Five Industries that Will Dramatically Change as a Result of COVID-19

Five Industries that Will Dramatically Change as a Result of COVID-19

We are now in the midst of a prolonged pandemic with no end in sight. Not only has this pandemic led to a deep economic recession, but it is dramatically changing the economic landscape. As an economist, I foresee major transformations of business models in various industries because of COVID-19. A key reason for this is consumers and businesses have learned how to operate effectively amidst a pandemic and that learning will carry over even once COVID-19 ends. Indeed, despite the challenging economic times we are living in, the U.S. economy has shown amazing resilience as businesses have adapted to changing conditions and people have learned to work online, educate online, shop online, be entertained online and socialize online. 

In this article, I discuss five industries where I expect to see rather dramatic changes in business models going forward. While these industries are some of the hardest hit by the pandemic, they also present the most exciting entrepreneurial opportunities since there is a great deal of uncertainty regarding the longer-term impact of the COVID-19 recession in these industries.

1. Travel and Hospitality – One of the hardest hit sectors by COVID-19 involves travel and hospitality. Airlines have experienced a dramatic reduction in passenger traffic and have been forced to reduce the number of flights while laying off numerous employees. Hotels have experienced unusually low occupancy rates, correspondingly low revenues and have downsized their workforce. Resort destinations like Las Vegas, Orlando and numerous beach destinations have experienced dramatic declines in tourist traffic as Americans have substantially reduced their travel. And the cruise line industry has simply been decimated by COVID-19. Improved safety measures have helped the travel and hospitality industry and will need to stay in place as Americans gradually become comfortable renewing their historical travel patterns.

Indeed, the stock prices for large hotel chains such as Hilton and Marriot have recovered a significant part of their price erosion in recent months. But the impact on this industry is likely to extend well beyond the end of this COVID-19 recession in part because of the length of this pandemic and the potential for other future pandemics and other potential adverse events. There is no doubt this will force accelerated consolidation in the various travel and hospitality business sectors, which will lead to greater dominance by the market leaders such as the major hotel chains and larger airlines. But the interesting economic question is what other winners will rise from the ashes? 

Who Will Rise Above?

Online travel planning is obviously a key player which will continue to displace travel agencies. But I also predict that the movement towards non-hotel lodging, such as Airbnb and VRBO, will accelerate. No doubt this is a trend that has already been in the works – it has been estimated that Airbnb’s market capitalization is greater than the largest worldwide hotel chain, Marriott International. But I suggest this shift will accelerate as people shy away from the large crowds that assemble at hotels in favor of smaller more intimate alternatives. Similarly, I suggest that there will be a sustained drop in travel involving crowds via planes, trains and buses, and a corresponding increase in travel via automobiles. We will see how it all plays out but COVID-19 will undoubtedly lead to major changes in the travel and hospitality industry!

2. Sports and Entertainment – Perhaps no industry has been more impacted by the pandemic than sports and entertainment. Movie theaters have been closed for extended periods of time. Concert venues are empty. Major sports are slowly restarting but without fans (or with very little) in attendance at local stadiums. Meanwhile, the movement toward at-home and online entertainment is accelerating. While it is difficult to predict what will happen after COVID-19 passes, certain business models are clearly under transformation. Most notably, the traditional Hollywood business model which has historically heavily relied on box office sales to support movies will need to be altered. At home-streaming has gradually been replacing box office visits as the movie theater is being replaced by the home theatre – COVID-19 will only serve to accelerate this shift.

Football vs Golf

The days of movie theatres are likely to be gone, or at least substantially diminished in their importance, but the outcome with respect to sports is trickier – in part because of the great enthusiasm that Americans have for team sports such as football, basketball and baseball. These sports are returning but, without large crowds in attendance, they may lose their luster. Indeed, the Los Angeles area just opened the NFL’s latest state-of-the art football stadium which was built for a whopping $5 billion and hosts both the Rams and the Chargers — yet for the moment that stadium sits largely empty during game day!  In contrast to team sports, COVID-19 has been more accommodating to sports such as golf, tennis and auto racing. In fact, golf ratings have reached all-time highs during this pandemic. Overall, while Americans’ passion for sports will no doubt remain high post COVID-19, the lingering effects of experiencing this pandemic may lead many to eschew attending crowded sporting events in favor of other forms of entertainment.

