Does the pandemic and subsequent lockdowns mark a structural shift in patterns of leisure and entertainment or has it merely exacerbated trends that were already there?
The covid-19 pandemic has impacted many aspects of our life – from the way we work to the way we spend our free time. Imposed lockdown measures have led to marked changes in consumption behaviour and spending patterns – something particularly visible in the leisure and entertainment space. The vibrant “out of home” world of entertainment, including travel, live and sport events, amusement parks, movie theatres and restaurants, came to a halt. Discretionary spend on “out of home” activities dropped to nearly zero as lockdown measures became widespread to the benefit of entertainment that can be consumed at home. This divergent trend observed in real life has been well reflected in the market and stock performances depending on their exposure to “stay at home” vs “out of home” consumption, with the former outperforming the latter and the broader market by 69% and 46%, respectively.
As consumers and investors, we try to understand whether the pandemic has forever changed the way we spend our leisure time. Will we go back to pre-covid world or will there a structural shift in our behaviour?
The answer at this stage is both “yes” and “no”. On the one hand, we have already observed a change in consumers’ preference for content consumption – digital, on demand and interactive, which has driven a shift away from traditional media towards video streaming and gaming. In this case, the covid-19 crisis is a catalysing change for a trend established well before the virus hit. On the other hand, when it comes to “out of home” entertainment and leisure activities, such as travel, concerts, sports events and dining, the pandemic caused an interruption but not necessarily a structural change in demand. In fact, we believe that the current crisis is creating an emotional pent-up demand that will materialise when consumers feel safe enough to be among crowds and to the extent that affordability remains unaffected.
WHEN AT HOME: STREAM AND PLAY
Thanks to social media channels, consumers have continued to engage in many of their favorite “out-of-home” activities from the comfort of their living rooms. The internet has exploded with online CrossFit, yoga and cooking classes, “live” music performances, and eSport tournaments. Entertainment activities that stand out as particular beneficiaries from the “stay at home” backdrop are video streaming and gaming.
The adoption and popularity of video streaming and video games are not new and have been growing over the last few years. The pandemic simply provided a boost to an existing structural trend. Simply put, streaming offers better value versus the TV bundle and is more suited to consumers’ preferred way of media consumption – digital and on demand. Meanwhile video games provide a truly immersive and interactive entertainment experience that is difficult to rival. And while lockdown levels of engagement might not hold as we slowly resume our pre-covid way of living and allocate part of our time and money back to “out of home” entertainment activities, the trend observed in recent months in not fully reversable. Streaming and gaming are here to stay. The structural growth story of these sectors is just too strong to reverse or diminish and we believe they will continue to command a bigger share of consumers’ time and spend, most likely at the expense of traditional media.
WHEN LOCKDOWN IS LIFTED: DINE AND TRAVEL
The global leisure travel spend was expected to grow by c.5% p.a. over the next few years driven by a strong and sustained demand among millennials. However, the covid pandemic has brought the travel industry to a standstill: thousands of cancelled flights, postponed holiday plans, and an ongoing uncertainty for the millions of people employed by the travel and hospitality industry. As individuals and investors we find ourselves in unchartered territories with plenty of unanswered questions: when will the world travel again and when it does how will it travel? Will consumers’ pre-covid habits return or there will be a new normal?
We believe that travel is not structurally impaired; however, it will likely remain depressed until a vaccine is found or consumers feel safe enough to embark on a journey and be in crowded places. It is also important to differentiate between corporate and leisure travel, where we will observe a very different recovery picture. Business travel is unlikely to resume previous peaks as corporates keep embracing digital tools and video conferencing as a more cost and time efficient way of doing business. On the contrary, we think that the underlying drivers behind leisure travel remain intact.
Demand exists but a return to pre-covid levels of activity will take time and happen in phases. Hotel operators suggest the industry will take 2–3 years to return to 2019 levels of sales and profits. Most management teams feel confident that leisure travel will recover gradually while corporate travel will likely take a permanent hit. In a survey by Tripadvisor, 43% of the consumers indicate that their next international trip will be more than year from today. Consumers would also opt for self-guided and self-drive trips initially and would prefer to avoid small or guided group trips.
These insights suggest a certain pattern of phased recovery for the travel and hospitality companies with restaurants and domestic-leisure exposed names likely to recover first, followed by amusement parks and hotels. Airlines and cruise operators will likely be among the last ones to recover. The industry as a whole will have to adapt to new norms of social distancing, at least in the near term, and offer high hygiene standards. This may increase the cost of doing business but is a must so that consumers feel safe to go out, travel and explore again.