Is the increase in digital adoption seen through the COVID-19 pandemic here to stay?
In March 2020, when countries around the world started imposing restrictions one by one, other than the evident disruption to normal life, one particular aspect that changed drastically was the pace of adoption of technology. Be it in developing world or ‘Western’ economies, the rate of digital adoption increased exponentially. Video conferencing tools like Zoom and other remote working channels like Slack have now become the norm. Needless to say, the value of these technology businesses most definitely reflected this increase in usage. In June 2020, approximately 4 months into the COVID-19 pandemic when economies were shutting and cities all over the world were in lockdown, Zoom and Slack had added an additional $50 billion to their market cap1. As of January 2021, this has risen to a mind-boggling $115b for Zoom alone. The industry then saw one of the largest software M&A’s ever towards the end of 2020 with the acquisition of Slack by technology behemoth Salesforce for $27.7b!
The digital adoption that took place during 2020 was exciting for many sectors old and new, but the clear and obvious winners are those companies that have placed digital at the heart of their core business model.
As of January 2021, there is some light at the end of the tunnel with the global vaccination programme now in full swing. However, the question remains whether the increased digital adoption that COVID-19 has brought about, is here to stay. I explore below three factors that might determine the outcome on this.
Convenience vs. experience:
The rapid adoption of digital platforms has forced many companies to significantly improve their logistics and supply chain management. Digitally savvy companies that have scaled-up their operations effectively to manage the rise in demand, are now benefiting from the huge trove of data they’ve collected. According to a McKinsey Global Survey of executives, many companies have accelerated growth in one year at a rate expected in three to five.2 What these digital platforms did with this data is important to determine what will happen in a post-COVID world.
Previous operational headaches for digital platforms to contemplate such as distance, returns and refunds and speed of delivery has shifted. The global supply chain analytics market size is expected to grow from $3.5b in 2020 to $8.8 billion by 2025, at a Compound Annual Growth Rate (CAGR) of 19.8% during the forecast period.3 Driven to create as seamless experience as possible for the consumer, the data these platforms gathered further enhanced their economies of scales, as they were largely operating at a lower fixed cost than counterparts encumbered by challenges such as legacy digital infrastructure and physical space. The data helped platforms understand trading hours, pricing models and promotions better. Online conversion rates rose by 8.8%4 globally as match-making algorithms - in which platforms place so much trust in - delivered an even more efficient and effective customer outcome with their new data trove. With everything now available at the click of a button, why would the consumer choose any other option. According to eMarketer data, E-commerce sales in 2020 grew 32.4% year on year (YoY) as compared to 14.6% YoY in 2019.5
Much in line with this, to provide a comfortable and safe experience for their users, traditional physical-store front businesses are reinventing their business model to change with the times. Starbucks has rolled out pickup-only stores and Walmart is experimenting ways to introduce frictionless and streamlined checkout processes. Physical spaces such as gyms are also turning toward digital by providing virtual streamed classes and equipment rental. ClassPass, a subscription service that partners with local boutique fitness classes, launched live workouts with more than 500 studios adding virtual classes to the ClassPass platform and 100% of the livestream booking proceeds going directly to the studios.6 Doubts around whether selling stationary exercise bikes with pricey subscriptions were put to bed, as Peloton logged strong growth through 2020 into 2021 with revenue surging 232% YoY to $758m. Here we see examples of physical retail reinventing traditional spaces to support the consumer’s experience in a digital world.
Remote working policy changes
What large digitally savvy corporates decided to do in regard to their remote working policies is another factor to be considered in determining whether or not the pace of digital adoption from COVID-19 is here to stay. Facebook and Google both announced indefinite remote working (more commonly referred to now as ‘WFH’ or ‘work from home’) following the global health pandemic in March 2020. This list goes on with Square, Coinbase & Upwork all announcing a remote-first strategy with many now hiring full-time remote roles.
The trend looks set to continue as businesses reflect internally on how to effectively balance the needs of their employees vs. their revised cost base in a post-COVID world.
