Renewables have become a major part of the electricity generation mix (with a 28% global share in 2020). Beyond the obvious investment in plant capacity, this has required significant advances and spending on grid flexibility and resiliency.

But there is much more to do. Delivering the Paris Agreement to cap global warming at 1.5°C requires a 75%-80% renewables share of generation by 2050. This level of intermittency demands much more fundamental shifts in the market and grid structure.

Notwithstanding the short-term challenges of COVID-19, government and investor sentiment towards the energy transition is robust, with sustainability concerns gaining momentum around the world.

In the coming decade, we expect smart money in energy markets to shift from generation to system support in areas like storage, energy management systems and services.

This Executive Insights explores the set of high-value challenges to overcome in getting to an 80% renewables share and the investment opportunities such challenges present.

Public and political commitment to energy transition is driving substantial investments in renewables generation, with major contributions from renewables developers, major energy players (e.g. Shell, Total, BP, Centrica, EDF, RWE), infrastructure funds, pension funds, sovereign funds and others. The total value of low carbon transactions in the oil and gas sector alone increased from some $1.5 billion per annum in 2010-13 to $3-$5 billion per annum in 2018-20.

But as the class matures, finding appealing opportunities is getting tougher. Multiples on operating assets have expanded considerably (up to 25 times earnings), and margins on new projects are being compressed by increasing competition, tougher auction conditions, less attractive offtake arrangements (Power Purchase Agreements replaced by merchant risk) and material risk of electricity price declines in the longer term. 

Happily, there is a range of high-value system improvement imperatives within the energy transition that require large-scale capital investment over the medium to long term. 

The challenges of moving to a renewables-dominated energy mix are well documented and include: 

• Variability and intermittency: Renewables generation can be both variable (functioning at different levels over short timescales) and intermittent (functioning only periodically). It is dependent on non-dispatchable resources, resulting in a mismatch between production and demand requirements on a daily, monthly and event-driven basis. Unless managed effectively, this can create fundamental inefficiencies, including excessive unused capacity, potential blackouts and pricing fluctuations. When renewables are no longer offset by a much larger base of controllable generation, these issues become significantly more difficult. 

• Grid structure/quality: Most renewables differ from fossil fuel electricity in that they are de-centralised sources of energy. The increasing move away from a centralised to a more distributed network — with, in addition, two-way flows of electricity — causes congestion and additional complexity, and has put increasing strain on (often ageing) transmission & distribution (T&D) networks, requiring upgrade and restructuring. Management of new output characteristics and profiles, including proactive customers (both industrial and individual ‘prosumers’), has also created challenges and opportunities. 

• Life cycle impact: The rise in renewables generation is creating a material sustainability challenge, with significant and rising quantities of waste from decommissioning/refitting renewable assets. (Germany, Spain and Denmark were each expected to dispose of 6,000 to 12,000 wind turbine blades in 2020.¹) Full life cycle analysis and comparison of new energy technologies are difficult, with some market experts suggesting ‘green’ technologies are often not as zero or low carbon as implied, especially once the supply chain is considered. For each stage of the value chain, there are investment opportunities and business models that are exploring new technologies addressing this challenge and underpinning broader circular economy tailwinds.

As the transition gathers pace, these challenges are attracting increasing investment and innovation focus. System technology (including grid support, efficiency, storage, etc. — often collectively referred to as ‘Energy 4.0’) is advancing rapidly, and there is a growing range of opportunities for investors to participate. We have set out a range of themes and examples in a structured framework below.

Optimisation of renewables generation

(Resolving intermittency/variability challenges; improving reliability/efficiency)
Opportunities:

(a)    Intermittency/variability

-     Storage technologies and business models

-     Batteries and related infrastructure (e.g. Tesla grid-scale battery solutions in Australia, vehicle charging stations)

-     Hydrogen (e.g. electrolysis, storage, fuel cells and engines) (e.g. recent acquisitions made by Hensoldt and Worthington or the Snam/De Nora deal in 2020)

-     Electric vehicle-to-grid (V2G) or vehicle grid integration (VGI) solutions (e.g. Virta, Origami Energy, Marubeni, Smartest Energy and Grid Edge are rolling out a new proof of concept for V2G )

-     Aggregation and virtual power plants (e.g. recent acquisition of NextKraftwerke by Shell)

-     Demand management/demand response at the end-customer level (industrial, commercial and individual ‘prosumers’) using new technologies and software, solutions, and services

-     Players like Enernoc and Opower are offering customer-centric solutions for demand response, load control, dynamic pricing, etc.