3. Apparel – Even prior to COVID-19, department stores and upscale clothing retailers were struggling amidst the expansion of clothing sales both online and at clothing discount chains. For example, e-commerce accounted for an estimated 20% of total fashion sales in 2018. However, unlike in other industry categories, online fashion sales are not increasing, but are declining because overall fashion sales (both in-store and online) have experienced a significant drop-off in demand during COVID-19. As a result, various department stores and clothing specialty retailers are struggling to weather the pandemic. JCPenney and Neiman Marcus have closed hundreds of stores and have declared bankruptcy. The same is true for national clothing store chains such as Brooks Brothers, Ann Taylor, Lane Bryant, J.Crew and Men’s Warehouse.


The Hidden Costs of Manufacturing Abroad

In the meantime, clothing manufacturers are being stuck with huge amounts of excess inventory, including fashion that is going out of season. All of this is leading to a potentially fundamental redesign of the traditional fashion model that currently involves manufacturing large amounts of supply abroad well in advance of demand. A continued expansion of e-commerce will no doubt be a key part of the changing business models, but the current oversupply will likely cause many fashion companies to rethink their approach to business – potentially shifting to alternatives such as just-in-time manufacturing. While it is supposedly much cheaper to manufacture clothes abroad, the pandemic is exposing the hidden cost of doing so. As a result, it is conceivable that some apparel manufacturing may relocate back to the U.S. Regardless, the traditional fashion business models will need to better match supply with demand in order to avoid future supply gluts such as this one.

4. Education – Across the U.S. and elsewhere, teachers and students at all levels (grade school to college) have been forced to create online learning environments. It has been estimated that over 1.2 billion students globally are now learning out of the classroom. This, in turn, is forcing our educational systems to confront a fundamental issue: online learning has potential advantages over in-person learning. This is not to say that you can replace the effectiveness that many of us experience by learning in-person. But online learning has been shown by some studies to increase retention rates, particularly for older students, such as teenagers and adults. Online learning can also be much more convenient and time efficient compared to in-person learning. This prolonged pandemic is now vastly expanding the online learning environment so the advantages and disadvantages of online learning will likely be exposed even further. Some observers are suggesting that what will likely emerge is a hybrid model that combines in-person and online learning. Regardless, this pandemic may well be the trigger that revolutionizes education for the future.

5. Real Estate – Real estate is another industry that is likely to be dramatically transformed as a result of COVID-19. While the recession has hurt the residential and commercial real estate markets in many geographic areas in the short-run, the more interesting economic question is what will happen after COVID-19 ends? I believe that COVID-19 will lead to major changes in the value of real estate properties – with some experiencing substantial appreciation while others experience substantial depreciation. One key learning from the current pandemic is that many businesses have been able to operate effectively with their employees working remotely. As a result, businesses post-pandemic will likely rethink their commercial real estate choices while employees rethink their residential real estate choices. After all, why do certain businesses need to carry high real estate costs when their employees can work as effectively in the comfort of their homes? And why do employees want to bother commuting into the office if they can work as effectively at home?

COVID-19 will also impact geographic locational choices, likely leading to an even more accelerated movement away from areas hit hardest by the pandemic, including dense urban living environments. Commercial real estate in certain key categories such as retail, hospitality and office may experience a sustained decline in values as a result of COVID-19. And residential real estate may again experience sizable appreciation as people place greater value on their homes because they are spending much more time there. 

Another industry impacted by COVID-19 is the retail sector. For more on details, check out my previous blog post – The Changing Competitive Landscape Due to COVID-19: The Impact on the Retail Sector.

Five Industries that Will Dramatically Change as a Result of COVID-19

The Changing Competitive Landscape Due to COVID-19: The Impact on the Retail Sector

The now prolonged COVID-19 pandemic is hitting the U.S. and global economy hard. U.S. GDP in the second quarter of this year fell a whopping 9.5%! And the unemployment rate remains above 10%, though it has improved in recent months. While the economy has recently been improving, the prospect of a prolonged pandemic raises serious economic concerns in the U.S. and around the world.

However, this pandemic also raises business opportunities as entrepreneurs attempt to anticipate the changing competitive landscape due to the new reality of living in a pandemic-prone economy. I have studied numerous industries for 30 years now and am fascinated as to how rapidly our free market economy adapts to economic challenges such as the current pandemic.

