At TEAM we are constantly searching for changes in economic, corporate and consumer behavior. We seek to identify long run, secular trends that may have important investment implications. Trends that we also believe our client portfolios need to be exposed to.
Covid triggers a lifestyle shift
I think the past three months of living and working at home have forced people to become much more involved in the kitchen. We are cooking for ourselves out of necessity, and, as a result, spice cabinets and “pantries” are expanding. At home, we have a lot more spices, condiments and flavorings; rice and pastas in our cupboard than before. I didn’t realise how many different peppers you could get. And I am sure we are not alone. We are all doing a lot more cooking at home.
The Covid-19 pandemic has triggered a change in lifestyles and eating habits. During one week in March, US grocery sales spiked 77% over the prior year, while restaurant sales collapsed 66%. As of April, grocery sales were still running 8% above average, with restaurants down 48%. Before Covid, cooking had become an interesting hobby for the few, and eating out the norm. That trend may well have turned for the foreseeable future.
A study done by Hunter, a food and beverage marketing firm, noted that 54% of Americans are cooking more than they were before the pandemic, and 35% say they “enjoy cooking more now than ever.” If the number of cooking enthusiasts triples and stays there, it will have major consumer spending implications.
That rather extreme outcome is unlikely, but it is probable that the “new normal” will include a shift toward more eating at home, which includes the continued growth in both cooking and grocery sales, and takeout and home delivery sales.
Online grocery sales take off
Meanwhile, in China, online sales of grocery and foodstuffs grew by 33 percent during the outbreak while their overall sales grew at only one-third of that rate. Before the pandemic, more than 400 million people, or about half of China’s citizens that are connected to the internet, had ordered food online. Online consumer spending habits in China are already well established via mobile device connectivity, facilitating ecommerce penetration of grocery sales towards 15% by 2021, up from 10% in 2019 (Statista). China's online grocery market is now expected to grow 62.9% in 2020.
JD.com and Alibaba dominate China’s online grocery market, and international market research bureauIGD forecasts that JD.com’s grocery sales will grow 28.8 per cent by 2023 to reach $9.8 billion and Alibaba’s grocery sales will grow to $9.5 billion, with a CAGR of 25.6 per cent.
‘WFH’ – a new acronym for the lexicon
The pandemic has forced developed economies to carry out the biggest experiment in working practices in history, the widespread implementation of remote working or working-from-home (WFH). Several credible studies are demonstrating that remote workers are more productive, satisfied and engaged than when they are in the office. Expecta battle to commence post lockdown. Employees will want flexibility and the choice to work from home for at least some of the time. We have been doing it for months and the genie is out of the bottle. Covid has shown we can operate efficiently for months without being in the office.
The studies include McKinsey Global Institute and not a single one recommends working in an office eight hours a day, five days a week to maximise productivity. On the contrary, working in an office probably wastes valuable time despite management presence. Working remotely removes the wasted commuting time, petty office politics and the interminable interruptions, in addition to the death by-a-thousand unnecessary meetings.
Traditional and incumbent senior executives will argue the traditional office bound structure builds trust, collaboration and team spirit, obviously under their guiding and watchful eyes! But I think trust and effectiveness are built though communication. Certainly, interpersonal behaviour is important, but there is no evidence whatsoever to suggests daily personal in situ presence is essential. HR will also refer to culture. Somehow, being cooped up in an office for continuous periods reinforces one’s corporate culture. Well, who of us has not experienced an office-based dysfunctional, and, frankly toxic, culture?
Then there is the cost of the typical or traditional office. The average company in the U.S. is estimated to spend toward $12,000 per employee per annum on “all in” office space. In that context, it is difficult to to push a strong return-on-investment case for office space. In the UK, the cost of office space, rent, rates, service charges, utilities, reception, photocopier, fax, etc. is about £60 per square foot in the South East; an average desk space per person is about 75 square feet per person. So the cost per annum is £4,500 per person.
The genie is not going back in the bottle. Remote work is here to stay. Perhaps not all businesses or personnel, but current surveys indicate 20-30% of workers could end up working remotely. The likelihood is almost certainly a hybrid - working occasionally on site with colleagues using collaborative space, and remotely at all other times. To achieve gains from this new hybrid structure companies will be required to adapt and change. This will have far reaching consequences on overall employee numbers, in addition to information and digital communications technology investment (including, but not limited to,the allocation of capital, recruitment, management structure and HR function ,
Back to cooking. Cooking is correlated with time spent at home, and working at home is as we have identified, likely to permanently increase post-Covid. Google has said a majority of their employees can work from home until 2021. Twitter CEO Jack Dorsey publicly informed all employees that they would be permitted to work from home permanently, even after Covid.
Your health is your wealth
This massive migration to working from home will be concentrated among high-income workers. More frequent cooking at home is associated with higher levels of education and income. Interestingly, pre-covid research demonstrated that home cooking resulted in a healthier standard of living. It has even been cited as a weapon in the battle against the global obesity crisis. Eating out regularly limits the ability to control portion size, while it increases the intake of processed meats, sugar and empty calories. Cooking at home is positively linked to greater life expectancy.