-     Offers linked to increasing smart-metering and sub-metering roll-out in a range of countries, receiving increased interest from financial investors

-     Smart procurement offers using new software and technologies

-     Use of energy trading and financial vehicles/approaches to hedge availability, with accompanying digital automation solutions

-     Over the medium to long term, electricity market structures are likely to evolve to place a higher premium on availability, providing further support for this type of initiative

(b)    Reliability and efficiency

-     More efficient components and systems (e.g. solar tracking systems, inverters, mounting systems) serving renewables generation

-     Services/Operations & Maintenance to maintain and improve renewables (e.g. offshore wind services)

-     Predictive asset management and monitoring systems for generation equipment

-     Related digital and other services/engineering/software, including for remote services

Solving T&D grid structure issues

(Distributed energy and multi-source/multi-directional flows, creating instability and complexity in the T&D network)

Opportunities:

-     Smart T&D equipment and systems to stabilise the network and improve power quality (for example, Italy’s TWO Terna has a strong focus on increasing digitalisation in its 2020-24 strategic plan)

-     More sophisticated ’smart’ T&D equipment like switchgear with integrated digital elements (e.g. for remote measurement and monitoring) being developed by major players like ABB but also smaller OEMs

-     System equipment specially adapted to renewables (e.g. energy-efficient renewables transformers)

-     Other developments in power electronics and automation and control

-     Storage-based systems to provide short- or longer-term system backup

-     Predictive asset management and monitoring systems, including related software

Full life cycle impact and sustainability of renewables

Opportunities:

-     Opportunities to improve material usage and develop new technologies that change resources requirements, or new sustainable raw materials supplying the energy sector

-     Sustainable logistics and sourcing for the renewables supply chain

-     Solutions for recycling and reuse of battery, solar photovoltaic and wind turbine assets (e.g. in November 2020, the world’s largest-scale lithium-ion battery recycling facility was funded; the plant is a JV between Northvolt and Hydro)

-     Solutions for sustainable decommissioning of renewable assets (e.g. full retrieval of offshore wind turbine foundations vs leaving segments buried in the seabed)

With a broader range of energy transition participation options and attention shifting to system support areas (e.g. intermittency and variability, reliability, grid capability, and sustainability), specific opportunities will need careful evaluation.

• How well-proven, effective and broadly applicable is the underlying technology?
• How does it create value?
• How well differentiated is the solution? Does it have a privileged position?
• Who are the customers, and how well is the business positioned to serve them?
• How is the solution likely to be impacted by any future regulatory change?

For those with a holistic view of the energy system, and an understanding of the technology and the key participants’ needs, investment opportunities will abound.

Additional Sources

IPCC, ‘Special Report: Global Warming of 1.5°C’
IEA, ‘Global Energy Review 2020’
Carbon Brief, 2020
Solar Portal, 2020

The fitness industry has been among the hardest hit by COVID-19. As the latest report from the International Health, Racquet & Sportsclub Association indicates, fitness industry revenue declined by more than 50% in 2020, as the strong growth of digital fitness revenues was far outweighed by the significant decline of traditional fitness membership fees and services.

But while we expect the industry to rebound to pre-COVID-19 levels eventually, consumer trepidation around using in-person facilities will likely push a full recovery out to 2023 or 2024. And even once fitness reaches its pre-COVID-19 levels, it will be based on a different mix of in-person and digital, at-home activity. With that in mind, L.E.K. Consulting has identified several investment opportunities that take advantage of the changing fitness landscape and should be well positioned to deliver substantial top-line growth in a post-COVID-19 world: 

• Differentiated boutique studio concepts (e.g., Orangetheory Fitness)
• HVLP gyms and HVLP 2.0 brands (e.g., Crunch Fitness, YouFit Health Clubs)
• Integrated ecosystems of hardware, software and content (e.g., Peloton)
• Wearable-enabled coaching services (e.g., Noom, Strava)

When the risks of COVID-19 became prominent in the U.S. in March 2020, many gyms and studios shuttered for months due to regionally mandated lockdowns and health concerns for both customers and staff. Even as locations began to reopen throughout 2020, government-mandated capacity constraints, elevated membership churn and stagnant new customer acquisition muted the revenue rebound. 

