World Reimagined

How the Pandemic Irreversibly Forced Digital Acceleration

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When we look back on 2020, there will be several notable items that jump out from the record books. The COVID-19 pandemic and its impact on the global economy will likely be at the top of the list, as will the pull-forward in digital transformation that ensued as people adjusted how they worked, lived, and played.

Pain points tend to give way to solutions, and given the number of pain points that emerged as a result of the pandemic, we have seen digital solutions come about in part to solve consumers’ needs.

With the deployment of new connective technologies such as 5G and gigabit fiber bringing greater data speeds and network capacity as well as lower latency compared to existing networks, there will be no putting the digital genie back in the bottle.

In late January 2020, China’s Wuhan province went into a state of lockdown to slow the spread of the coronavirus. Soon after, the World Health Organization (WHO) declared a COVID-19 pandemic. Shelter in place orders and travel bans accelerated the sea change of digital interaction, which was already changing our daily lives.

The shift to work from home (WFH), as well as the desire to communicate with family and loved ones, fostered the adoption of video communication like those offered by Zoom Video Technologies (ZM), Microsoft’s (MSFT) Teams and Skype, and Cisco’s (CSCO) WebEx.

WFH also drove the adoption of cloud-based tools offered by Dropbox (DBX) and e-signature solution company DocuSign (DOCU), which reported adding 88,000 new customers during its July quarter.

Shelter in place and the pandemic restrictions brought havoc to the movie box office as theaters closed and film debuts were pushed back. In addition, live music, conferences, and other events were canceled. The thirst for content led to a surge in consumers using video streaming services from the likes of Apple (AAPL), Walt Disney (DIS), Netflix (NFLX), and others.

During the first nine months of 2020, Netflix added 28 million paid members globally, bringing its total to more than 195 million. Disney+ exited the June quarter with just over 60 million subscribers, more than doubling from the 26.5 million exiting 2019.

Travel curbs and social distancing brought theme parks and casino gaming to a standstill, while video-game consumption and online gambling exploded. Microsoft saw record subscriber growth at Xbox Game Pass during the June quarter, and the casino company Golden Nugget reported a 78% year over year increase in its online gaming during its June quarter.

In our view, the timing for the launch of cloud-based and subscription gaming offerings from Apple, Google (GOOGL), Amazon (AMZN), and Microsoft could not have been better.

The pandemic changed other aspects of our daily lives, including how we shop for groceries and other everyday items. During April and May, grocery chain Kroger (KR) reported a triple-digit increase in its digital business, which led to a 92% year over year increase in revenue.

In the second quarter of 2020, Walmart (WMT) reported a 97% year-over-year increase in its e-commerce business while Target’s (TGT) digital comps for the quarter rose by nearly 200%. Costco Wholesale’s (COST) e-commerce business posted a 64.5% positive comparison for the company’s May quarter, which strengthened to a 90.6% year over year increase during its August quarter.

Digital grocery orders and deliveries also exploded during the first half of 2020, which led Instacart to hire 300,000 “full-service shoppers” during the first few months of the year and soon thereafter another 250,000. For context, before the pandemic, Instacart had roughly 200,00 full-service shoppers.

Initially, during the pandemic, consumers ate at home as they sheltered in place. Over time, as local, regional and national restaurants ramped up their digital ordering, expanded order ahead and curbside pickup, and inked deals with delivery companies such as Uber’s (UBER) Uber Eats, Door Dash, Postmates, and others, their businesses began to ameliorate the effects of in-person dining as consumer re-embraced food to go.

When it recently reported its September quarter results, Chipotle Mexican Grill (CMG) shared its digital sales grew 202% year over year to $776 million, accounting for roughly 49% of the quarter’s sales. Chipotle Chairman and CEO Brian Niccol said that the company will continue to use its digital business as “an acquisition tool for people to come into the business.”

We would point out this shift to digital ordering has occurred across the globe as evidenced by comments from McDonald’s (MCD) about seeing higher digital ordering in China, Japan, and the UK, during the Evercore ISI Virtual Consumer & Retail Summit in June.

There are other examples of how the pandemic is changing the way we shop, such as the shift to digital car-buying that is propelling business at Carvana (CVNA), while homebuyers have turned to digital services like those from Zillow Group (Z). The closure of gyms and athletic clubs led to the adoption of digital workouts and classes, which not only spurred on Peloton’s (PTON) Connected Fitness subscription base but also Apple's Fitness+ offering.

To help put some context and perspective around this pronounced shift to digital, here are some metrics. Speaking at a recent conference, AT&T (T) shared that during the month of April it noted that WiFi calling was up over 100% on its network; texting increased over 50% in April vs. February, and noted such increases have usually unfolded over three years, not a single month. IP traffic on its network was up 20% to roughly 400 petabytes per day; and roughly 60% of its traffic moved to video.

Again, that was in April and we suspect the network traffic at AT&T and other mobile network and broadband providers continued to grow as consumers and businesses embraced digital solutions.

Like switching from a mobile phone to a smartphone, there is no putting the digital genie back into the bottle. Why has Amazon been so successful in winning over consumers with Prime? By combining digital ordering on almost any device with two days if not next day delivery and easy returns, Amazon removed the friction from shopping.

As a result of the pandemic, friction is being reduced across other aspects of our work, play, and home lives. Newer connective technologies will not only foster that acceptance but enable new applications, such as augmented and virtual reality, and artificial intelligence that will only further accelerate the adoption.

Companies that choose to forego altering their business model to meet these changing preferences are likely to resemble those retailers that ignored the rise of digital shopping in favor of their physical storefront.

By making the physical world more dangerous and reducing our ability to physically interact, the pandemic accelerated the shift into the virtual/digital world. Change that would have otherwise occurred over years took place nearly overnight and there is no going back, even when this pandemic is just a nightmarish memory.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Chris Versace

Christopher (Chris) Versace is the Chief Investment Officer and thematic strategist at Tematica Research. The proprietary thematic investing framework that he’s developed over the last decade leverages changing economic, demographic, psychographic and technology landscapes to identify pronounced, multi-year structural changes. This framework sits at the heart of Tematica’s investment themes and indices and builds on his more than 25 years analyzing industries, companies and their business models as well as financial statements. Versace is the co-author of “Cocktail Investing: Distilling Everyday Noise into Clear Investing Signals” and hosts the Thematic Signals podcast. He is also an Assistant Professor at NJCU School of Business, where he developed the NJCU New Jersey 50 Index.

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Lenore Elle Hawkins

Lenore Elle Hawkins has, for over a decade, served as a founding partner of Calit Advisors, a boutique advisory firm specializing in mergers and acquisitions, private capital raise, and corporate finance with offices in Italy, Ireland, and California. She has previously served as the Chief Macro Strategist for Tematica Research, which primarily develops indices for Exchange Traded Products, co-authored the book Cocktail Investing, and is a regular guest on a variety of national and international investing-oriented television programs. She holds a degree in Mathematics and Economics from Claremont McKenna College, an MBA in Finance from the Anderson School at UCLA and is a member of the Mont Pelerin Society.

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