Coronavirus Quarantine Could Change Consumer Habits … for Good
The world’s business model has changed overnight: We’ve been cooped up, self-isolated, working from home or simply left with nowhere to go as businesses shutter.
As people prepare for this shut-down, supplies are flying off the shelves faster than most retailers can resupply and restock. Shoppers are getting frustrated as their attempts to purchase essentials are thwarted.
Small, independent businesses are feeling the pain of social distancing most acutely. Service industries in particular, which rely on a steady stream of in-person consumers.
Teaser: But some businesses were built with social distance in mind, while others compel us to buy in bulk. And investors should pay attention. Demand for businesses like Costco and Amazon will last a while >>
But some businesses were built with cocooning in mind. And others compel us to buy in bulk. Previously, these methods were considered conveniences. But with the spread of the novel coronavirus pandemic, these business models are more in demand than ever.
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It’s no secret that convenience and quality had Costco Wholesale (COST) and Amazon.com (AMZN) winning retail before COVID-19.
Now, it’s not even a fair fight.
The two retail giants are remarkably similar. Both offer low prices, selection across the wide gamut of product categories and superior customer service. It’s a triple threat that’s tough to beat.
Your average Costco sells everything from flat screen TVs and giant boxes of cereal, to designer pajamas. Amazon.com offers the same from the comfort — and safety — of your home via their website.
Their secret to success is three-fold: Scale, warehouses that defy normal inventory practices and flywheels.
Costco and Amazon.com customers are unusually loyal because membership brings perks. For an annual subscription — $60 and $119, respectively — members get freebies or hefty discounts on essentials.
Amazon Prime clients get digital music, a video-on-demand service that includes exclusive, original content, data storage and free fast shipping. Costco members get discounts on top-of-the-line products ranging from T-bones, roast chickens and fine wines to prescription eyeglasses and as much as a 5% discount on gasoline.
The shopping experience, considered to be an industry standard at both retailers, is bolstered by these ancillary benefits. Those membership fees add a hefty stream of income. And once members pay to belong to something, they feel more attached to the brand. That loyalty means memberships will be renewed.
According to a report at Statista, Amazon had 112 million Prime members in the United States in 2019, up from 95 million in 2018. They spent an average of $1,400, about 230% more than non-Prime members.
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Now, throw in the COVID-19 pandemic and nationwide commitment to social distancing over the next few weeks. It’s the perfect storm for the rest of retail.
Two businesses, one brick and mortar and the other online, are set to dominate consumer spending for the foreseeable future.
The New York Times reported on Tuesday that Amazon will stop stocking non-essential items at its warehouses though April 5. The temporary move would see the online giant focus on stocking and delivering household staples, medical supplies and other high-demand items stemming from consumers corralled by the coronavirus.
By all accounts, business is booming. The company announced separately that to meet demand, it would hire 100,000 additional workers. The company will even pay a $2 per hour premium over regular staff rates.
Meanwhile, Costco stores, known for bulk packaging, are attracting long lines across the country. Viral videos of concerned shoppers stocking up before quarantine have become the norm.
It would be easy to conclude all of this will pass when fears about viruses and shortages abate. The idea that the future will look a lot like the past is compelling. Amazon and Costco competitors are certainly hoping that is true.
Unfortunately, this wishful thinking is unlikely.
The COVID-19 crisis is reinforcing the strength of the business models at Costco and Amazon. Consumers are learning they can rely on the warehouses to supply essential items when other stores have drained their stock. And suppliers have found the distribution scale is leading to dramatically increased sales.
Large brands that sell products like aspirin, Lysol wipes and Huggies diapers are moving product lines away from brick and mortar stores, the Times notes. In many cases, sales during the past two weeks have rivalled Black Friday and Amazon Prime days, sale dates offered exclusively to Prime members.
Brands are going where the sales are. That’s likely to continue after the quarantine ends.
Costco and Amazon have performed well this year. But they were big winners on Tuesday.
Costco shares surged 8.4% Tuesday to $306.99. While the stock is still down 4.7% this month, shares have risen 4.5% so far in 2020. They are ahead 29.5% during the last 12 months. And Amazon shares jumped 7% yesterday to $1,807.84. They are down 2% year-to-date, and up 2% over the past year.
By contrast, the S&P 500 index is down 21.4% in 2020. The index is lower by 8.8% during the past 12 months.
The markets remain in turmoil as the impact of the COVID-19 virus pushes through the economy. Ultimately it will take several months before investors come to grips with the systemic changes unfolding.
But it shouldn’t take you that long to recognize that something big is happening in retail.
Consumers are changing their spending habits. Brands are seeking more efficient distribution. Costco and Amazon are the clear beneficiaries.
Investors would be wise to buy weakness in the shares of both companies.
Jon D. Markman