Some major chains, among them Town Sports, Gold’s Gym and 24-Hour Fitness, have subsequently declared bankruptcy, while others have remained open but have reduced their footprint. Overall, as many as 17% of U.S. locations had closed by the end of 2020, primarily small, independent gyms and studios. Meanwhile, digital fitness accelerated greatly, led by Peloton and a proliferation of new services along with new service launches from traditional gym and studio operators.

For the most part, consumers say they are willing to return to in-person fitness — just not right away.

Almost all fitness club members — approximately 94% — expect to return to in-person fitness in some capacity once the pandemic is under control, as equipment access and workout variety is difficult to replicate at home. However, in-person fitness frequency is expected to decline slightly from pre-COVID-19 levels, with roughly 35% of fitness club members saying they expect to attend three to four days per week, down from approximately 42% pre-COVID-19. As for boutique studio members, they expect to attend 10% less frequently post-COVID-19 than they did before.1

However, in the near term, fitness club members remain hesitant to return to in-person fitness, with approximately 43% of fitness members not expecting to return to in-person fitness in the next three months and 11% of members not expecting to return within the next year.2

Assuming vaccination continues at a reasonable pace, traditional gyms should begin to rebound in the second half of 2021. But the strength — and speed — of recovery will vary by segment.

Traditional gyms: HVLP gyms will likely be the earliest among traditional gym formats to return, driven by their attractive price points and strong value proposition. Premium gyms, which are concentrated in regions harder hit by COVID-19 (e.g., New York City, Chicago, throughout California), are expected to stay resilient as they have the staff, resources and facilities to accommodate social distancing; their members are also less likely to have been adversely impacted by COVID-19. But mid-tier gyms that survived COVID-19 will likely continue to struggle with members on either end of the hourglass: both the high-end premium consumer and the cost-conscious value consumer.

Boutique studios: Overall, boutique studios are expected to rebound slightly faster than traditional gyms. Their growth dynamics will differ, however, depending on the concepts they employ. For example, spinning studios may find it harder to reach pre-COVID-19 levels of participation after Peloton added approximately a million subscribers in 2020 alone. Equipment-light concepts such as yoga and barre will likely face increased competition from digital fitness services that can provide a comparable experience at home, which suggests they will need to invest in the “community” aspect of their offerings to differentiate themselves and realize a full recovery. Multimodal, equipment-heavy and/or highly community-oriented concepts (e.g., Orangetheory Fitness, CrossFit, 9Round), on the other hand, have more points of distinction and are thus likely to be more insulated from digital fitness cannibalization, so they should rebound faster than the broader market once COVID-19 is contained.

Digital fitness: With Peloton adding nearly 100,000 connected fitness subscriptions a month, digital fitness will continue to be additive to the market, though its growth will likely slow from its COVID-19-fueled peak once people start returning to in-person facilities. But the current digital fitness users we surveyed expect their usage to drop just 15%-20% once gyms reopen in a post-COVID-19 environment. This is consistent with our pre-COVID-19 findings on the complementarity of digital fitness subscriptions with in-person facilities: Some 60% of commercial gym members we had surveyed pre-COVID-19 reported spending more time at the gym after subscribing to a digital service.

Key investment themes

Now, armed with this greater understanding of consumer sentiment and behavior, we are focusing on the following key fitness investment themes, which we believe should capitalize on post-COVID-19 conditions:

• “Hourglass” appeal: Fitness brands should articulate a clear value proposition geared toward either the high-end premium consumer or the cost-conscious value consumer.

