delivery in a post-coronavirus world lies in new models. For instance, delivery-optimised kitchens of the future or “ghost kitchens”, like CloudKitchens and Taster, are grabbing more and more market share in today’s food delivery landscape.
And they make perfect sense, economically speaking. For example:
- (1) Upfront costs are no longer needed, and what would have been fixed costs are transformed into variable costs.
- (2) Restaurants are better equipped to answer variability in demand and can quickly adapt their menus. Ghost kitchens allow restaurants to book more or less units depending on the demand they are facing, hence allowing them to better manage the intrinsic seasonality of the restaurant industry.
- (3) Ghost kitchens naturally grow the addressable market of a restaurant as their activity is no longer location-dependent.
- (4) Ghost kitchens are a digital platform by nature, which means they provide detailed data analytics previously not accessible to restaurants. That way, they can retarget loyal customers and incentivise new customers.
Generally speaking, dehumanisation will happen faster than we think, removing humans from daily interactions and giving automation and robotisation a significant boost. We think it is very likely that online grocery shopping will keep its new fans post Covid-19 as the friction related to adoption behaviour was overcome in the crisis and one easily gets used to the convenience it provides. The future of food is happening now but is still unevenly distributed today as it concentrates on urban areas and hasn’t yet reached rural places as swiftly.
Let’s play together
Virality in gaming can lead to unprecedented economic gains, as Pokemon Go taught us when Niantic made $790M in revenue last year although the actual virality peak was in 2016. People are trying to keep themselves entertained while being stuck indoors and naturally discover new virtual entertainment formats, of which gaming is an undeniable winner.
App Annie reported that consumers spent over $16.7bn on games in Q1 2020. That same quarter, mobile game downloads grew 20% year-over-year to reach 13bn, up 30% quarter-over-quarter.
TikTok, a genZ video sharing social network app on which one might have seen several peer-to-peer challenges emerge, is highly engaging and seducing new audiences as the confinement is intergenerational. It broke into the top five by consumer spend on iOS and was the most downloaded app of the quarter.
Records have been crossed across various gaming verticals. On April 7, Twitch broke their all-time concurrent viewership with 4M (the number of viewers watching the stream at each second). Riot games made an impressive contribution to that record with the beta launch of Riot’s new first-person tactical shooter, VALORANT, which peaked at 1.7M viewers, surpassing Fortnite’s peak viewership (World Cup hit 1.69M viewers).
Twitch’s record also illustrates the rise of lifestyle streamers whose narrative is articulated around their personality and who focus on engagement. The growth of non-gaming content on platforms like Youtube Live, Twitch, Caffeine, TikTok etc. supports the rise of that community. “As people become increasingly removed from traditional sources of community during the pandemic, lifestyle streamers are going live to help fill that void”.
Coronavirus is undoubtedly expanding the addressable market of gaming players. A report by FoxIntelligence shows a 265% increase of daily video games sales (online and offline) in the first three weeks of confinement in France. Good timing for Nintendo which released their new game: Animal Crossing New Horizons made the Nintendo sales jump from 25% to 62% week-over-week.
We might therefore see a sustainable change in the gaming narrative and content, better adapted to new target groups.
Let’s chat
In a period of physical distancing, there are more social bonds than ever before. Online and mobile entertainment has been going through the roof in the early months of this new decade, which has seen the emergence of a new lexicon such as “virtual happy hours.”
There were 31bn new app downloads in Q1 2020, up by 15% from Q4 2019. App Annie reported that consumers spent a record $23.4bn on apps in Q1 2020, the largest ever quarter. Globally, consumers are shifting their time toward digital and video entertainment.
Interestingly, Nokia’s graph below highlights a totally new trend: the spike in Zoom’s traffic on weekends illustrates the online socialisation movement that is taking place across the globe — a new habit that might last.
All facets of social interactions are moving online, and this goes for sex too. The SexTech industry (sex toys, erotic apps and services) opens new doors for consumers looking to reconnect with their natural human needs for touch. As mental health and wellness practices at home are also becoming crucial to the sanity of the world’s population locked down at home, the marketing moves made by players from the space (e.g. free trial for a couple of weeks) have high chances of converting into long-term subscriptions. Eric Crowley wrote a very interesting blog post on how Consumer Subscription is the next Software Boom Market.
Now that technology can improve virtual experiences, it will be very interesting to see to what extent it will replace in-person gatherings.
