Joerg Tybussek, Partner at Alteri Investors, gives his views on the impact of Covid 19 on the consumer and retail markets.
Hi Marcus, pleasure to speak with you. Well, working from home can be nice from time to time, but in a lockdown scenario it is rather challenging. Both my wife and I are working from home plus home schooling our two daughters which requires space, laptops and computers as well as managing the normal day to day. However after a few weeks things are running smoother I have to say.
No, nothing like this. A global crisis impacting everyone and everywhere to this extent is unseen.
Well, in the short term, most companies in the sector have short term liquidity issues, trying to raise new money, using available credit facilities and government support where available and some are forced into administration. But to be fair, a lot of companies in the market already had structural problems and COVID 19 was the final impact.
The expectation is that consumer confidence is low and will take some time to partially recover. People who were more reluctant to shop online have now moved a significant step and I am certain we will see a further shift from bricks & mortar retail to online.
Consumer behaviour has shown certain product categories see unexpected growth like the famous toilet paper, more pasta, rice, tinned food, everything about hygiene while most items in the discretionary spend category like clothes, consumer electronics (with the exceptions of consumer etc for WFH and home schooling) is declining. Including the whole snack/ sandwich category because our daily commutes are missing.
Moving forward, working from home, less commuting, different commutes than public transport could impact places known before as high traffic areas. It could also lead to more scepticism towards visiting shopping malls.
But in general, the topic for many years “channel shift” meaning shopping in stores vs online will accelerate. This does not necessarily mean that all stores will die, but companies need to think across all channels to serve customers with little to no friction.
I think this really depends on geography, partly because of different restructuring environments and level of fragmentations of the market plus level of digitalisation in the markets. The UK for instance is significantly further than some Southern European countries.
In terms of opportunities, investors will have a view on the capital structures and debt instruments of individual companies. Trading in high yield bond structures could be one way as well as providing additional liquidity with super senior loans.
It appears that everything on the food side is currently benefiting and I wouldn‘t expect a massive decline.
On the other hand segments strongly impacted by online purchases like apparel, consumer electronics will go through a period of consolidation.
A downturn in any market creates possibilities and should provide plenty of opportunities to invest. In particular for investors with a stressed & distressed background it should be a good time to invest, ideally by finding the “the future winners“ at attractive entry valuations.
My opinion is that we might see additional “waves” during the next 12 to 18 months. The struggling companies are already in trouble, will have issues to raise liquidity and have low chances to survive.
Next will be the recovery and capital structure for those getting through the liquidity problems. But low margin sales for the remaining of the year and structural changes with potentially different customer behaviour might result in them not surviving long term.
Potential issues through supply chain (financial difficulties, lockdown in India and Bangladesh, issues along the distribution across the globe in terms of capacity and longer lead times or higher costs to fly) could create situations where companies will have issues coping with the “new now“ and struggle to adopt this in their customer approach.
Those structural problems could lead to another wave of administrations, need for new money or M&A processes next year. There is also the risk that we might see a second wave of COVID 19 later in the year, which could be a disaster for a large part of the companies in the Consumer and Retail sector.