• Digital fitness relevance: Fitness concepts can either leverage digital fitness to enhance customer engagement and implement an omnichannel model or have other attributes that insulate them from digital-native competitors.

• Wearables data integration: There has been substantial growth in consumer utilization of fitness performance measurement and tracking solutions, yielding more consumer engagement and data collection. Leveraging wearable platforms, and even developing de novo consumer services on top of one or more of them, can enhance the consumer experience and value propositions for gyms and studios alike.

• Strategic retail footprint optimization: Traditional fitness operators with a relatively small geographic footprint should be able to capitalize on favorable commercial real estate conditions to outpace the recovery.

With these themes in mind, we have identified several investment opportunities that should be well positioned to deliver substantial top-line growth in a post-COVID-19 world.

Differentiated boutique studio concepts (e.g., Barry’s Bootcamp, Rumble Boxing)
When it comes to reaching affluent consumers and delivering a premium experience at a premium price, no segment is better positioned than differentiated boutique studios, which also offer an opportunity to integrate with wearables platforms to facilitate performance measurement and tracking.

Their potential for post-pandemic growth differs by concept: Bootcamp/group exercise/kickboxing concepts are expected to experience strong post-COVID-19 growth as fitness enthusiasts return to in-person activities, while yoga/barre concepts may see a muted rebound as they are more susceptible to digital fitness replacement.

Spin is more of a special case. Whereas the strong community element and specialized equipment requirements help keep it insulated from digital fitness, strong Peloton (and Peloton clone) growth may have cannibalized a significant portion of the addressable spinning consumer base during the pandemic.

Well-capitalized concepts with a relatively small footprint, such as Barry’s Bootcamp, are uniquely positioned to capitalize on post-COVID-19 commercial real estate dynamics, benefiting from favorable rent terms and location availability. Indeed, even despite COVID-19, many of the stronger boutique concepts (e.g., Orangetheory Fitness and Xponential Fitness) increased their location count in 2020.

HVLP and HVLP 2.0 brands (e.g., Crunch Fitness, YouFit Health Clubs)
As discussed above, HVLP brands are expected to be among the earliest to return to their pre-COVID-19 heights due to attractive pricing and strong appeal to value-oriented consumers. However, there are several additional tailwinds that will benefit the HVLP brands and other providers within the HVLP ecosystem.

In a post-COVID-19 world, consumers are expected to place a higher degree of importance on fitness, health and wellness. As lingering COVID-19 concerns fade, HVLP brands will be well positioned to capture a disproportionate share of these new members as a result of their affordable entry price point and appeal to new or inexperienced exercisers.

Additionally, HVLP brands may be able to leverage digital fitness to enhance ancillary revenue in a post-COVID-19 world. HVLP members are less likely to adopt a separate digital fitness solution, creating a potentially meaningful opportunity for HVLP brands to upsell their own digital fitness service for an incremental fee.

Integrated ecosystems of hardware, software and content (e.g., Peloton, Hydrow, Mirror)
Not only do they reach more consumers and deliver a seamless turnkey experience, ecosystems that integrate hardware, software and content can streamline performance measurement and facilitate the tracking of individual users’ progress from session to session. In the process, they improve the quality of user experience and enhance user engagement, creating competitive differentiation from stand-alone digital fitness services.

Wearable-enabled performance tracking services (e.g., Noom, Strava)
Health and fitness has emerged as the “killer app” for wearables; both the recent launch of Apple Fitness+ and Google’s ongoing integration of Fitbit are expected to accelerate wearable penetration and grow the digital fitness user base going forward. The integration of Fitness+ content with the Apple Watch in particular should improve the scale and fidelity of data collection, which could be amplified even further if Google pursues a similar strategy with Fitbit. Meanwhile, a growing wearables ecosystem can enhance the value proposition of existing services like Noom and create opportunities for innovative new consumer offerings, such as fitness rewards/incentives programs.

The COVID-19 pandemic hit the fitness industry hard, in large part due to its reliance on in-person facilities. But it’s also greatly accelerated the inroads that were already being made by digital fitness concepts — in particular those, like Peloton, that leverage integrated ecosystems of hardware, software and content to enable the tracking of user performance. And it’s highlighted the attractiveness of the various differentiated boutique concepts, which are also uniquely positioned to take advantage of a favorable post-COVID-19 real estate market to deliver a premium in-person experience at a premium price.

