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How consumers spend in a COVID-19 world

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By Kenneth Zinner, CFAPortfolio Manager, Growth Equity, Eaton Vance Management

Boston - Consumer spending has slowed during the pandemic lockdown, with clear shifts from discretionary categories like apparel, home furnishings and restaurants to consumables purchased from grocery, club and online retailers. According to the Census Bureau's report on March retail sales, grocery store sales were up almost 30%, while clothing and accessories stores saw declines over 50%.

Home improvement is one area of discretionary spending that appears to have held up relatively well, as people stuck in their homes have more free time to tackle DIY projects such as painting or gardening.

What retailers are doing to adapt

The typical retail model was not built to have revenues decline by this magnitude for any prolonged period of time, creating an extremely challenging environment for many. Retail margins are inherently low, with a large fixed cost burden of rent, wages and benefits. Given long lead times, sell-through of inventory on hand is critical to make room for the constant flow of new inventory arriving. As inventory backs up, significant margin risk becomes a concern, especially on seasonal goods that are perishable by nature.

Companies have been forced to preserve and in some cases raise cash by drawing down revolving credit lines, suspending buybacks and dividends, raising new capital, cutting capital expenditures, deferring rent, extending payables, reducing purchase orders or furloughing employees. Where possible companies have shifted resources to online or to-go models to capture a larger share of the demand that is out there. But in aggregate, online fulfillment and delivery cannot offset the lost revenues from in-store transactions.

How the retail environment is evolving

In recent weeks, we have seen a notable improvement in discretionary spending cited by a number of restaurants, retailers and even auto dealers. While this pop in discretionary sales coincides with the release of government stimulus payments, it is nevertheless an encouraging sign that underlying demand still exists.

We think it is reasonable to expect a continued sequential improvement in sales in the weeks to come as the economy begins its gradual reopening, and that process has already started in several states. That said, we believe a vaccine or medical treatment is a prerequisite for us to fully return to economic and social normalcy.

Why and how consumer behavior may change

As many consumers have been under lockdown for about two months, we have all had to adapt and form new habits. While there is no question that pent-up demand for spending is building, what if some of these habits end up persisting well beyond this pandemic?

For example, COVID-19 could become the catalyst that accelerates online adoption in many categories, most notably in food at home. Consumers who may have historically been on the fence have now tried and learned to appreciate the benefits of shopping for groceries online. We suspect some of this business will prove to be sticky — a shift with the potential to disrupt many food retailers who lack the infrastructure to provide this service efficiently and profitably.

What could these behavior changes mean to business models, market shares and ultimately equity performance over the intermediate and longer term? We believe some of the best-positioned companies are those with strong brands that resonate with consumers who will follow them regardless of the end distribution channel.

A common thread in many of the changes we are contemplating is the use of technology as an enabler of convenience. Retailers with online fulfillment and curbside pickup, hotels with contactless check-in and keyless entry — these became necessities during the pandemic and are unlikely to go away. We think those companies with the scale to make meaningful investments in technology will be in a better position to take share going forward.

Bottom line: With the economy likely in a recession while we exit this cocoon phase, unemployment may remain elevated for a time. As retail sales recover, we anticipate that consumers will remain cautious when it comes to public settings and large social interactions, which will impact how retail commerce is done.

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Eaton Vance are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness.