Aversion behaviours in a time post-COVID

How we expect consumers’ lack of spending to impact industries.

Supernode Global looks at the impact of the Covid-19 crisis in three-different articles. Previously, Oli Strong discussed why we’re optimistic for VC funding post-COVID. In this second piece, we consider how the pandemic may change consumer behaviours in the longer term.

During the past few months, quarantine and distancing measures have been put in place across the globe. As life slowly opens back up again, we looked to previous pandemics to understand how people have acted in the past when coming out of quarantine. For this article, we examine so-called ‘aversion behaviours’: what this means, how happened previously and what we expect to see in a time post-COVID.

Looking to past pandemics

For the past couple of months, we’ve been researching past pandemics and recessions to better understand what the future might hold. From our research, we noticed how after epidemics, people purposefully avoided specific activities, products, or locations due to a fear of viral transmission when there was no real threat to life.

One way of this was avoiding purchasing products and visiting locations that they associated with a pandemic’s origin — whether correct or not.

🇲🇱 🇱🇷 🇸🇱 In 2014–2016, there was an Ebola outbreak in western Africa, mainly affecting Guinea, Liberia, and Sierra Leone. Beyond this, a small number of cases were recorded in a few other African countries, Europe, and the US. However, after the virus was no longer a threat, there was a drop in tourism not just in the main three affected countries but instead across the entire African continent, including places where there had been no hint of the virus. An academic reviewing this noted the trend “where a tragic event in one African country or region, is generally associated with the whole continent, a disease such as Ebola then has a ‘neighbourhood’ impact.”

🇲🇽 In a similar vein, the Mexican tourism and pork trade saw a notable fall following the 2009/10 Swine Flu. “By the end of 2009, Mexico had a pork trade deficit of $US27m. The losses derived from this pandemic were clearly influenced by the risk perception created in tourist-supplying and pork trade partners.” (Source)

The other behaviour we noted was how people continued social distancing when it was no longer required or recommended.

🇭🇰 An example of this can be found following the 2002–2004 SARS outbreak. Hong Kong suffered a “drastic drop in the number of visitors… with even Hong Kong people themselves reluctant to shop, dine and spend like they normally do [and as a result] the aviation, hotel, tourism and catering industries [were] been particularly hard hit.” A cross-industry ‘We Love HK’ campaign was launched as a result to encourage locals and tourists to spend and re-instil confidence in the economy. (Source)

These are called aversion behaviours.

The economic impact of quarantine and distancing measures

Before we address the post-COVID impact, it’s crucial to recognise the scale and impact the virus has already wrought — from the direct human cost to the indirect cost caused by the measures necessary to fight it. Aside from human lives and health, many industries have already taken a hit.

At the time of writing, The New York Times reported that “at least 93% of the global population now lives in countries with coronavirus-related travel restrictions, with approximately 3 billion people residing in countries enforcing complete border closures to foreigners”

✈️ Tourism, as a result, saw a reported loss of 67 million international arrivals in Q1, which translates into c.$80 billion in receipts. Current scenario planning point to an annual decline between 58% — 78% for 2020. As of May, these scenarios estimate 100 to 120 million direct tourism jobs at risk.

The response to COVID-19 has also placed importance on physically staying home. Governments across the globe have imposed varying degrees of quarantine and social distancing measures to further reduce transmission.

🇳🇿 As most countries (at time of writing) are yet to lift all social distancing measures, we look to New Zealand for analysis as they are close to lifting all measures following a strict quarantine (At time of writing, they had reported no new cases of COVID-19 for 7 days in a row and allowed gatherings of up to 100 people). Sadly, it doesn’t look good: the chart below shows the impacted industries in New Zealand, that indicates the expectation for 250,000 jobs to be lost over the next year.

Source: infometrics

What aversion behaviours do we expect here?

As with pandemics before, we believe that after quarantine and social distancing measures are legally lifted, we will see some aversion behaviours — even though not required for individuals’ health and safety. While the press is quick to highlight how measures are being broken, our view is that the majority of people will take time to go back to ‘pre-COVID’ behaviours.

People will avoid activities that ‘constrain’ them in an enclosed space. Consumers will seek to maintain some social distancing as physical proximity to strangers will feel uncomfortable and unhygienic for several months.