So while it may take until 2023 or even 2024, the fitness industry will not only recover from COVID-19, but will offer numerous attractive investment opportunities along the way.

Endnotes
¹L.E.K. Boutique Studio Fitness Consumer Survey, January 2021
²William Blair Consumer Pulse Survey, February 2021

Background and challenge

A leading drop-ship furniture supplier was looking to attract additional investors and enlisted the services of L.E.K. Consulting to assess and create an independent report on the company. In addition to wanting an assessment of the overall market size, trends and growth related to the segment, the client wanted to better understand customer purchase behavior, the competitive landscape, and the dynamics of the ecommerce channel and risk of disintermediation by Amazon/Wayfair, and frame the company’s potential for category expansion and international growth. 

Approach and recommendations

Our first objective was to evaluate the size of the furniture and home furnishings ecommerce market and the overall drop-ship segment. We then assessed key trends within the segment, including the long-term impact of COVID-19, which accelerated ecommerce penetration and spending on the home, and we forecasted market growth for the overall drop-ship market as well as the online furniture market. 

Next, we conducted a consumer survey to uncover key purchase behavior for furniture, the role of online platforms vs. brands, and purchase decision behaviors. The survey helped illustrate key consumer tendencies when researching furniture purchases, which were critical to understanding how to succeed in the market. Additionally, we used our proprietary Navigator tool to highlight platforms dominating online search results to determine the most important online retailers and marketplaces. Using the insights uncovered by both the consumer survey and our proprietary tools, we were able to articulate the vendor selection criteria used for the ecommerce channel and the keys to success for suppliers.

Subsequently, we took an in-depth look into each of the company’s core product categories to assess their SKU search placement ranking using SKUology, another proprietary L.E.K. Consulting tool. SKUology used millions of data points across product catalogs to compare the company’s product search placements against competitors, highlighting the company’s relative position and strength. This further confirmed the defensibility of the supplier’s future sales in addition to highlighting potential areas where incremental market share could be captured.

Finally, we pressure-tested the supplier’s opportunities for future growth via additional SKU/product category expansion and international expansion. By looking at the supplier’s planned rollout of new SKUs across nascent and emerging product categories, we were able to forecast incremental revenue potential from these new target segments. Paired with increased focus on underpenetrated categories, these opportunities represented significant sales upside for the supplier. Additionally, we analyzed ecommerce penetration in identified international markets. By assessing online marketplace relative success when entering these markets, we further validated the growth opportunity available outside the supplier’s current core geography. 

Results

By clearly articulating the value proposition of the company in the context of the larger drop-ship furniture segment, we positioned the business to receive a significant investment from a leading investment firm to help drive future product portfolio expansion and international growth prospects.

Background and challenge

A private equity client enlisted the services of L.E.K. Consulting to help assess a potential investment in a rapidly growing beauty and lifestyle product that used sustainable and natural ingredients. A key part of developing the investment thesis was understanding the brand’s ecommerce position and revenue growth potential within DTC channels, including the brand’s proprietary website and third-party ecommerce retailers such as Amazon. Additionally, the client wanted to better understand the upside potential in adjacent categories that could supplement future revenue growth.

Approach and recommendations

L.E.K. first assessed the drivers of growth in the beauty and lifestyle products market and identified several headwinds and tailwinds currently affecting the trajectory of the industry. We found that while COVID-19 had been detrimental to personal care products as consumers stayed home, preferences were still high for products that focused on sustainability and all-natural ingredients. 

Next, we used a customer survey and several proprietary tools to provide the client with a “real-time” assessment of customer dynamics for the brand. Using Navigator, we looked at web traffic across DTC websites and various keyword search terms to assess the overall strength of the brand’s ecommerce presence. This highlighted the brand’s underperformance relative to competitors’ performance when considering traffic and search rank. Additionally, we leveraged our Fingerprint tool, in conjunction with a consumer survey, to characterize the brand’s key customer profiles. This helped us define the younger customer demographic that was primarily responsible for the brand’s sales. 

