Newsletter by Mary Buffett
Right now, we are in the thick of a terrible pandemic that seems like it will never leave. The economy is stuck somewhere between first gear and reverse. Every time somebody tries to force a reopening, another COVID-19 spike reappears. As I print this, roughly 1,000 people are dying daily from COVID-19 and conservative projections will have 300,000 dead Americans by the middle of December. Millions are unemployed and whole sections of the economy have flatlined.
However, there will come a time when the clouds will lift. A vaccine will emerge that either stops the virus in its tracks or minimizes its deadly symptomatology. The economy will begin to recover, first in an uneven fashion until it finds its pre-COVID-19 footing. At some point, this Lost Year of 2020 will finally be in our rear view mirror.
But I think The New Normal will be very, very different.
The long-term impact of the COVID-19 pandemic is that it will transform and realign the American retail and service economy. It will be a difference unlike any of the past crises that Americans have ever experienced.
After the planes crashed into the Twin Towers on 9/11, some said that the aftermath would transform the American landscape. We were supposed to grow closer as a society; we lionized first responders who put their lives on the line. We placed a special emphasis on our loved ones because other families would forever experience an empty chair during the holidays and other important family gatherings. Some even suggested that the terrible experience would allow us to evolve into a higher place.
Next year will mark the 20th anniversary of that terrible time, but the changes in our post 9/11 world have been more regulatory than societal. After 9/11, it took longer to board a plane and we accepted longer lines; we obediently took off our shoes and belts at airports. It also took longer to open up a checking account because of Patriot Act legislation. Companies were now under greater scrutiny when it came to Anti-Money Laundering regulations and “Know Your Customer” (KYC) requirements.
The initial economic shock to the economy after 9/11 was focused on those initial weeks after the attacks when the government shut down the entire transportation grid. While the 9/11 economy went into a slowdown—which was more pronounced in the Greater New York area—the economy began to bounce back in time for the 2004 presidential election.
However, the economic impact of COVID-19 is far more damaging than 9/11 because we are now in the 6th month of an economy that is stuck. Things are made worse because of continual governmental fumbling; where other countries have flattened the curve, Americans are experiencing roughly 40,000 new cases of COVID-19 on a daily basis.
As a result, Americans are establishing new and enduring habits that will have long-lasting consequences.
What we are seeing is the centralization of retail spending behavior in a small series of globalized brands that have the financial wherewithal to sustain themselves (and even grow), while others will fall by the wayside. Brands like Amazon, Home Depot, Netflix, Zoom, and Walmart have seen substantial growth, with Amazon up 29% in their Q2 numbers.
These brands have served as “General Stores” for Americans as we have navigated through these surreal times. It was easier to hit the “Re-Order” button on Amazon and have the items directly sent to your homes than to risk going shopping. A nation going “stir crazy” would binge on anything that Netflix had to offer. Family members with decent Wi-Fi could watch their own content without any need to share the larger big screen. The emergence of Zoom might have a lasting disruption on the airline industry because people are getting used to sitting in front of their laptops rather than lugging them through airport after airport.
Meanwhile, this pandemic has shaken traditional American retailing to its knees. Long tenured American blue-chip retailers Lord & Taylor, JC Penney, Pier One, Brooks Brothers, and Neiman Marcus are in some form of bankruptcy reorganization or outright liquidation. Some brands that were struggling before the pandemic took hold were always able to find a way to muddle through until the next recovery came—until now. Stores are closing, jobs are lost, and brand names that once graced our closets and homes will soon fade into the nostalgic past.
However, smaller Main Street businesses, even with federal help, will take a harder hit from the pandemic. Most are not as capitalized and lack the marketing heft of their national competitors. This is especially true within restaurants. Those who remain are trying to survive with a combination of takeout or curbside service. Many have begun to reopen with tented outdoor dining, but those who live in the colder parts of the country will discover that few will venture outside when there is a foot of snow on the ground.
There are other parts of the hidden service economy that grinds to a halt in these times, too. Once the belt is tightened or the layoffs begin, the needs for gardeners, housecleaners, and all of these other household helpmates will often disappear in an instant.
However, like I said at the earlier part of this piece, we will emerge this pandemic and the sun will appear again. So, what will the world look like?
Consumer spending drives 65% of our national economy. Americans will continue to buy stuff, but they will just do it differently. Because we remained under a form of partial quarantine over the past 6 months, new habits have emerged that will stay with us for the longer term.
There will be a further acceleration of online reordering for commonly used household items; the “replenishment” technology has been there for a while, but there are now higher customer adoption rates as seen over the past 6 months. It is only a matter of time before Amazon’s auto-replenishment models service American homes in the same way they manage business inventory levels.
Retail will rebound but it will be different. This crisis has forced retailers to aggressively review their square footage needs which may enable them to drive more auto-replenish traffic to their websites, allowing them to manage down their fixed labor and real estate costs. We will experience a near term glut of available retail space, and it will only drive the final nail into these large suburban malls that were built in the 1970s and 1980s.
Restaurants will inevitably rebound too, but only after a period of prolonged and sustained closures because most independent locations are too undercapitalized to operate at 50% levels for too long. However, once the cloud lifts, there might actually be an unlikely renaissance in independent dining. What shuttered so many urban restaurants in the past 5 years was not the rise in labor costs or the changing tastes of the American diner, but landlords who jacked up their rents to untenable levels. This was repeated again and again and many restaurants that did not own their building either left for cheaper rent or simply closed up shop. A glut of storefront square footage has already driven down rents and we are starting to see it in places like San Francisco and New York.
Finally, how will we change as we move through this difficult period of a deadly pandemic combined with deepening national unrest? Will these lessons sear themselves into our collective consciousness? Those who grew up during the Great Depression and World War II—the Greatest Generation—were engrained with thrift and prudence. Or will we fall back into our old habits of short-term enjoyment?
Only time will tell. Until then, be safe.