Coronavirus outbreak will drive investment in new directions
The coronavirus outbreak is first and foremost a human tragedy that will have a profound impact on the global economy. The potential scale can already be seen in the extraordinary increase in US jobless claims which will potentially dampen any “bounce back” of previous consumption patterns. We believe this will cause many economic dis-locations to finally break and for the plethora of bubbles to burst.
The impact on the traditional retail and consumer industry will be extreme as the initial supply chain miseries morph into a consumer demand driven crisis. Traditional business models that do not serve a consumer need will fail quicker than fit-for-the-future models in a period of accelerated “corporate Darwinism”.
At True, we focus on two key overriding principles. First, to invest behind consumer behavioural shifts that we believe will become permanent or accelerated as a result of new working and living habits. Secondly, the once-in-a-generation opportunity to invest in great businesses at favourable prices; businesses that ironically will potentially have a bigger blue ocean ahead of them due to the shakeout of weaker assets.
Our expectation and the emerging evidence from nations recovering from the virus such as China is that consumer behavioural change will be accelerated and changed for ever. Many of today’s market leading companies, such as AirBnB and Uber, were born out of the last financial crisis and we expect history to be repeated as technological power is only accelerating. Typically, when management teams have to do more with less, they find innovative solutions that are universally adopted leading to greater productivity and change.
The forced closure of bricks and mortar operations in China led Alibaba’s Tmall to dramatically enhance the digitisation of stores and product launches such that consumers might not return to old interaction habits. In our portfolio, Ribble, our DTC cycle brand is live streaming its latest product launch and this is potentially a marketing channel that will explode due to the crisis and enforced habit change.
Similarly, UK grocery has spent c.20 years reaching c.6%1 market share. In the last three weeks, demand is 3-4x that, and it seems likely consumers will get used to the added convenience and service. This behavioural shift has implications for the whole supply chain, but most profoundly the future cash flows from real estate-based activities which in our eyes are only partially through a dramatic correction.
True’s investment in Zwift benefits from the convergence of myriad structural mega-trends we invest behind including health, fitness, e-sports, and passionate communities. A growing consumer focus on health and wellbeing, witness recent google searches for boosting the immune system, combined with access to an enhanced and convenient at-home fitness experience driven by Zwift and Peloton amongst others will see the fitness industry increasingly democratised.
Another powerful movement is the pursuit of frictionless commerce. Uber transformed the taxi market by enabling a seamless end to end app experience. Nespresso increased coffee consumption by providing one-click home delivery. Similarly, Zwift provides a frictionless way to enjoy fitness whilst saving valuable time. Technology, driven by quantum computing advances, will reduce friction in other categories that have yet to be considered; new significant markets will be created. Consequently, we expect to see huge strides in areas such as e-learning and ways of working including an enhanced focus on mental health.
Does value exist today? Despite the collapse in values of many listed retailers, it is impossible to price risk today given so many unknowns. However, there is an old adage to never let a good crisis go to waste and this is a once-in-a-generation opportunity to invest in businesses that:
- Participate in channels consumers are gravitating towards
- Satisfy an identified consumer need and/or want and
- Can demonstrate a competitive moat vs. competitors
Growth investments, particularly digitally-led brands, have been expensive and this correction will provide liquidity driven opportunities to invest in fit-for-the-future companies at fairer risk-adjusted prices. Direct-to-Consumer businesses will become more prevalent, traditional occupancy costs will be re-worked and brands which prioritise purpose alongside profits, particularly sustainability and citizenship, are on the shopping list.
A crisis yes, an opportunity certainly.