No office, no problem
This Buffer report from last year already highlighted how the working from home (WFH) trend was here to stay. The coronavirus pandemic left employers and employees with no alternative to WFH practices and even the more reluctant ones (👋 large corporates) had to embrace these new working methods, meaning that companies are now willing to pay for the right tools supporting optimal WFH setups to make sure good productivity levels are preserved.
Interestingly, remote workers stated in that 2019 report that even though they could work from anywhere, they often chose to work from home (84% of the respondents).
People are appreciating the inherent flexibility and productivity from having access to such tools. And due to the uncertainty around how long the confinement will last, they have no other choice but to get accustomed to this new working mode. Our prediction is that, in the mid- to long term, this situation will translate into less tolerance for commuting and a steep increase of “noffice” (home office) and remote teams.
The impact on the real estate industry will likely be a shrinkage in office requirements and a resultant decline in parts of the PropTech market, with WeWork in the front line, due to reduced demand for co-working spaces and large office spaces.
The market is already sensing it. On April 2, Softbank announced they won’t buy WeWork co-founder Neumann’s shares, hence terminating the $3bn offer. The Wing lost 95% of its revenue overnight and subsequently had to lay off nearly all of its hourly employees and half of its corporate staff. Wing’s co-founder and CEO Audrey Gelman worries that they might not even be able to reopen post Covid-19 crisis. A survey of 14,000 co-working spaces in 172 countries worldwide by Coworker found that 67% of spaces have experienced a drop in the number of new membership enquiries.
As the effects of the pandemic on work processes will go on for several months and as co-working and colleague communities can get reinforced digitally, our working patterns may fundamentally change towards this “noffice” policy.
One of the most common ways to keep members socially engaged is hosting day-long Zoom rooms, to empower the sense of community. Video conferencing apps have experienced record growth reaching 62M downloads during the week of March 14–21. Empathy and serendipity have entered our digital workspace, too. Technology players are also speaking to the individual behind the employee, taking into account their social needs, too. Donut Slack, for example, matches people randomly for short and light-hearted conversations.
People have also become available 24/7, but we would expect that to change in post crisis times as people value more and more the separation of work and personal life. The current situation will help people put in place a clear barrier from home and work, without having to leave their home.
App Annie report on video conferencing tools shows that on March 15th 2020, the global downloads of Business Apps during Covid-19 Pandemic had increased by 90% versus 2019 average. The jump in business app downloads to 62M across iOS and Google Play earlier in March was up 45% from just the prior week and was up 90% from the weekly average in 2019. Those tools break down geographical barriers and allow for a more seamless collaboration and socialisation with colleagues. It also enables to establish remote trust in a more reliable and quicker way.
The video conferencing space simply exploded and existing players triggered various initiatives to attract customers to their tools versus their competitors. Zoom won that battle and went from 10m DAU in December 2019 to 200m DAU in March as it managed to crack the professional and personal space.
Other productivity tools are supporting employees to organise their time as well as possible. Notion is one of them surfing on that wave and just raised $50M from Index Ventures at a $2bn valuation. You can find a very comprehensive overview of the space in this blog post by Pietro Invernizzi.
In an interview to Elpha, Brianne — co-founder of WorkLife Ventures, an early stage fund which investment thesis focuses on future of work tools — explains that when she started Worklife, she discovered that “the new American Dream isn’t keeping up with the Joneses, it’s individuals using creative expression, online influence and extreme optionality, i.e. remote work, calendar flexibility, and new creative projects, to define personal success.” Covid-19 validated her thesis.
Conclusion
There’s been an immense demand shock at the macroeconomic level which will impact all industries in the mid- to long-term. This has strongly reinforced e-commerce but also questioned supply chain structures and outlined pick and pack challenges in e-grocery space. Social interactions went virtual and, as a result, gaming and video conference tools blew up, while the digital workspace entered the comfort of our homes.
The current tech winners of the Covid-19 pandemic follow the general trends highlighted in this blog post, underscoring how technology has become a clear driver of today’s economy. As the analog world is being shaken by this crisis, tech firms will become even more powerful.
In the long-term, Covid-19 will have profound structural implications on different industries. Below is a very insightful chart put together by Dealroom in which you can also see which industries we, at Cherry Ventures, have invested in.
French President Emmanuel Macron may have declared, “We Are At War” with the coronavirus, as uncertainty is at its utmost against this invisible enemy. Yet, the Covid-19 crisis has ignited a new “e-normal” that will help us get through these difficult times. It has also created new habits and values powered by technology, and most of those will remain characteristics of this new decade, even when the coronavirus threat gets eliminated.