Shopify have themselves made sweeping changes to their remote working policies. They’ve now decided, that as a software business at their core, they can operate effectively with their workforce at home for the foreseeable future. They have no need for commercial office space. Shopify’s growth during 2020 was outstanding with revenue in Q3 2020 reaching $767.4m, a 96% increase from Q3 2019. This was reflected as their stock price rose by 2.5x in the period from Q3 2019. There is absolutely no doubt that the company thrived during the COVID-19 pandemic, both in the widespread digital adoption of their retail ‘point-of-sale’ platform but also in the way they embraced a drastic change to their business model with their remote working policy changes.
What does this shift to remote working mean for digital adoption? WFH has inevitably seen the widespread uptick in the rate of adoption of digital first services such as last-mile delivery services for food and groceries and E-commerce with online shopping on loungewear, home furnishing, home entertainment and fitness products selling through the roof. Many companies like Google were remunerating their employees up to $1000 to set up WFH spaces with the direct impact seen on furniture retailers such as Wayfair and Ikea. Wayfair Inc. reported a huge jump in Q2 2020 earnings of $4.3b up from $2.3b the previous quarter. This was by no means an isolated quarter of growth and by the end of Q3 2020, Wayfair reported that sales jumped 67%, exceeding analysts’ expectations. The shift in remote working policy has only gone to support greater consumer demand enabled by digital first platforms and services. Is it therefore safe to say that this societal shift in the way we work will continue to support the increase in the pace of digital adoption evident during 2020?
Pre-COVID sector specific digital infrastructure
The COVID-19 pandemic has affected all businesses, although certain sectors have been hit harder than others. There’s an argument that those sectors hardest hit are also those that lacked robust digital infrastructure. These sectors were unable to digitise their core offering or in some way use technology to help supplement the functioning of their day-to-day operations. For sectors such as Aviation, Manufacturing, Hospitality and Energy it was either unfeasible or impossible to provide a digital substitute in their core offering. Many of these sectors came to a near-screeching halt with digital adoption unable to prevent this. The hope for these sectors is a smooth and effective roll-out of the vaccination programme and a fast post-pandemic recovery. Many non-digitally native sectors such as Residential Real Estate that traditionally lacked any form of adequate digital infrastructure were able to adapt by utilising technological solutions such as ‘virtual property viewings’ and ‘remote consultations’ to continue to operate. These sectors were able to embrace the uncertain challenges associated with a global health pandemic and widespread economic lockdown.
Much has been said about the E-commerce and the last-mile delivery sectors which already had robust digital infrastructure in place prior to the COVID-19 pandemic. But what about those that lacked digital infrastructure but were able to migrate online such as Education? While EdTech stood as one the highest venture backed industries at approximately $10b7 globally in 2020, the sector is not without its challenges - particularly exposed during the pandemic. In a survey, contrasting methods of teaching, it was found that ‘82% of students felt that outdoor activities, group projects and development of communication skills were better in classroom learning’ and ‘78% of students felt that poor internet connections, social isolation and eye strain as the most common problems faced during online learning.’8 A fundamental enabler of online education is the availability of digital infrastructure, which proves to be challenging given it is largely based on one’s socio-economic background. Strained under the lack of appropriate digital infrastructure to support pupils and staff through such as a challenging environment, many of the solutions provided have not been welcomed. Given the chance, sectors such as Education will to a large extent revert back to their original modus operandi as soon as they are able to.
As we have already outlined above, a few select sectors thrived during the COVID-19 pandemic. These sectors were able to tweak their existing offering to ride the pandemic and support a change in consumer needs by placing ever more reliance on digital infrastructure.
To conclude, in late 2019, early 2020, gripped by a global health pandemic and the widespread lockdown of economies, businesses across all sectors were impacted in some way by their ability (or not) to transition effectively and efficiently to a digital first approach. Many sectors were not able to make any sort of transition with bailouts, redundancy and bankruptcy their limited options. Those sectors that were non-digitally native prior to the pandemic but were able to harness digital capabilities to support the functioning of their operations, have been able to battle back against the challenges that the pandemic presented. Many of these have done so with a great degree of success. Those, however, select few sector specific companies that had largely embraced the adoption of technology or had even placed it at the forefront of their approach would only need to tweak things slightly, to capture the opportunity at hand. McKinsey goes as far to suggest that the digital adoption by some sectors will create a wide-reaching ripple effect across all sectors, so much so, that the digitisation we have witnessed over the last year is here for the long-haul.9