In this article, I focus on one of the business sectors which I have studied extensively, and which has been deeply impacted by the COVID recession: the retail sector. I discuss some of the current challenges but, more importantly, future business opportunities in this industry.

Pandemic Winners and Losers

The retail landscape has dramatically changed since I grew up in the 1970s. At that time, most retail shopping took place at local strip shopping centers with mom and pop retailers and large indoor shopping malls. But today, indoor shopping malls are dying in favor of outdoor lifestyle centers where you can shop, dine and be entertained. And while some mom and pop retailers have survived, the retail sector is largely dominated by large mass merchandisers (e.g., Walmart), big box retailers (e.g., Best Buy), clubs (e.g., Costco) and internet retailers (e.g., Amazon). 

What can we expect to see in the retail sector amidst COVID-19 and other potential future pandemics? Well, the simple answer is “more of the same” only at an even more accelerated fashion. This is because those retailers who have best weathered the COVID recession are the same ones that have been gaining the most ground in recent decades. 

One obvious beneficiary of the pandemic is e-commerce. In Q2 2020, Amazon’s revenue rose 40% over the same quarter last year and its net income doubled! Not surprisingly, Amazon’s stock price has increased by more than 50% since April. 

Certain specialty e-commerce retailers have done even better than Amazon. For example, Wayfair’s stock price was under $30 in March and now it is over $300 – a greater than tenfold increase! Overstock has experienced a similarly dramatic increase in its stock price. And many other firms in the e-commerce sector have gained substantially as well including eBay and Chewy. This trend fares well not only for large e-commerce retailers but also for many smaller online retailers that, for example, make use of Amazon’s business model. Indeed, the new mom and pop business model in a pandemic-prone economy may well be made up largely of small specialized e-commerce retailers!

Another big retail beneficiary from the pandemic are the mass merchandisers and club stores. In large part due to their size and breadth of product offering, Walmart and Target stores were able to stay open during the pandemic, allowing them to gain sales from other retailers who were forced to close or shift to curbside only sales. Both Walmart and Target also substantially benefited from their substantial online presence, which facilitated the ability of shoppers to order their products online and pick them up at the store. Similarly, Costco and Sam’s Club have also gained ground during this pandemic. Clearly, living in a pandemic-prone economy will only strengthen the retail positions of Walmart, Target, and the club stores.

Many big box retailers have also done well amidst the pandemic. For example, Best Buy’s stock recently hit an all-time high despite the fact that it shifted to only curbside offerings in the spring. This is because Best Buy was able to keep sales relatively high (in large part due to people ordering online and picking up at the store) while cutting costs. Other big box retailers have also fared well, particularly Home Depot and Lowes, as many people have shifted their focus to home projects amidst the pandemic. And even the office superstores (e.g., Staples) and pet superstores (e.g., PetSmart) are sustaining themselves through the pandemic.

So, all of this begs the question, if the mass merchandisers, big box retailers, clubs and e-commerce retailers are doing well, which retailers are being hurt by the pandemic? Well, the answer is, pretty much everyone else. You just need to take a look at the relatively empty large shopping malls and strip centers and there is your answer. Department stores like JC Penney and Neiman Marcus have closed hundreds of stores and have declared bankruptcy. The same is true for national clothing store chains such as Brooks Brothers, Ann Taylor, Lane Bryant, J.Crew and Men’s Warehouse. And many other national and regional retailers that are typically located in large shopping malls and strip centers have also followed suit including Pier 1 Imports, Modell’s and GNC. 

In addition, the available information indicates the smaller mom and pop retailers are struggling with reduced sales, though these smaller businesses have shown amazing resiliency and have adapted to the economic challenges of the pandemic. Many of those smaller retailers that have survived are doing so by offering curbside-service, reduced business hours and expansion of their online offerings.

