May 14, 2021
The 3 big winners from the year of revenge spending

In our Investment Strategy Note we take a look at the ‘revenge spending’ that is set to be unleashed this year as economies reopen and excess savings are put to work, including what areas are likely to be the winners.

Covid-19 has been a painful story with billions of dollars of retail sales forgone as lockdowns and social distancing rules slashed foot traffic and disrupted consumers’ usual routines.

But now economies are set to gradually reopen through 2021, and consumers will unlock their pent-up demand. We are about to witness a surge in ‘revenge spending’ the likes of which we have never seen before.

The businesses that are set to benefit from this revenge spending could be some of the biggest investment winners in the next few years, while those missing out on the recovery could seriously underperform.

Super savers

Businesses have a rightful reason to be excited at the prospect of a post-pandemic spending spree. To understand the power of this force, one must first appreciate the magnitude of lost potential consumption during Covid-19.

With few opportunities to spend their money, savings ballooned through 2020. Households globally are estimated to have stockpiled US$5.4 trillion of cash. The biggest increases in savings were seen in countries where the shutdowns have been most severe, particularly the UK.

The savings rate in Australia has not jumped as high, which makes sense given we have not faced as severe lockdowns. The spike is still significant, though, and represents a marked change from the almost non-existent level of savings that Australians sat with before the crisis (see right hand chart).


The 3 winners

With consumers in the developed world now itching to return to their pre-COVID ways (see left hand chart above), the question is: how will this mountain of cash be spent?

It seems unfair, but we suspect that the consumption recovery over the next year will not be evenly spread. There will be winners and losers.

Many of the businesses which felt the brunt of COVID restrictions will return to life. Others may not.

The pandemic has changed the way people shop. Consumers have accelerated their shift to new technologies and re-evaluated their priorities in life.

There will be 3 big structural winners through the economic recovery: online retailing, sustainability, and health.

1. Online retailing

Online shopping in Australia has surged from 7% in 2019 to 11% of all sales. This trend is likely to continue, even as brick-and-mortar stores open their doors again.

Besides food, online retail has made even more significant gains. It now accounts for almost 20% of sales – double what it was two years ago.

In many cases, e-commerce through 2020 offset slower parts of many businesses, which led them to rethink their business models and invest further in their e-commerce abilities for the coming years. Key Australian small/mid cap examples here include Adairs (ASX:ADH), the omnichannel manchester and homewares retailer, and Super Retail Group (ASX:SUL), the owner of the Supercheap Auto, Rebel, BCF and Macpac brands.

2. Sustainability

Consumers have also surprised with how rapidly they have embraced sustainability issues during the pandemic. With Covid-19 disrupting work routines and increasing financial stress, we may have expected our ethical and environmental concerns could be forgotten when shopping.

However, various reports show that the opposite is true. Covid-19 has actually focused consumers’ minds on helping to create a better, healthier world. A global study by market research firm Ipsos Mori, found 65% of respondents agreed “that it is vital that climate change is prioritised in the economic recovery after coronavirus”.

3. Health

Similarly, people have said that from now on they will aim to boost their physical immunity through adopting more healthy lifestyles. Already on an upward curve even before the outbreak, markets for exercise, wellness, nutrition, and product safety will continue to thrive.

One-off wonders

There will also be pockets of the economy in the nearer term that receive concentrated ‘one-off’ boosts as consumers celebrate reopenings and spend stimulus checks (see chart below from recent survey of US consumers).

Use of Stimulus Checks in 2021 vs 2020

Source: Citi Research

Restaurant bookings and cinema attendance are still below normal, but they will continue improving sharply as 2021 progresses. Indeed, in some American states, it appears as if a ‘carnival atmosphere’ of sorts has already set in, with discretionary foot traffic and restaurant bookings eclipsing pre-pandemic levels.

Travel for leisure purposes, spending on live entertainment and in-person education will also revert closer to pre-Covid trends, albeit with modifications.

And with interest rates staying low and people wanting to ‘home nest’ and relocate to less populated areas, anything housing related will remain hot for a while longer. This will drive demand for home furnishing, electronics, gym equipment and renovations.

A fruitful time

Clearly the pandemic will continue affecting sectors and companies in very different ways. Some businesses are achieving their best ever results, while others are teetering on the verge of insolvency.

In aggregate, however, the next year should be a very fruitful time for consumer related businesses. We continue to advocate for those businesses that have seen COVID-19 accelerate their businesses into the future, rather than simply borrowing revenue from the future.

But as the current situation in India amply illustrates, a resurgence in infections can easily turn hopes of a swift economic recovery to dust, and hence the path to the post-pandemic world is still fraught with risk.


Get our latest insights

By subscribing to Ophir News & Insights you'll understand more about our investment philosophy and process and the investment decisions we make on all of our behalf.

What You'll Get

  Monthly Ophir Letter to Investors
  Timely investment ideas
  Exclusive event invitations