It would be easy to get overwhelmed by the fact that everything has changed for a time. But, in an attempt to understand the new trajectory of our world, we resolve to push through and try to separate what we know—or, at least, can reasonably anticipate—from what we don’t know. To that end, we’ve been appreciating the following quote from Ray Dalio:
“Sincerely believe that you might not know the best possible path and recognize that. Your ability to deal well with ‘not knowing’ is more important than whatever it is you do know.” – Ray Dalio
Patience, conviction, and humility have become a mantra at Loup in recent days because these tenets have served us well, especially when things are moving fast.
We analyze our portfolio, the world, and potential investments with a new lens. How does the world live, work, and play differently in a post-coronavirus world? And for how long? Most analyses of COVID-19’s impact on the world miss a critical element to be considered: duration.
Exhibit A: Movies
Take, for example, theatrical movie releases. Universal Pictures recently announced that it would make its latest movies available at home on the same day as their theatrical release. In doing so, Universal has finally broken the theatrical window—perhaps the last unbreakable rule in the movie industry. For $19.99, movie watchers will get a 48-hour rental starting with three Focus Feature titles and continuing with Trolls World Tour, which debuts on April 10th.
Is direct-to-download movie releases just a temporary change while we’re all stuck at home? Or is this a shift to a new norm? One could also argue that this simply accelerates a change already underway, as studios continue to experiment with profit maximization in a streaming world.
In our view, this is an acceleration of a change already underway, and that major blockbusters will still be released in theaters for the foreseeable future. The magic of the movie theater experience can’t be replicated at home. This truth supports demand from moviegoers that will eventually return. Regardless, the example of theatrical movie releases provides a helpful framework to consider the various changes we’re observing today.
A Framework for Analyzing Change
First, let’s devise a model for considering the duration (and thus the associated absolute impact of) various changes that will come about due to the shutdown we’ve just begun. I propose the following categories for assessing the duration of a given change:
1. Temporary Change
We don’t go to the bathroom any more today than we did a few weeks ago, but we stocked up on toilet paper for an anticipated shut down, causing a temporary spike in toilet paper sales. We may use the bathroom at home more frequently under quarantine than we used to when we were free to go to out, but the spike in sales is temporary. Temporary changes are measured in weeks or even months, but not years. These changes are the ones that profiteers jump on, not long-term investors. That said, temporary changes can still have disastrous even fatal impacts on a business.
Our lists don’t attempt to be exhaustive, but we consider the following observed changes to be temporary:
- Restaurant closings – If they can survive the shutdown with takeout food offerings, restaurants will eventually return to normal. If not, new restaurants will start up to meet consumer demand.
- Gym closings – Similarly, if gyms can survive with virtual classes and loyal members, gyms will fill up again.
- Manufacturing plant shutdowns – Manufacturing plants enjoy a relatively high variable cost model that will help them weather this storm. As an example, we outlined the case for Tesla’s production shutdown argue that, despite the temporary production shutdown, Tesla’s future is still bright. Read more here.
- Spike in sales of essential products – Groceries, including meal kits, paper products, and other essentials have seen a temporary spike in sales that will not sustain.
- Remote working – We see the sudden spike in remote working as temporary. Productivity is down, and this work-from-home period will be correlated with economic decline. So, there is a hidden headwind to this trend that will motivate employers to encourage employees back to their desks.
- Transportation – Subways and busses are empty. Uber drivers are transporting meals not people. As the spread of COVID-19 slows, people will return to Uber, Lyft, and even public transportation. The ramp will be slow but evident.
- Live sports and entertainment – The magic and energy of a live crowd is hard to match. Viewing parties offer a temporary solution, but The Tonight Show: At Home Edition without an audience just isn’t the same Jimmy Fallon. And college hoops reruns just aren’t March Madness.
2. Cultural Shift
Once-in-a-generation events like this one can cause wholesale cultural shifts that permanently change how people live, work, and play. Think of Depression-era kids that have grown old always eating everything on their plates. These examples are few and far between. Humans’ ability to adapt — and then forget — is powerful.
It’s hard to believe today but life will go back to normal. Our habits and practices around hygiene will change for a while, but we view nearly all of the changes that we see today as largely circumstantial, not fundamental.
3. Accelerated Change
Under new circumstances, we may see the value of an existing product more clearly. Online video streaming, digital learning tools, telemedicine—for each, the value proposition is more obvious today than it was a few weeks ago. The adoption curve is accelerated because users are forced to start something today that they likely would have adopted eventually.
We considering the following to be accelerated changes that were already underway:
- Digital learning tools – Education already lives online. For those teachers and students that have been slow to adopt, now is the time.
- Telemedicine – The convenience and safety of texting, calling, or video chatting with a doctor is so obviously superior in most use cases, the telemedicine trend will certainly accelerate during and after this pandemic.
- Digital health – Coronavirus has brought with it a heightened awareness for personal health and wellness. Wearables like the Apple Watch that help us understand our own health now have a more obvious value proposition.
- Ecommerce – At just 10% of all US retail, ecommerce is still nascent. People are using ecommerce in new ways during this shutdown, which will create new habits and accelerate the trend toward buying goods online.
- Grocery and prepared food delivery – Online delivery of groceries and prepared food under index overall ecommerce, leaving even more room for growth. Uber Eats, Door Dash, Instacart and others will see new and long-lasting demand.
- Retail closings – As more goods are bought online, the trend of large retailers closing their doors will also accelerate.
- Esports and streaming content – Consumers are enjoying content in new and different ways while they are staying at home. Twitch, Netflix, and YouTube usage has spiked, but will eventually stabilize at a higher level than before.
A Word on Community
How will our collective understanding of community change? Temporarily, there’s a fear of the other as we pass each other at the grocery store, or a gloved hand delivers takeout. But a smile changes that feeling and reminds us of the human connection that we share.
Loneliness is an epidemic that preceded the COVID-19 pandemic. There is a grim outlook that would suggest it will accelerate under these all too isolating conditions. A more optimistic outlook suggests that we’re learning the cost of loneliness the hard way. Perhaps that tide turns toward a collective gratitude for each other, a new understanding of the value our relationships bring to our lives.
Much has changed temporarily, and not much will change permanently, but here’s to hoping that we’re learning just how much we matter to one another. I can’t think of a more powerful cultural shift.