The Future of Retail in a Pandemic Prone Economy

What does this tell us about the future of retail? It tells us several things:

  • First, and most obviously, the movement towards e-commerce retail will accelerate including not only Amazon but also other online retailers such as Walmart and specialty online retailers. 
  • Second, large multi-product retailers such as Amazon, Walmart and Target will continue to dominate the retail landscape for the foreseeable future. 
  • Third, the movement towards retailers with a combination of strong brick & mortar and e-commerce operations will accelerate. 
  • Fourth, both small mom and pop specialty retailers and specialty retail chains that tend to locate in strip malls and large shopping malls will need to significantly change their business models. This the area of the greatest challenge but also with the greatest entrepreneurial opportunities. 

Here are some of the changes that will need to be made for these latter businesses to continue to compete:

  • E-Commerce – Most obviously, specialty brick & mortar retailers will need to expand their presence in e-commerce. This will be particularly challenging but necessary for smaller mom and pop retailers who will need to expand the prevalence of online order and curbside pickup in a pandemic-prone economy. This suggests an expansion of e-commerce platforms that will facilitate the ability of online retailer ordering and pickup (or delivery) for small businesses. 
  • Space – Specialty retailers have historically operated in relatively small retail spaces (e.g., 2000 square feet) with narrow aisles and limited outdoor space. These retailers will need to shift to larger footprints, including more outdoor space, to better accommodate pandemic spacing requirements and curbside pickup services.
  • Prices – Greater spacing will likely translate into higher prices which will in turn alter the attractiveness of retail options for consumers. Specialty retailers will need to revisit their pricing strategies and focus on products that will remain attractive to customers at heightened price levels, particularly in comparison with mass merchandisers and internet retailers. Consumers may be willing to pay a heighted price premium for a prom dress or pair of Ray-Ban sunglasses, but much less so for a best-selling book or a pair of tennis shoes. [Note: bookstores and shoe retailers have been particularly hard hit by the pandemic.]
  • Selection – Specialty retailers have typically focused on a narrow selection of products and services but the shift towards larger space environments is likely to be also associated with combining multiple products and services under one roof. Some larger retailers already include smaller retailers within their footprint (e.g., Walmart). This trend towards combined product and service retail operations under one roof will likely expand in a pandemic prone economy.

Final Thoughts

Overall, the retail landscape will go through significant economic changes as we move forward amidst COVID-19. And, while the future is challenging, particularly for specialty retailers and mom and pop operations, there are great business opportunities for those retailers who can weather the pandemic storm and adapt to the new reality of conducting business in a pandemic-prone economy!

Five Industries that Will Dramatically Change as a Result of COVID-19

The Economic Impact of COVID-19: The Plight of Small Businesses

COVID-19 is dramatically changing the economic landscape. Some industries are faring well while others are being devastated by the pandemic. Businesses are rapidly adapting to the demands and peculiarities of living within the constraints of a pandemic. Of particular concern to me is the plight of small businesses. In many ways, small businesses are the lifeblood of the American economy. Indeed, before COVID-19, various studies found that small businesses accounted for about 50% of private-sector jobs. Moreover, Americans highly value their right to start a small business – be it a local restaurant, a small retail shop, or an online business. 

But small businesses historically have been adversely impacted by recessions in part because many small businesses operate on limited cash flow. This begs the question: how are small businesses enduring this now prolonged impact of COVID-19?

When COVID-19 began in the spring and many states shut down or substantially reduced various business services, it was clear that small businesses were skeptical they could survive a prolonged pandemic. For example, in an April 2020 survey of 5,850 small businesses across the country, Main Street America found that 75% of respondents reported that their business revenues had declined by more than half. And 66% of respondents predicted their business would be at risk of closing if the economic impact of the pandemic continued for 3 to 5 months. 

Now we are more than five months into this pandemic and there appears to be no end in sight. Indeed, it appears that many states are pausing their re-openings while others are re-imposing restrictions they had lifted earlier. This would seem to have dire consequences for small businesses. But not so fast…

Despite the prolonged pandemic, it appears that small businesses are resiliently adapting to the changing economy and increasingly have reason to be optimistic. In late July, the U.S. Chamber of Commerce conducted a survey of the small business impact from COVID-19. The survey found that while 23% of the small businesses surveyed had temporarily closed in late May, 86% reported that as of July they were either fully (52%) or partially (34%) open. And there was a general finding of cautious optimism regarding the future of small businesses. 