The experience of cooking at home and “make do and mend” can result in less food wastage. This is clearly positive for the environment. I know that is my own experience. It has also encouraged us, like many, to search out new recipes, and these often require new and additional spices, or broader ingredients. These are not expensive additions to the monthly household bill.
The organic food movement isn’t going away. As consumers learn more (including recipes) about the effect food has on our overall well-being, and the environment, the stronger the commitment of consumers will become.
4 simple reasons consumers go organic;
- No prohibited pesticides or synthetic fertilizers, all harmful to the sustainability of our natural world
- It’s healthier because you are minimizing exposure to toxins, hormones, antibiotics and GMO’s,. Deficiency in certain vitamins and minerals has been associated with vulnerability to the Covid-19 disease, not least obesity.
- Better taste, because of higher levels of antioxidants.
- Organic, or responsibly farmed produce, helps protect our ecosystems. Synthetic chemicals in food production threaten our water supplies through contamination. 2020 will see 30-40% of the world face the very serious issue of water scarcity. China will produce 807 million gallons a day from desalination. China has only 7% of the world’s freshwater.
Organic farming is significantly less damaging to the environment and unlike conventional agriculture, does not strip wildlife from their natural habitat. Instead, farmers encourage a diversified natural order that assists with pest control.
To evidence this consumer trend, the organic food brands company Hain Celestial CEO recently reported, “I am pleased to be raising our full year guidance for 2020 as third quarter financial performance exceeded our previous guidance and is expected to show continuing strength in the current quarter. With our transformation plan taking hold and food-at-home consumption accelerating, Hain Celestial's natural and organic product offerings resonated with consumers, resulting in year-over-year growth in third quarter net sales, the first such increase since fiscal 2018."
Another example of this cook at home trend is, the week ended March 15, McCormick reported sales growing by 65%, with all major categories up double or triple digits. This momentum didn't slow, with volumes increasing 90% the following week. McCormick owns brands, McCormick, Thai Kitchen, Schwartz, French’s and Simply Asia amongst others. While that is great news, it is important to remember with McCormick that one-fifth of sales are from restaurants,where sales are currently not so great.
However, this diversified customer base from consumer to restaurant makes sure that McCormick is not too reliant on one segment and is able to prosper throughout COVID, with sales up 8% year-over-year as of the most recent earnings release. A 26% increase in consumer segment was offset by the 18% decline in the flavor segment (restaurants and packaged food manufacturers). As more and more US states and other countries are in various stages of re-opening, it’s possible for both segments to show increased demand as people continue to cook at home and restaurants re-open their doors.
With a strong balance sheet, leading profit margins, and a growing dividend, McCormick is poised to continue to dominate.
In addition to remote working post-Covid, two other behavior trends that are inevitable are “dinner for one” and “density”.
Dinner for one
We will continue to see the growth of single or two person households. History has demonstrated from the Black Death to Cholera to Ebola that pandemics can restructure cities. It is estimated that 68 per cent of the global population will live in an urban area by 2050 (Savills). Urbanization has been a global megatrend for the past decade or two. City dwelling gave the trinity of proximity to work and home, sound transport systems and social activities in the form of retail, leisure and entertainment. Will remote working change or halt that trend? For many there will be no option, and for many city-life will remain a lifestyle preference.
Cities have evolved over the centuries according to the necessity to fight disease, turning features such as public parks and sewers into “a mundane part of city thinking”, says Michele Acuto, a professor of global urban politics at the University of Melbourne. The sanitary and security of health infrastructure following Covid-19 may be digital in the form of the surveillance technology used by cities such as Singapore and Seoul to retrace the steps of infected people and warn others who have come into contact.
“Dinner for one or two” together with the existing urban population will continue to drive online grocery sales and food delivery growth. U.S. online grocery sales grew 22% in 2019 and, propelled by high demand from nationwide COVID-19 lockdowns, stand to surge about 40% this year, according to the Coresight Research U.S. Online Grocery Survey 2020. Urban living with less storage space means more frequent deliveries. These online shoppers are extending the product categories they are buying. The ‘shop’ is getting broader to include packaged food, toiletries, personal care, household cleaning and paper products, fresh food and beverages, alcoholic and non-alcoholic.
Online shoppers are also extending the number of e-stores they buy from. In the US, Amazon again leads the field as an e-grocery shopping destination. In a recent survey, 62.6% of consumers said they bought groceries online from Amazon.
Shoppers have historically been much slower to shift purchases online for groceries compared to categories like apparel and technology. That trend is now changing.
The final trend will be a consumer aversion to density. The “stranger danger” mentality will persist and crowded restaurants and shops will be less appealing. Again, this will further anchor home cooking and online groceries and food sales, together with food delivery.
To be noted, typically US consumer spending accounts for approximately two thirds of total GDP. GDP in 2019 was $20 trillion (who knows for 2020), so the consumer spent about $13 trillion. That’s about the size of the Chinese economy. Don’t underestimate the US consumer’s power to drive the post-Covid recovery.
Retail and food services sales saw a jump in April and May, creating a “v-shaped” bounce from the record lows experienced during lockdowns. A significant portion of spending came from online shopping. That may be temporary but…
Real life investing
At TEAM our client investment portfolios have strong exposure to these global changes and considerations.
“Invest in life, invest in your life”
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