Crisis can drive structural changes in consumer behaviour: the UK recession in 2008-09 spurred demand for value-for-money, which then became an established behaviour for UK consumers. It is evident to all that the COVID-19 pandemic has had a profound impact on consumers in the past few months. We find it difficult to envisage these new behaviours disappearing as quickly as they arrived, especially given the continuation of social distancing measures and consumers’ safety concerns as the threat of a ‘second wave’ looms. We expect that many of these changes will become ingrained in consumer behaviour even in a post-COVID world. We discuss four such trends below:
Trend 1: Time In rather than Time Out
The home is the new consumer hub and is likely to remain so for the foreseeable future. While the easing of the lockdown will inevitably see spending of pent-up demand outside the home, consumers have now experienced and learnt to appreciate the convenience and value of ‘at home’ activities, a behaviour which we expect to continue to remain significant. In our view, the more interesting subsectors of this ‘Time In’ trend are:
Eating In: Given social distancing measures will continue to impact the restaurant experience and consumers’ willingness to go out, consumers are seeking ways to improve their at-home food experience, looking for quality, variety and convenience. Appealing propositions include home delivered meal-services (e.g. Mindful Chef, Gousto, Hello Fresh), pre-cooked meal providers (e.g. Pasta Evangelists) and ingredients providers (e.g. Oddbox). The key challenge for any of these players is to maintain volume by creating a long term loyal and stable customer base, beating other providers but also alternatives such as traditional delivery services (e.g. Deliveroo) and new home meal offerings from restaurants chains diversifying into this space, such as Patty Bun burger boxes, Cote Restaurant at-home offerings and Pizza Pilgrims pizza kits.
Fitness at Home: Even before the COVID outbreak, at home-fitness was emerging as an interesting trend – as exemplified by connected fitness product provider, Peloton. The COVID crisis has accelerated this trend, offering existing consumers new ways of training as well as expanding the fitness market to new customers (e.g. those previously put off by the gym experience). Online fitness propositions are likely to become more widespread and potentially erode the consumer base of traditional fitness businesses. This extends to services businesses, such as fitness training software provider Freeletics (which has 40m subscribers and recently received a $45m capital injection), as well as equipment providers.
Arts and Crafts: In the UK, arts and crafts has historically been a niche but resilient segment with a loyal customer base. Increased time spent at home, with a greater focus on creativity and mindfulness (see Trend 2 below) has driven an expansion of the sector in recent months. Private equity has already successfully operated in the space, fostering growth and innovation (e.g. Blue Gem’s investment in DMC Group, subsequently sold to Lion Capital in 2019 and Scottish Equity Partners’ 2017 investment in Lovecrafts).
Leisurewear: Another sector likely to benefit from the ‘at home’ trend is leisurewear. Again, this is a sector that was already undergoing expansion pre-COVID, and the expectation of continuous working from home is a further boost to the market. A number of brands are emerging and competing in the space (e.g. Mahabis acquired by YYX Capital and Gymshark).
Trend 2: Accelerated Focus on Self Care and Wellbeing
The COVID outbreak has further accelerated the shift towards products and services that support consumer well-being. Mental health, mindfulness and self-care practices are now becoming mainstream and more consumers are embracing and valuing them. Further innovation and emergence of new products is expected in the space, and interesting subsectors include:
Healthy Food: The shift towards meat alternatives, natural ingredients and no dairy products seems to be more permanent than transient, with healthy products continuing to become an important category across all grocery types. A number of PE and corporate transactions have already happened in the space (e.g. the recent sale of Graze to Unilever; Foresight’s investment in the high protein brand Oomf; a £30m investment by True Capital into Soulfresh brands) and we expect this to continue to remain a sought after space. However, the increased competition due to proliferation of brands will require careful assessment of consumer propositions and their competitive values.
Vitamins and Supplements: Continuous innovation and research is bringing new products to consumers. An example of deal activity in the space is the £20m investment by Highland in Huel, where the funds will be used to support product and international expansion.
Wellness and Beauty Products and Services: Similar to food, ‘healthy’ beauty is a key area for potential deal activity (e.g. Piper’s minority stake investment in Neom Organics in 2017 and TSG Consumer Partners’ investment in Huda Beauty), with more deals on the horizon. We also see potential in the emerging market of home wellness equipment (e.g. therapy devices such as Theragun, or LED light devices), although this segment is at an early stage of development.
Trend 3: Accelerated Tech
Unsurprisingly, with consumers stuck at home, online delivery has become indispensable. Recent estimates by Deutsche Bank suggest that, in the UK, online accounted for 39% of retail spending in May, up from 25% pre-COVID. With the store experience continuing to be impacted by COVID, online is likely to stay at a heightened proportion of spend.
In our view, the more interesting online delivery opportunities are those with a specialised focus and segment. Examples include Bloom and Wild (flowers), Pact Coffee (specialised coffee) and Bella and Duke (pet food). Aggregator platforms such as Cult Beauty, which allow consumers a wide choice within a specific category, could also disrupt the Amazon status quo.
Looking beyond the UK, the pandemic has created a step change in the use of online in countries where online has traditionally struggled to take off, such as Spain and Italy. There is clear investment opportunity here.
Trend 4: Local
Although a less ‘investable’ trend, we have also identified a shift in consumer preferences to shop more locally, as local businesses offer convenience and play into consumers’ desire to support local economies. In particular, those with a strong community feeling (a sentiment which the COVID outbreak has re-energised) are likely to be favoured by consumers.
In the leisure sector, a rise in staycations is expected, although the degree to which it lasts over the long term would depend largely on government quarantine plans and travel corridors and consumers’ willingness to adapt to the new safety measures (e.g. possible longer airport queues, potential flight cancellations and limited services at hotels).
There is no doubt that consumer related sectors will remain under considerable pressure from the COVID pandemic, given both economic uncertainty and the lockdown/social distancing measures. Most recent economic forecasts suggest a drop in UK GDP for 2020 in the range of -6.5% (IMF) to -14% (Bank of England), with considerable uncertainty over the shape of the recovery as it is difficult to predict the timing and extent of further COVID waves before a vaccine becomes available. Retail sales, which saw a considerable drop in April, are starting to recover as shops and other establishments are now opening but remain well below pre-crisis levels (-13% in May according to ONS data), with their future outlook highly vulnerable to changes in government support schemes and potential rise in unemployment.
However, despite the above, tapping into emerging consumer preferences might lead to interesting investment opportunities, especially for those business that can take advantage of one or more of the trends identified above, coupled with an attractive consumer proposition and solid competitive positioning.
If you want to have more detailed conversations on any of these trends or potential opportunities in the space, please contact Paddy Woods Ballard. This article was prepared in collaboration with Oriana Colombo, a consumer sector expert and adviser to Fairgrove.