This sense of cautious optimism is the result of several factors. For one thing, the small business subsidies by the government appear to have helped to sustain them through the roughest part of the current COVID-19 recession. And certain industries are actually growing or, at least, sustaining themselves despite the pandemic. For example, e-commerce retail is growing and expected to thrive in the future — and a lot of small businesses heavily rely on e-commerce. More generally, the economy seems to be slowly recovering from the pandemic. For example, recent unemployment figures show the U.S. unemployment rate at 11.1% in June which is down from 14.7% in April.

We are obviously far from being out of the woods in terms of small businesses withstanding this pandemic. Many small businesses remain concerned about having to permanently close if the pandemic continues for a prolonged period of time. And there are recognized limits to the ability of the government to continue to subsidize small businesses under a prolonged recession. There is also concern about a second wave of the pandemic hitting in the fall or winter. 

Moreover, certain industries and certain types of small businesses have been particularly hard hit by the pandemic. Studies have found that small businesses in certain geographic areas have been strongly hit by the economic impact of the pandemic, including those in more densely populated cities. And most studies have found that minority-owned small businesses have been particularly hard hit by COVID-19. In addition, studies estimate that many of the hardest-hit industries will not likely return to the levels of business that existed pre-COVID-19 for at least 5 years. This includes industries which involve a lot of small businesses such as restaurants, hospitality, retail and education. Finally, new business start-ups have also fallen dramatically since the spring – a trend that needs to substantially change for our economy to recover from this pandemic!

Despite all these challenges, it appears that small businesses are rapidly adapting to the new normal of running a business amidst a pandemic. Locally-owned restaurants have added curbside pickup and are gradually expanding the to-go portion of their business. Local retailers are also now frequently offering curbside pickup in addition to adjusting their hours, limiting the number of customers, and even offering special hours for their most vulnerable customers. Various small businesses are substantially expanding their online offerings. Small business manufacturers are adjusting their work environments to allow for appropriate social distancing through the creation of manufacturing pods. Small businesses generally are greatly expanding their work-at-home options and related support capabilities. And at least some new small business opportunities are being created amidst this pandemic – note the advent of COVID-19 disinfection services! 

It is difficult to say what lies ahead for small businesses given the rapidly expanding number of COVID-19 cases in the U.S. and the associated burden it is creating on our healthcare system. But it appears that many small businesses are adapting to what now appears to be a pandemic prone economy. Ultimately, I remain eternally optimistic that our small businesses will withstand this pandemic — and other economic crises that may come our way in the future — and continue to be the lifeblood of the U.S. economy.

Pay For Delay Debate Post Actavis Decision

Pay For Delay Debate Post Actavis Decision

Since the Supreme Court’s decision in Actavis (2013), there have been many “pay for delay” class action suits with a wide variety of legal outcomes.  Given the emphasis in the Actavis decision on the size of the reverse payment, many Court decisions in this area have involved how to evaluate the relationship between the type and size of “reverse payment” and the implications for liability, anticompetitive effects and antitrust injury.  What type of payment (e.g., only cash) is necessary to meet the Actavis standard?  What size of payment is necessary to infer a likelihood of anticompetitive effects?  What type of analyses and weight should be given to procompetitive explanations of “reverse payments”?

I grappled with these same issues during my six plus years analyzing “pay for delay” cases as an economist working at the Federal Trade Commission.  I was fortunate enough to be part of the FTC team that developed the Commission’s policy in this area and the appropriate economic and financial tools that could be used to analyze the likely competitive effects associated with certain types and sizes of “reverse payments.”  These same economic and financial tools can also be of great assistance to legal practitioners currently working on “pay for delay” cases.

For example, standard and well accepted financial techniques, such as net present value, can be used to evaluate the relationship between the size of the payment and the length of time that the generic firm is incentivized to delay its entry.  This type of analysis generally shows that relatively small “reverse payments” (e.g., in the millions) can be used to incentivize a generic firm to be willing to substantially delay its entry (e.g., more than six months).  Also, not surprisingly, this relationship applies regardless of if the form of “reverse payment” is cash or some other type of compensation such as what is commonly referred to as a “No AG” provisions.  However, the actual relationship between size of payment and incentive to delay depends on various factors such as market growth and the relevant discount rate.  Careful evaluation of these market factors is crucial towards developing a reliable economic model that can be used to not only support a finding of liability and antitrust injury, but also form a basis for measuring damages and evaluating common impact.