With the insights derived from the consumer survey and our proprietary tools, we could provide the brand with well-articulated recommendations, such as to optimize marketing spend including paid search to drive DTC traffic.

We then turned our attention to the competitive positioning of the brand. Leveraging our consumer survey, we discovered that the brand outperformed most core competitors across key purchase criteria; with that and strong customer loyalty, the brand was primed to perform well across major third-party ecommerce retailers. However, our SKUology tool revealed that the brand was severely underperforming competitors on one prominent ecommerce platform when the brand’s differentiated characteristics were used as search terms. This revealed a significant opportunity for incremental revenue growth by stealing share from core competitors on the ecommerce site. 

Finally, we leveraged our consumer survey to identify and prioritize opportunities to extend the brand’s core value proposition into other beauty and personal care categories, and we developed a long-term revenue forecast with adjacent categories included to inform the client’s investment decision. 

Results

Our work gave the client confidence to move forward with their investment, which successfully closed shortly after the project. The team also left with a better understanding of the key strategic initiatives that will drive growth for the brand and is working toward implementation. 

Multiple data readouts drive positive sentiment 

Analysis of social media and ASCO abstracts allowed the identification of Phase II or III data readouts that were major drivers of sentiment (See Figure 2). Lung and breast cancer had the most of these major drivers (seven and five, respectively), which correlates with also being the most talked about diseases. 

Twenty-four major readouts were identified across the most talked about diseases, and these were studied further to identify key themes

Breakthroughs in adjuvant settings

Data readouts for Olaparib (Lynparza; AstraZeneca) in HER2-negative breast cancer and pembrolizumab (Keytruda; Merck & Co.) in clear-cell renal cell cancer were notable as both demonstrated benefits in adjuvant settings. Both drugs were used following surgery and were shown to reduce the risk of disease recurrence or death. These and other drugs are aiming to move earlier in the treatment paradigm and follow the success of osimertinib (Tagrisso; AstraZeneca) which was approved for adjuvant use in EGFR-mutated NSCLC last year. Being used to prevent recurrence requires meeting a significantly higher standard for safety than when being used to treat active disease in later lines. This is because side effects are less acceptable in populations in which only a subset experience disease recurrence.

Rise of novel checkpoint inhibitors

Categorisation of the mechanisms of action of the 24 major readouts reveal clustering within immune checkpoint inhibitors, oestrogen receptor antagonists (in breast cancer), PSMA inhibitors (in prostate cancer), kinase inhibitors and immunostimulant cell therapies (See Figure 3).

Within the lucrative checkpoint inhibitor category there were several readouts for the established PD-1 and PD-L1 antagonist mechanisms. There is representation for LAG-3 antagonists, which is a highly anticipated mechanism being pursued by over 25 preclinical and clinical programs currently. Adenosine receptor antagonists are another novel checkpoint inhibitor mechanism which is being pursued by a similar number of programs.

Beyond these novel mechanisms, the next wave of innovation is expected to be in bispecific checkpoint inhibitors. They target various combinations of PD-1, PD-L1, CTLA-4, LAG3 and other targets, and there are more than 30 in Phase II development and earlier.

Growing pipeline of bispecifics, ADCs and TILs

The 24 major readouts span a range of therapeutic modalities (See Figure 4). Innovative modalities include antibody drug conjugates (ADCs), bispecific antibodies and tumour infiltrating lymphocytes (TILs). ADCs consist of an antibody bound to an anticancer drug which specifically delivers the payload to target cells. Building on several ADC approvals in the past few years, there is a deep pipeline of over 250 in development. Bispecific antibodies and TILs are more novel approaches but still have pipelines of over 250 and over 25 candidates, respectively. Bispecifics allow the dual binding of two targets, with significant activity around checkpoint inhibitor targets, as previously mentioned. TILs are a form of cell therapy that utilise the fact that this cell type can penetrate tumours and specifically target cancerous cells.