We expect this to lead to consumers avoiding particular activities — as shown below:

Of these industries, we believe that specific characteristics indicate that an industry is more likely to see the long-term impact and subsequent change in this situation:

• Service-based (rather than product-based) — e.g. cleaning, transport,
• Sales are based on a consumer’s physical presence — e.g. festival, hairdressers,
• A remote alternative offers a significant cost reduction vs in-person product. E.g. fitness, education
• A large proportion of the industry is self-employed, contractors, or short-term contracts e.g. construction, hospitality, delivery

Based on the above, we looked at two industries that have many of these characteristics and extrapolated our view of their future.

🛩 Business Travel

• Service industry
• Sales are based on a consumer’s physical presence.
• A remote alternative offers a significant cost reduction vs in-person product.

In line with a lot of current commentaries, we believe that business travel will be severely impacted by COVID-19. The pandemic has demonstrated that remote video calls can offer a competitive experience to in-person meetings — as well as a considerable cost saving.

• Short term: Business travel will see a large drop in the next 12 months. Companies will prioritise online-meetings over face-to-face as this both reduces risk and costs.
• Long term: Business travel will shift to longer and less frequent trips as the value of ‘fly for a meeting’ is seen as an increasingly taboo. We expect travel firms to develop more products focused on the ‘homestay’ experience rather than ‘hotel stay’ to cater for this change in behaviour — competing increasingly with companies like Airbnb for sales.

🏋🏿‍♀️ Gyms

• Service industry
• Sales are based on a consumer’s physical presence.
• A remote alternative offers a significant cost reduction vs in-person product.
• A large proportion of the industry is self-employed, contractors, or short-term contracts.

While many gyms have adapted by offering online products, our assumption is that these pivots are not offering the level of revenue to cover their cost base. We believe that the nature of gyms (i.e. sweat) will put off consumers from using them for some time after they are allowed to open. Further, we expect this to be exacerbated by the wide range of cheaper online offerings available. As with theatre, a significant proportion of this industry is made up of SMBs and/or self-employed. We expect the combination of this and consumer avoidance to cause many gyms to close permanently during this period.

Short term: We believe that consumers will turn to a ‘portfolio approach’ for their fitness, combining several lower-cost online fitness memberships that are supplemented by occasional in-person options, such as personal trainers or classes. We expect the combination many gyms to close permanently during this period.

Long term: We expect to see the demand for physical gyms gradually rise again over the longer term. However, with the competitive landscape fundamentally changed by the increased use of online fitness products, we anticipate gym offerings to segment to low-cost or super-premium. This may lead to large gym chains (e.g. Fitness First etc) to struggle longer term as they are limited in their ability to pivot successfully to either positioning.

What impact will this have on investing and start-ups?

💸 A long-term shift to more international investing. We anticipate the aversion to business travel to extend to the investing ecosystem:

• Initially, to see a surge in investments in local areas — e.g. London VCs to invest in London-based start-ups. While the use of online meetings has been a great equaliser for companies not based in hubs such as New York or Silicon Valley, we believe that post-quarantine, we will see a preference to meet in person pre-investment again.
• Longer-term — as the quality of investments carried out via meetings in-person vs. remotely become apparent (and we assume having no impact on the quality)- we expect that more VCs will shift to remote meetings, increasing international, remote investing.

🖥 An increase in online event start-ups- We anticipate the aversion to business travel to extend to the investing ecosystem and that travel for conferences will be less common:

• The industry will shift to fewer, larger conferences, local conferences, and a large increase in online small-to-medium events initially.
• Online events will evolve rapidly in the next 12 months due to the higher uses and behaviours and norms will be developed.
• As the investor industry increasingly sees value in this category, we will see a large increase in the number and sophistication of start-ups offering products for this. This will further propagate the development of this category. We see this space as currently very nascent.

Coincidentally, my colleague Gina, writing in Spotlight (the Supernode newsletter), highlights a few exciting companies already making waves in this space. Read here.

📈 Rise in online-fitness start-ups and overall growth in this market: We anticipate an initial growth online as consumers become more sophisticated in their fitness and (due to the comparative cheaper online products) adopt a portfolio approach.

• This amounts to a single consumer having several online accounts where they would have initially had a single account.
• This will provide an opportunity for a multitude of new start-ups in this area — both at a platform and tools level — as this market grows dramatically over the next few years.
• These platforms and tools will ideally evolve the online fitness market and products. While there is a multitude of products currently, there is a significant opportunity to further develop impact products and offerings in this market. As with online events, we see this space as currently very nascent.
• Finally, expect the online fitness market to grow substantially over the next 5 years as the demand and supply increase.

Although COVID-19 has shut down a lot of the world, here at Supernode Global, we remain very much ‘open for business’. If you would like to get in touch, you can find me on phoebe@supernodeglobal.com.