Conclusion

Analysing social media for comments from ASCO attendees revealed a notable focus on lung and breast cancer. Sentiment was most positive around leukaemia and renal cell cancer readouts. Identifying 24 major clinical readouts across the most talked about diseases identifies breakthroughs in adjuvant settings, novel checkpoint inhibitors, and a growing pipeline of novel modalities such as bispecific antibodies, ADCs and TILs.

Social listening analysis performed by Prithvi Menon (Junior Data Scientist) and Sinéad Flahive (Senior Data Scientist) in L.E.K.’s European Data & Analytics team.

Extended COVID-19 lockdowns gave consumers a chance to reflect on their lives. That’s led to a “priority reset” of how they intend to behave going forward. 

In an April pulse survey, we asked U.S. consumers what they expect to spend their time and money on once the outbreak is contained. Edition 1, Part 1 of The Great Reopening and Priority Reset Series covers the macro themes that the survey revealed. Now, in Part 2, we’ll dive into the specific behaviors and shifts in spending that appear to have staying power in the wake of the crisis. (Note that all forward-looking data reported is a reflection of consumer sentiment or expectations and is not an official L.E.K. Consulting forecast.)

Consumers are rethinking their pre-pandemic choices

Among the respondents in our survey: 

• Most (75%) say they will increase the time and money they spend on health and wellness activities as a result of heightened sensitivity to health risks
   
• A majority (57%) agree that reflection during the pandemic made them realize that at least some of their pre-COVID-19 discretionary spending was unnecessary
   
• Most parents (80%) believe they will be permanently closer to their children as a result of the pandemic

Post-COVID-19 attitudes reflect consumers’ experiences during the pandemic

Among survey respondents, viewpoints tend to break down into four distinct, strategically significant segments.

Bounce-backs (44%) believe the pandemic has had little more than a temporary impact on their attitudes, behaviors or spending categories. These consumers cover many demographics, with a slight skew toward middle- and lower-income consumers in the outer suburbs. 

Health obsessionists (15%) have permanently changed their view of health and sanitation. They’re willing to spend more on personal health, rest and well-being. Health obsessionists skew a bit older, and they are more likely than the other segments to be retired or living on less than $50,000 a year. 

Newly frugal consumers (19%) are more critical of their post-COVID-19 discretionary spending. They skew a bit lower in income and are disproportionately single. 

Balance seekers (22%) have drawn permanently closer to their families and expect to live more active lifestyles. Most balance seekers are millennial or Generation X parents with children at home, typically married and higher earning.

So how does this translate into consumption? For bounce-backs, the outlook is unchanged — they don’t anticipate a permanent shift in where they spend their time and money. 

The other segments expect to make significant permanent shifts, reflecting their various priorities. 

For example, health obsessionists intend to spend significantly more on home productivity, presumably to enable them to retain greater control of their environments. Newly frugal consumers plan to spend significantly more on digital streaming services and groceries while spending less on out-of-home entertainment and dining out at restaurants. 

As for balance seekers, look for them to spend “more” in general, particularly in categories that can be shared with family such as takeout and home entertainment. Balance seekers are also a segment that, relative to pre-pandemic levels, expects to put more money and time toward leisure travel and fitness. 

Shared priorities shake out differently across consumer segments

Let’s take a closer look at some of the spending priorities among health obsessionists, balance seekers and the newly frugal — the three segments that are in a state of “permanent reset.” 

Groceries

The majority of consumers across segments expect to do more grocery shopping online. The largest increases are among the health obsessionists and balance seekers, who claim they will nearly double the proportion of online grocery shopping (across curbside pickup and delivery) relative to what they did pre-crisis. 

Health obsessionists likely value the relative safety of having groceries delivered to their cars or front doors. Balance seekers, on the other hand, are probably more attracted to the convenience and time savings of grocery ecommerce. 

Leisure travel

In the wake of the crisis, leisure travel looks poised to rebound much faster than business travel. Those who travel for business expect that videoconferencing using products like Zoom and Teams will continue to displace one-quarter of their trips. This implies that it might take several years to fully grow out of this impact to the most lucrative portion of the travel market. 

However, all three of the permanent reset segments (collectively representing more than half the U.S. population) plan to spend more on leisure travel than they did pre-crisis. Balance seekers expect to increase their spending the most, but even the new frugal segment appears to be relaxing constraints in this category. Combined with bounce-backs reverting to 2019 levels of expenditure, leisure travel looks set for a very welcome rejuvenation in the industry that suffered the most through the pandemic. 

Personal fitness

Swinging the lens to personal fitness, we see that the three permanent reset segments generally expect to spend more time on exercise post-COVID-19. Balance seekers and health obsessionists say they will spend more money overall on fitness, particularly on digital subscriptions. For the newly frugal, the plan is more time, less money as they seek low-cost alternatives to maintain their pre-pandemic fitness routines. 

Reaffirmed priorities drive changes in post-COVID-19 behaviors

Those in each of the reset segments are emerging from the pandemic with a different view of the activities they expect to participate in. 

Health obsessionists want activities that improve their health and well-being in more solitary environments. They expect to avoid activities with crowds (e.g., all-inclusive resorts) and increase their use of fitness apps and curbside pickup for takeout. 

For balance seekers, the emphasis is on activities that either are restorative, such as going to the gym or a spa, or enable them to spend time with friends and family. More than other segments, they anticipate visiting friends and family more — including through family-friendly activities like traveling to resorts — and spending less working time in the office. 

Get ready for long-term change

Executives need to be mindful of these post-COVID-19 shifts in consumer activities and spending. Don’t expect a full reversion to pre-pandemic behaviors across the board. Certain changes in consumer behaviors are expected to transcend the crisis. And while there are separate groups making very different choices, it’s clear that more than half of the U.S. population has permanently recalibrated the priorities underlying discretionary spending.

This means that consumer-facing organizations should be on the lookout for new opportunities arising from these shifts. It also means that organizations will need to evolve their business models to address the new realities and the risks from shifting consumers preferences. With proper planning, executives can use the priority reset to their advantage and strategically position their businesses to outperform as the country reopens. 

To continue the discussion, please don’t hesitate to contact us. 

Charlie Meade, Manager, contributed to this report.

The face of the global higher education sector has changed drastically, with students from emerging markets increasingly opting to pursue an education overseas. This megatrend has had a considerable impact, not just for source markets, but also for key destination countries. Anglophone countries alone enroll 2.5 million-3 million international students per year out of a total of 5 million students studying abroad. However, with the pandemic disrupting physical mobility, new factors are shaping the world of international education.

Key source markets

Students from various Asian countries represent most of the global demand for international higher education. China is the largest source market, with 1 million+ international students enrolled, and it has been a market leader for the better part of the past two decades. This is followed by India (~0.5 million students), which is the fastest-growing source market, with student enrollments predicted to grow at a compound annual growth rate of 8.5% (2019-2030). Following the trend of high demand are other developing Asian countries such as Bangladesh, Vietnam and Indonesia. International students from these countries currently total ~.065 million — a number that is forecasted to rise to more than 2 million by 2030.

There are several factors contributing to this impressive growth, including demographic trends, rising affordability and household incomes, poor quality of local education provision, improved accessibility of international education, premium salaries commanded by foreign graduates, and a greater desire to emigrate to Anglophone countries.

Key destination markets 

Most international students flock to a few key destination markets; prominent among these are Anglophone countries — the U.K., the U.S., Australia and Canada. While growth has been consistent for the most part, the pandemic has disrupted the market dynamics to a large extent.

While Australia is expected to see a slowdown in student enrollments due to border closures, key markets like the U.K. are set to capture this demand and gain a larger share of international students. Canada, which suffered lower enrollments due to the pandemic, is expected to be the fastest-growing market post-pandemic, albeit not as fast-growing as it was pre-COVID-19. Canada’s uptick is at the expense of U.S. universities, whose international enrollments are growing, albeit at a slower pace due to regulatory dynamics.

Conclusion

Although there are significant changes on both sides of the value chain (supply and demand), the broader global student mobility trends will remain largely consistent. Key Anglophone destinations will continue looking toward Asia as a primary source of international students, and demand will only increase from here on. As these markets move along the evolution curve of enrollment trends, value creation opportunities for investors and operators will continue to emerge.