null Episode 7: Consumer Behavior in the Time of COVID-19
Double Take podcast

Episode 7: Consumer Behavior in the Time of COVID-19

COVID-19 Double Take podcast Audio Equity Fixed Income
May 2020
Episode 7: Consumer Behavior in the Time of COVID-19

Mellon’s Leigh Todd and outside expert Professor Beth Redbird
examine both the challenges and opportunities that countries are facing in the wake of COVID-19.

The link to the survey discussed in the podcast can found at

Rafe Lewis: Okay. Hello folks. Welcome to another pandemic edition of Double Take, the Mellon podcast. I'm your co-host and director of investigative research here at Mellon, Rafe Lewis.

Jack Encarnacao: And I am your other co-host and investigative researcher, Jack Encarnacao. On today's episode, consumption in the time of COVID-19, how has the pandemic sheltering in place and steep job losses affected the consumer, and which of these impacts could lead to permanent behavioral changes? Today, two experts to help us navigate these unchartered waters, Leigh Todd, Mellon's veteran consumer industry analyst, and Beth Redbird, assistant professor of sociology at Northwestern University, who studies, among many other things, economic attitudes, social class, inequality and something I can't remember too well, group interactions.

Rafe: Well, by the way, I just want to remind folks, we are recording this from our respective home offices. We're using wifi. There's dogs, cats, kids. So if you hear some extraneous sounds, that's why. So typically, we like to start our Double Take episodes with an in house Mellon expert first, but in this case we wanted to make an exception because Professor Redbird has been conducting a very interesting survey of American consumer behaviors over the past several weeks and we'd like to explore those findings with her to set a baseline for our discussion with Leigh Todd who can then examine what Professor Redbird's findings could mean when it comes to public consumer facing companies and the investment implications of some of these findings. Professor Redbird, welcome.

Beth Redbird: Thanks. Thanks for having me.

Jack: Professor, so happy we could have you on here because selfishly I'd like to know how out of the mainstream I've been these past several weeks as I've lived and worked in lockdown. So why don't we start on a really high level? What is the survey you've been conducting and why are you conducting it? What are you asking of the American people?

Beth: So we're conducting a nationally representative survey every day of about 200 different Americans. And the goal is to track changes in attitudes, behavior, opinions, and some social and cultural changes that are occurring during the pandemic. So we launched the survey the week of March 12th and we've been surveying in the five weeks since in an attempt to follow on the ground in real time, the way in which the pandemic is impacting the way Americans think and feel.

Rafe: That sounds like a pretty important endeavor. I've had a chance to cruise around the dataset. And by the way folks, the survey itself is available through Northwestern University and we're going to try to put a link up to it on as well, so you guys can take a look at it, our esteemed listeners. So professor, maybe the first thing we should be asking you is what's the most surprising finding that you've seen in this survey so far? Is there anything that's really blown your mind and was counterintuitive to you or just amazingly interesting?

Beth: Well, from the standpoint of things that I find to be personally really interesting, I'm interested in group behavior, and so I'm really interested in concepts like social solidarity and effectiveness. And I have sort of had this bet going with myself on the way in which this would impact that. After big social disruption events, we see typically an increase in solidarity. So after 9/11, we see a really huge rally around the flag effect, after hurricanes and big instances of natural disasters, we tend to see a pulling together and a large amount of outreach to that community. And so I wondered whether or not this would have a similar effect. And the thing that surprised me most is that actually it hasn't. We haven't seen a lot of movement that suggests an increased connection with your community. If anything, people report today, they expect their neighbors are less likely to help them if we needed help today and they feel less connected with their community. And so I suspect that there's something unique about the nature of shelter in place or the pandemic that's not creating that big push towards community that you would normally expect.

Rafe: So social distancing is creating social distance.

Beth: Yes.

Rafe: That makes sense in some ways. And in other ways-

Beth: Yeah, our physical distance is translating into an emotional and attitudinal distance.

Jack: And what would you assess at this point, professor, are the ramifications of that? It's counterintuitive in a way. In another way, it makes sense. How are you thinking about how that's going to change how we might emerge from this pandemic on the other side?

Beth: Well, I mean that's a giant question. There's several competing pressures that the average American I think is living with these days, in that we still see, in fact, we've seen over the last five weeks, a drastic increase in concern about contracting COVID, getting sick and bringing it home to your family. And so to some extent when social distancing practices started emerging, I think the first one actually came out in northern California the week we began the survey. People didn't really support them. They thought they were a general overreaction on the part of the government. And now people are far more worried about COVID than they are about the disruption COVID is creating in their life. They're scared of getting sick far more so than they're worried about the economic impact of this. So we asked people flat out, are you willing to get sick if it means keeping your job? And by far people say no, they would rather lose their job than get sick. So people are scared of the pandemic more so than they are of the social disruption created by policies that we're implementing to deal with the pandemic.

Rafe: Professor, aside from the emotional distance anomaly that you pointed out in the beginning of our conversation, I'm curious if there's anything else new or different in how Americans are responding to this pandemic versus the Great Recession versus 9/11. Just generally speaking, what sticks out to you?

Beth: Well, to some extent, the Great Recession creates a lot of uncertainty about our economic well-being, right? So the Great Recession is filled with anxiety about when the Great Recession is going to end. And this, of course, has a lot of the signs of that too. We're all kind of economically uncertain. We're all very much wanting the economic difficulties and costs by COVID to end. But COVID is additionally complex in that it comes with the pandemic aspect of it. COVID pits us against two forms of well-being, and Americans are being asked to choose whether or not they wish to risk their health or they wish to risk their economic well-being, neither of which is something we want. But to some extent, it's something we're being forced to choose.

Beth: I think that's one of the reasons maybe why we see some divisiveness around this. None of us want to make that decision, but we're all going to weigh that risk differently. To some extent, some people are going to prioritize one and some people are going to prioritize the other. And COVID is additionally complex because it's a pandemic. The decision your neighbor makes will impact you in a lot of ways.

Beth: Speaking to that divisiveness perhaps, we have seen, of course, some schisms develop in how certain parts of the country respond to these shelter-in-place orders. We're seeing at least media coverage of some pushback and protest. I wonder if you could take us through the differences you might be detecting in your surveys of behaviors amongst those who describe themselves as Republicans, Democrats, Independents. Has that factored into how you find folks respond to these types of questions?

Beth: Yes and no. To some extent, yes, there's a big party difference in a lot of behavior and attitude, but in a lot of our COVID-related attitudes, what we find is bigger than a party difference is support for the President. So support for the President raising far more significantly than party difference. In other words, Republicans that support Trump and Independents that support Trump feel very strongly one way, and Republicans and Independents that don't support Trump feel very strongly the other way. And there's an insufficient number of Democrats who support Trump for us to conclude what they're doing.

Rafe: So maybe party is not really an effective category or label anymore in this country. It's more about whether you are a believer in the personality of the leader or not.
Beth: Yeah, I think to some extent. Also, Republican and Democrat is kind of a complex interaction with what's going on. There are Democrats living in red states, and we see that they're a little more skeptical about social distancing than Democrats living in blue states. And kind of at an invert, Republicans living in blue states are a lot less skeptical of social distancing than Republicans living in red states. There's a complex interaction of multiple levels here, and the response to the pandemic has been so decentralized and states are kind of going their own way. That complicates how we understand whether or not people are supporting policies at various levels.

Rafe: Well, it's fantastic that you got on this so early in the pandemic here in the country, because you're able to trace the arc of how things are changing here. And maybe that should be my next question. This has been going on for you now several weeks. As the data has been flowing in, thousands of Americans now have responded to your survey. What's been the biggest kind of change that you've seen, I guess, in terms of behavior, attitude, fear, you name it? I'd leave it wide open for you.

Beth: Well, I would say the biggest shift that we've seen is an increase in worry about COVID. When we started surveying, most people weren't worried about COVID at all, and almost nobody knew anybody sick. And now, more than 30% of our respondents know somebody who's sick. Large numbers of people know somebody who's died, and people are scared of the disease. That has drastically shifted, which I guess is to be expected given the way that COVID moved through the population.

Beth: But initially, what we saw were people were mostly worried that they were going to be seen as overreacting or that they were worried their government was going to overreact. And that's just not their opinion now. This podcast is kind of about consumer attitudes, and I think that's really relevant for when we start to talk about opening back up the country, what that's going to mean.

Jack: I'd love for you to expound a little bit on that, Professor. How does that impact what this will mean?

Beth: Well, it doesn't matter if the mall opens up if nobody goes. So long as Americans are scared of the pandemic, and so long as we can't convince Americans that we can get a handle on the pandemic, it doesn't really matter what economic policies we put in place to restart businesses. Consumers aren't going to spend until they no longer feel that risk. So long as they're scared, it's sort of irrelevant what the bowling alley does.

Beth: We saw this drastic increase in fear of COVID, and that fear has not yet gone away. We haven't convinced Americans that we've got the pandemic under control. We haven't convinced them that pandemic response is effective or that they can go to a local hospital and get treatment. And until we can do that, their spending is going to continue to be low.

Jack: How about in terms of income classes? There's been so much written about income inequality in the United States, how it poses a potentially destabilizing influence on society over time. We talked a little bit more about party affiliation and ideology. We talked there about it really doesn't matter if you're scared what's open and what's closed. How about in terms of what you can afford anyway? Does this show, this survey, anything about the impact of Corona and sheltering in place across classes?

Beth: Well, we know there's drastically different abilities for people to shelter-in-place based on income. Most essential workers are coming from the bottom half. Distribution, retail workers, grocery store workers, even healthcare workers, don't largely tend to be from higher-end groups. But in terms of attitude and belief, I'm actually really surprised at how little income difference there's been in those respects. People are scared of COVID across the board. They're endorsing shelter-in-place and closure of non-essential businesses across the income spectrum. There's not big income divides in this. It doesn't really matter what your income is. Nobody wants to get sick, because nobody's really convinced that they're in a place where everybody in their family could survive if the pandemic found their household. It's actually been interesting to watch since income inequality, you often see big schisms between rich and poor and those just don't exist, at least attitudinally, in our data set at this point.

Rafe: Wow, respiratory viruses are the great equalizer and actually lend credence to the notion that we're a classless society maybe. Well, let's turn to age for a moment. I was pretty surprised to see that the oldest cohort in your survey, age 55 and up, I believe, they were the most likely to speak to their neighbors face to face. And it was also striking to me to see that at least in your earliest surveys, the oldest cohort was the least likely to leave the house wearing a mask or wearing gloves. What do you make of that?

Beth: Well, I too have been surprised by the fact that in terms of social distancing and behavioral change, individuals over the age of 55 have been the slowest adaptors. It surprised me a lot because we know their risk is highest. But we also know, for instance, there's good research on the Chicago heat wave that occurred 20 years ago now, I think, that basically found that individuals with deeper social connections had better information about what was going on in the disaster and were more likely to survive. One of the things that we do know about people over the age of 55 is once they leave the workforce, your network shrinks. You just have fewer people you can talk to to get a broader swath of information about what's going on. And we're measuring where you're getting your information and at some point we'll be able to divide up the information and actually know. But I wonder to what extent this slow adaption by people over the age of 55 is the result of smaller networks and so less information exchange.

Jack: Among the things you asked, Professor, in your COVID-19 social change survey is in the last two weeks, did you go to the store or shopping? Also, you ask, in the last two weeks, did you go out to eat? What has the trend line been there? Does it contain any signals that tell us what consumer habits are, I don't know, falling by the wayside or changing in a quarantine?

Beth: Yeah, I mean it behaves much the same way you would expect in that going to non-essential businesses has declined a lot but continuing to go to the grocery store is something we do. We might even do it slightly more often than we were doing it. Possibly, in part, because the grocery store has shortages so we have to go more regularly to find what we were looking for. As businesses have closed kind of universally, people's tendency to go out and about has shifted. I don't know that people are leaving their house drastically less than they were. And I think actually some of the GPS movement data suggests that they still leave their house. They're just not going to retail. They're not buying things that they need. They're still out. Hopefully they're out in ways that are compatible with social distancing.

Rafe: That makes sense. You know, one of the things we've tried to do on this podcast is to separate the evanescent and the temporary from the more permanent shift that can occur in a large theme that's taking place. So we've talked about the US-China trade war, for example, things like that, 5G communication. In the case of this pandemic, I'm curious what you're seeing in the data that would lead you to believe there are certain things about the way Americans behave, think, act, purchase, that might be more long-lived and even permanent as opposed to just temporary reactions to what we're enduring.

Beth: Oh, well, that's the million-dollar question, I guess. From the standpoint of just longer trends, I'm worried about the restoration of consumer confidence. I think that what we're likely to see in the way our pandemic behaves is that there's not going to be one U.S. curve, that COVID will be a little cyclical and it will experience several other humps. And so long as that's occurring, if we can't convince people that the United States has a ready and organized pandemic response, I'm worried we'll see a lot of whiplash in the economy. The consumers will come out, and then they'll have to retreat, and then they'll come out again, and they'll have to retreat. And there's only so many times they can do that before they become very concerned about the future and they stop spending. On the short term, I'm worried about whether or not we can actually achieve a V-shaped recovery if we can't get a handle on the public health side of this.

Beth: In terms of permanent change, that's definitely a question that everybody's asking. Will we continue to shake hands? Will we spend our money differently? Will movie theaters still exist? And I have no answers to that. I tend to think that Americans are very resilient and that big social changes are hard to accomplish, so I'm skeptical as to whether or not we'll see any big permanent changes, but I have no idea.

Jack: When we start to feel, Professor, that whatever it is we have shut down or curtailed greatly during the pandemic starts to loosen up, I'm sure it won't be like a flip of the switch and one day we're back to life as it was in 2019 from an economic and social standpoint. But there will come a point where we all coalesce around the idea that we've taken a step out of the pandemic. We've taken a step back toward what we would consider normalcy. I'm interested in how you would look at that from your vantage point. What will you watch most closely at the point where it starts to seem that people are filtering back out into the workplace in society again? What at that point becomes the most important data point to track?

Beth: Well, I will personally be most interested in the way we begin to regard social interaction from the standpoint of cooperation and listening to the government. In the United States, we've been for a hundred years now really skeptical on the ways in which big social projects occur in authoritarian regimes. Rightly so. We used to watch things in the Soviet Union and their ability to organize workers around big public works projects. And we saw it in things like China too where they built a hospital in 10 days. The ability of regimes of this type to mobilize people towards a giant social response comes in part from the authoritarian nature of the regime. And we see in other places like the United States and Italy where we're very much not culturally-oriented towards that type of big call, we just don't respond well to that, but COVID kind of required it of us. Where we, culturally, are really skeptical of that in the United States, we paid for it to some extent here, and so I wonder if we're going to shift more towards being less skeptical of big requests from the government that we sacrifice for our neighbors.

Beth: There's all that literature about children of the Great Depression and how children who grew up during the Great Depression came out different from the cohort that proceeds and the cohort that follows them, because they lived through such hardship that they had a different attitude towards a lot of things, both money but other things as they aged. And I wonder if you'll see a generation of young people come out of this saying that they're less skeptical about the government's demands that we sacrifice on behalf of the country than the cohort that will follow or the cohort that came before.

Rafe: That's really interesting because there was already polling that suggested that millennials and older gen Z were much more open to the concept of socialism. And I wonder if that dovetails with the notion you were just mentioning. We've talked a kind of ideology, we've talked income and class, we've talked age. How about race and ethnicity? One of the things I saw in your data, it looked to me like Hispanics, in particular, were the most worried about losing their jobs of all the racial and ethnic groups followed by Asians. I guess just generally speaking, what are your takeaways so far when you look at this pandemic from the racial, ethnic point of view?

Beth: Well, racism is a really salient factor in U.S. society, a whole bunch of metrics, including where you work. Race is highly correlated with the likelihood that you have a service job. It's highly correlated with the idea that you have a retail job or you work in a restaurant. It doesn't at all surprise me that there's big racial differences in worrying about the economic disruption and how much the economic disruption will hurt. There's also been racial differences in the likelihood that you know somebody who's gotten sick or died. We see actually that Latinos and Asians are the most likely group to know somebody who got sick with COVID. We know that this is hitting different communities in differential ways.

Beth: The ability of us to rectify social inequalities during times of social disruption is really reduced. Social disruption exacerbates inequalities. They're very rarely compressive. In fact, the Great Recession was really unique in that way. For the first two years of the Great Recession, it was compressive, and we saw increased equality in the United States. But even that didn't last, and it was gone very quickly. Big social change creates worse inequalities.

Jack: Professor, parents and teachers are being forced to make do virtually with computers, making sure that kids are still learning during this pandemic. Does the research tell us if we'll think differently about how we educate our kids on the other side of this?

Beth: That's a really good question. Part of the goal with the research is to follow up with our respondents in three waves. So far, we're still in the first wave. We're about to pivot to the second wave next week, actually, where we'll return to the approximately 8,000 people we surveyed to date and see how their views have changed. Part of our goal in that is to assess, what do you think that we as a society needs to do differently? Should we educate our children differently? Should we re-explore the idea of universal healthcare? Should we have universal paid sick leave? The United States is having a serious conversation right now about U.B.I., which is kind of a weird position for us to be in as a nation.

Beth: I called my father last night. He's in his seventies, and he said to me, "Beth, you're living in the most socialist country in the world right now." He didn't say it derisively or anything. He kind of said it tongue-in-cheek. And he's not totally wrong in that, you're right, we've seen this resurgence of discussions that we had tabled as not possible discussions in the United States.

Beth: I think in the next couple of months we're going to have them and ask questions about should we be structuring our society differently if we risk pandemics returning. There's no evidence that there's only going to be the one COVID pandemic. I think there's reason to believe COVID will return, and to top that all off with climate change and the suggestion that we might experience an increase in events of this kind going forward anyway, are we a resilient enough country to deal with that? And if we're not, what should we change to ensure we can?

Rafe: Oh, that's pretty sobering, Professor. That's fine. There's not a lot of rays of sunshine.

Beth: Students very rarely leave my class saying, "Wow, that was uplifting."

Rafe: Well, maybe that's a good segue. As a final question, from me anyway, from what you've observed so far in conducting this survey, and again, kudos to you for getting on it so early, it's just amazing, I think you did a great job in real-timing your research on this as opposed to trying to go back and piece it together later, I think that would have been scientifically much more difficult to do, what do you think we're likely to take with us from this experience, either attitudinally, behaviorly? What's the scar tissue?

Beth: Well, I think that to some extent we're likely to look around and say, "What is the responsibility of our government to us?" We did this a little bit after the bank bailout during the Great Recession. We said, "If the government can spend that much money on a bank bailout, why can't they help me?" And from that, you see the rise of both the Tea Party and Occupy Wall Street, two social movements that start very much the same. Eventually they diverge quite a lot, but they actually start from a very similar place. I think we're likely to see very similar questions here too. You know, why doesn't the government have procedures in place to ensure vital medications are produced in the United States? Why is it that we don't have a stockpile of the kinds of things necessary to ensure that if trade is cut off, we don't all starve to death or experience a drastic contraction in the availability of various vital supplies?

Beth: I think going forward we're going to ask, what is the purpose of our government, and what should we demand of it? I don't think it's implausible to suggest that we might see a resurgence of American manufacturing after this, a question of what is vital and what should be manufactured here. I don't know whether or not we have the actual structures in place to pivot our economy to some extent in order to do that, but there are some things that are vital to national security, products that are vital to national security, that should be made here. Whether or not we can do that as an economy, I don't know, but I think it's a conversation we're likely to have after all this is done.

Jack: Yeah. Whether or not we're building the future now, the future will have to be built. We'll see where and how and around what kinds of social attitudes as being monitored by our guest here on Double Take this time around. Professor Beth Redbird, thank you so much for your time. Keep up the good work and we'll check in again with you sometime down the road, I'm sure.

Beth: Thank you for having me.

Rafe: Okay, folks. Well, we got a great table setter there from Professor Redbird on the behavior and the mentality of the American consumer during this awful pandemic. Now, let's look at the investment ramifications of those findings with the one and only Leigh Todd. Jack, give our dear listeners a sense for why Leigh is with us today.

Jack: Gladly. Leigh Todd is a portfolio manager of Mellon's large cap growth equity strategy, and for the past two decades has been a senior research analyst covering the consumer sector for Mellon.

Jack: Before joining Mellon, Leigh was a member of the US large cap portfolio management team at State Street Global Advisors in the Global Fundamental Strategies Group. And before that, a member of the small and mid-cap investment team, where she was responsible for the technology, consumer staples and transportation sectors.

Jack: She holds a BS in economics from Lehigh University and holds a CFA as well. Leigh, welcome to Double Take.

Leigh: Thank you, Jack. Nice to be with you guys.

Rafe: Lehigh Leigh. I never put those two together.

Leigh: Exactly.

Rafe: You were made for that institution, Leigh.

Leigh: I was.

Rafe: Why don't we dive right into it? One of the things that came up in our conversation with Professor Redbird was income inequality and what she was seeing, in terms of some of the class stratification and the behaviors, that you can identify with one segment of the consumer population versus others.

Rafe: It appears we're entering a recession now, amidst this pandemic. What do you think are the implications of this growing income inequality for consumer facing companies in your universe?

Leigh: Yeah, I think there's really a two-pronged approach at looking at this. The first one is the individual company's responsibilities to their employees. Many of the lower income individuals are often employed in service areas like restaurants and retail and hotel. And many of these areas of our economy are right now essentially in shutdown.

Leigh: I think a corporation's responsibility is to ensure that their employees are safe, are able to satisfy their immediate needs. We have seen some hourly wage increases from a handful of companies that have remained open. We've also seen some of our companies pay their employees even while their locations were closed. Really as a stop gap, essentially, until the government could get the necessary bills passed to really supply the backstop that people needed through unemployment, the PPP program, various programs that are going to help people continue to generate their incomes in this really difficult environment.

Leigh: And this is something that we really saw across many of the consumer companies over the last several years, where we saw wage increases coming, not as mandated by the government in terms of higher minimum wage, but really companies choosing to be that employer of choice. And recognizing their need to keep their employees happy and healthy.

Leigh: I think this income inequality is going to continue to be a hurdle for companies as they try to ensure that their employees are safe, just given the extreme volatility and the vulnerability of the lower income demographic right now, and that they are the most vulnerable in terms of job loss. I think that we're going to continue to see the struggle in the US and globally.

Leigh: Now the other... Oops, sorry, go ahead.

Rafe: I guess what I was going to say is that was a little bit of a counterintuitive answer to me, because I was thinking you might go toward the folks who are walking up and down the aisles and putting stuff in a cart. But you went to the employees, which I think is fabulous and very interesting, but we may as well have you pivot over to the consumer themselves, irrespective of where they work, I guess. Right? How do you think about what's happening with the income inequality divide widening at this moment and what it might mean for what kinds of companies might do well or do poorly in this kind of environment?

Leigh: I think what you're going to see going forward now is the recovery is going to continue to be slower for the lower income consumer. So going forward, when I think about the people that are going up and down the store shelves, I think you're going to continue to have that higher income demographic recover more quickly. Respend, recover more quickly than the lower income demographic.

Leigh: But I think what we've seen and what this crisis has caused is essentially a larger adoption of those alternative abilities to shop, are going now down into more of the lower and moderate income demographic. The higher income demographic had generally been catered towards, in terms of that buy online, pick up at store, the buy online shipping.

Leigh: But essentially what we've seen here now is that all demographics, demands need to really be able to be satisfied with those flexible delivery arrangements. I think the companies that are going to do better and survive the best are those that have a broad platform of product that can help satisfy demand across multiple demographics, and also have a product that's really going to be able to be delivered how the consumer wants to receive it.

Leigh: So whether it be shopping in store or delivered to the home, the curbside pickup that has been quickly and rapidly adopted in the current environment, I think that those companies that are going to be successful. They're going to be those with the broad platforms and easy access to delivery of product.

Jack: One of the things, Leigh, that Professor Redbird talked about, she's finding in her research, is how this crisis is different than past ones. And that she's not seeing the data points to suggest that we're uniting as a nation. That in fact we're segmenting even more so, and dividing ourselves and sealing ourselves even more so than we were before this from each other.

Jack: And I wonder if you as a consumer analyst have read throughs there. Do you think that that has any ramifications? Does that mean anything for spending and consumption on the other side of this?

Leigh: Yeah, I think that it does. I wonder if when we come out the other side, that's when we actually start to unite. I'm fearful of people pointing fingers and even as we've been... before, we could unite really nationally within the United States, but now states are being pinned against states. Some states that are remaining closed being concerned about those states that are remaining open.

Leigh: I think that that's a longer term risk, when you think about the mobility of the consumer within the United States to travel for vacation, for business. I think that that's going to be a hurdle that we're going to have going forward.

Leigh: But I do think that locally, I think there's been a little bit more uniting on a more local level, in terms of your local communities helping each other, neighbors helping neighbors. I actually think is happening, but I also think that it's going to be a challenge and whether the United States can really unite. And that would really increase mobility for the consumers and individuals in the country.

Leigh: I wonder if the environment continues to be more, they shop local, do things locally, what you can't do locally have dropped off at your doorstep. I think that that's going to be our environment for the next six months at least.

Rafe: That's an interesting a change in a way, because it seems to me that the businesses that have been in most peril right now seem to be the local businesses that don't have an international footprint that they can fall back on. Or, economies of scale that will really help them.

Rafe: And so it seems to me like there is a lot of effort going into local neighborhoods, trying to prop up their local businesses. But at the same time, it seems a heck of a lot easier for the consumer to just go onto the slick website of certain mega consumer companies and have things ordered and just show up to your door. You know what I mean?

Rafe: How do you think about, we already had an acceleration toward eCommerce, right? But is the table even more shifting toward the big, broad company now?

Leigh: I think so, generally. There is a definite risk to a lot of small business owners not surviving this on the other side. I think that's going to harm Main Street shopping and experiences.

Leigh: What I do think also though is that there has been an ability, and social media has provided this opportunity for companies, for small, local, whether it be restaurants or people who've been able to satisfy demand here in the near term, and an ability to communicate with your customers, your local customers, that you wouldn't have had that capability five, 10 years ago.

Leigh: A small mom-and-pop store can announce on Facebook, we've reopened, we were closed for two weeks, now we've reopened. That would have been a message that would have been much more difficult to get out five or 10 years ago. So I think these smaller companies' abilities to communicate directly with their consumers is going to help them.

Leigh: At the same time, I do think that scale is going to be incredibly important going forward for the larger companies. I almost think this is going to be, the people in the middle are going to be the ones that get lost the most. The companies that have significant scale, ability to really satisfy consumer demand, when, how, why, really be able to identify their customers, really be able to keep their customers happy. I think that continues to be incredibly important for the larger companies.

Leigh: You have a lot of companies in the middle that aren't particularly differentiated. They do an okay job, but not a great job. They don't have a broad offering. They maybe don't have the infrastructure in place that is needed to satisfy that broad demand. I think it's the companies in the middle are the ones that are going to get the most lost, post the other side of this, how we refer to it.

Jack: And maybe the flip side of that coin, relative to small businesses being able to leverage social media to get the word out that they're back and in business much more efficiently than they used to be able to, is that if you're a large firm and social media can prove to be a significant pressure on you and some of the business decisions you make, look no further than some publicly traded companies that were able to secure payroll protection program loans from the federal government. Which, of course, by name, being administered by the SBA, you would think were for small businesses.

Jack: And we have seen firms Leigh that have had to return or at least felt compelled by public pressure on social media and other channels, to actually return the money they secured through that program, because they were just too large to comport with what the general impression was of where that money was going. How have you observed that? Because these have been consumer companies that have been returning this money. What does that say to you and does it mark a new day?

Leigh: I think it does. I think an area of focus for the investment community along the lines of ESG, I think that that's really playing an important role here.
Leigh: These companies were eligible for these funds based upon how the government wrote the bill and based upon how these PPP funds were planned to be implemented across the economy. I think that it behooves the company to make sure that they are really representing their brand and representing their company and not alienating potential customers down the line. And then they view that as more important than the needs for the immediate funds that were available through PPP.

Leigh: I think it's important. We've seen it across higher education institutions, restaurants, retailers. We've really seen it across the board. Many of these companies refusing or returning these funds at the best interest of their own reputation. And that your reputation is more important than the initial help that these funds were going to provide.

Leigh: I think that that's really the right thing to do for these companies. I think we've seen some other companies, as I mentioned earlier, increase their hourly wage. One, their customers are at risk. Their customers, excuse me, their employers are at risk. The employees are working harder and working faster than they have before. It's really important to make sure that an employer and particularly a consumer facing brand does not look like they're taking advantage of their employee base at this time.

Jack: And relative to reputation, I wonder if we could take it a step further even, because we have seen anecdotes to this effect out there, where firms particularly smaller companies that have been able to secure some of the federal money to protect their payroll in this crisis, have found that when they call their workers and say, hey, I've got this loan from the Feds, you can come back on payroll, they're not too happy about that, the employees.

Jack: Because when you net it out, they actually are making more with the sweetened unemployment benefits, with the $600 additional from the federal government, plus whatever they're getting from their individual state. And then they'd actually be forced to be making less if you go back onto the payroll.

Jack: Now, I know that might be mostly an anecdotal circumstance, but it does happen. I'm sure you think about the spending power of the consumer. Now that these unemployment benefits, Leigh, are at a higher level than they really ever been with the federal support, can we think of the unemployed as unemployed, as it regards their access to money during this crisis? Or, do they have more than ever such that if that is any indication, they might not even want to be back on payroll right now?

Leigh: Yeah, I think that's a definite risk, particularly in some of the services areas as we attempt to open some of the restaurants and retail more broadly across the country. That additional $600 that the federal government is augmenting unemployment with, I think is a definite risk.

Leigh: What will end up happening, and that's right now scheduled to run through July 31st, whether that gets extended or not is still an unknown, depending upon where employment levels are at that point. What can encourage employees to come back is other benefits. So healthcare benefits potentially, that may get lapsed if they maintain, stay on unemployment. You could also have longer term benefit retirement 401(k) contributions.

Leigh: Realistically, you'd have potential promotions coming down the line. So at some point, those employees are going to have to weigh the benefits of the unemployment increase versus the longterm salary and longterm opportunity that they could have by returning to work.

Leigh: I think it's anecdotal now. I think it's anecdotal because there aren't that many states currently reopening. I think it's going to become a more obvious problem as more and more states open prior to that July 31st expiration of those additional unemployment benefits.

Leigh: But there are other reasons for people to want to return to work. I think eventually it will happen, but it could actually slow down the reopening of some of these locations prior to that July 31st elimination of the extra benefits.

Rafe: Leigh, here's what I would kind of call the $20 trillion question since that's the US GDP, how do you think the consumer will come back, with a bang or with a whimper?

Leigh: I think they come back slowly. I think the consumer is rattled. I think there's still going to be concern of this reoccurring come the fall, next winter. So I think people are going to be much more conservative with how they spend and how they plan the next six to 12 months.

Leigh: I actually think that's one of the key tenets there, is it's really impossible to plan. So any big purchases you make, any investments you make, it's really difficult to have any sort of idea what the environment is going to be looking like three months from now, six months from now. I think people are going to be very conservative, partly because you really can't plan for anything longer term in the future and partly because there's going to be a concern that this comes back again and we have significant layoffs and potential unemployment risk coming back.

Leigh: So I think the consumer is going to come back slowly. I think that's actually the right thing to do, and I think that consumers will refocus on how they want to spend their money. I think people have spent a lot of time at home. I think spend is going to continue at home, continuing to improve your home environment.

Leigh: I think people are social, but I think the way that people are social could be different going forward, as restaurants open perhaps at half the capacity that they were before. I think that there could be more home entertainment. I think that just inherently, there's going to be less travel. Again, that inability to plan, that inability to plan a trip six months from now, because you're not sure whether you're actually going to be able to travel or not. I think that that spend on travel is limited going forward.

Leigh: I think that the consumer is smart. The consumer came into this with fairly good balance sheets. The consumer came into this with, savings rate had increased post the financial crisis. People weren't particularly overlevered. There's always been the problem of that emergency $400 not available to a majority of citizens in our country, but overall, consumer balance sheets were relatively strong.

Leigh: I think as long as we've put in the right stop gaps through unemployment, through PPP, the different programs that are put in place, I think the consumer will be okay. I just think they're going to be a little bit more hesitant on making those large purchases or planning out trips three to six to 12 months from now.

Jack: So with a slow return for the consumer predicted here, where do you see the recovery happening first, in terms of which sectors and which parts of the consumer economy?

Leigh: As I mentioned, I think that customers and consumers will spend on their home. I think that that's an important component. I think that that's what people have realized. I think that entertainment, the ability to entertain at home, not just necessarily sitting on the couch and streaming a video, but the goods that you need to really be able to have a small party, have a gathering, be outside again. As the weather gets nice here up in the Northeast, I think that you're going to have spending in that regard, of really that entertainment of small gatherings.

Leigh: So the food, I think people will continue to spend on food, at home, at a higher rate than the food away from home. I think that that's going to continue to be a spend.

Leigh: I really do believe that there's going to be some pent up demand in terms of apparel. There's going to be some pent up demand in some other categories where people have really just put on hold as they all wear their pajamas all day. But eventually, people will want to get back out and spend on apparel. I think you could see a little bit of recovery in apparel coming out of this.

Leigh: But I think where it's really going to be last is going to be on that travel side of the consumer spend.

Rafe: I got to admit, I was looking at a pair of Oxfords in my closet and thinking, boy, I never thought I'd test you.

Jack: When she said pajamas all day, I had to check to make sure my camera was off on my laptop here.

Leigh: Well, did you see somebody got caught on the news today with just his jacket and shirt? He didn't have any pants on and they panned down and showed that he didn't have any pants on, on the news.

Rafe: Oh, dear. These are things to make notes of, all right. Leigh, we got into it a little bit earlier in the conversation, but brick-and-mortar retail is already a pretty challenged part of the world before this pandemic and it's been going on for years now.

Rafe: But how do you think about the longer term viability of physical retail in light of this pandemic? What is it going to look like on the other side?

Leigh: Yeah, I think what this pandemic is going to do is accelerate those trends that we already saw. A lot of struggle in malls, a lot of empty storefronts within malls. And the bricks and mortar, generally, I think this is going to accelerate the demise of the bricks and mortar companies. They don't have a strong online presence, aren't those omni-channel type retailers, where you can buy online, you can buy in store, you have various levels or ability to have the product delivered to you.

Leigh: I think that this is going to accelerate the demise of bricks and mortar. I think that really, probably move forward two years, the percentage of our goods that we purchase online versus purchase in store. We've been slowly moving above that level for years now. I think that probably where we'll be at the end of 2020 was where people predicted we'd be at the end of 2022, 2023.

Leigh: I also think what this crisis has done, accelerated adoption of digital and online ordering and delivery for categories like grocery. Grocery was one of the least penetrated areas of the market. Only about 5% of goods were purchased online for grocery.

Leigh: So I think you get the double of, even for goods that had 20% to 30% had historically been purchased online, now you do have an acceleration in those goods. Plus, you have an acceleration in some of these categories that had been really slow to be adopted as online purchasing, like grocery.

Leigh: I think you're going to have 10% of grocery purchased online by the end of 2020. Again, outside of the current crisis that we're in right now, where a significantly larger percentage is being purchased online. I think you're going to accelerate the categories, and I also think the total's going to accelerate as well.

Jack: So your call is that folks aren't just adopting increased grocery delivery and won't abandon it entirely on the other side of the pandemic. That habits are being formed here around grocery delivery that will continue. You said 10%. As opposed to what in the throes of the crisis? What are the numbers there?

Leigh: You're seeing grocery penetration, online ordering. Now this isn't online ordering delivering to home. Much of this online ordering is picked up at the store. So this isn't all delivery, but digital numbers are accelerated at a growth rate of like 35% to 40% to 50% for some of the retailers.

Jack: Wow.

Leigh: So you're seeing a massive adoption of online ordering of grocery. And then the delivery portion will come much more slowly because I think that there's just an inherent... Part of it too what's happening right now is people are actually home. So it actually is easier to order online and have it delivered to your home now because everybody's home.

Leigh: It becomes a little bit more of a challenge to order online and deliver to home when people are back at work. But that order online, pick up at store and really, there's models now that are being built for grocery retail, where you have a portion of the store is order online. And then the other portion, the area that people really like to pick out themselves, the perishables, the fruits, the vegetables, the bakery, you can order all of your other goods online and go to the store and just pick out those items that you like to pick out yourself.

Leigh: So I think that there's going to be a shift in how people purchase and shop for groceries generally, and this crisis is really going to accelerate that adoption.

Rafe: I had one last one for you, Leigh. One of the things that got exposed during this pandemic was that you have certain kinds of businesses that are deemed essential. I'm thinking supermarkets, grocery, liquor stores, you name it, pharmacies. These are essential. They stayed open.

Rafe: Whereas you have clothing stores and athletic stores, gyms, et cetera, that had to close. They're not essential. I wondered if there's a longer term ramification of this. Does that make the quote-unquote essential business more attractive as an employer? Will it be easier for them to recruit now? Or, maybe it's tougher, maybe people don't want to be forced to work when there's a pandemic. What do you think?

Leigh: That's a good question. I think that those companies that have been deemed necessary are going to be the employers of choice, just because people want to know if they're going to have a job or not. I think the uncertainty of working for a company or an organization that you're not sure what will happen down the line, just makes it inherently less attractive to work there.

Leigh: I also think the other risk you have is that many of these retailers that have been deemed non-essential, they have a greater risk of how they are going to be able to invest and how they're going to be invest in their employees, how they're going to be able to invest in their stores, how they're going to be able to invest in their experience going forward, because they have been hit harder by this pandemic and this crisis. I think that the employer of choice is always going to be that company that's investing in their employees, investing in their stores, investing in their infrastructure, that makes it more enjoyable to work there.

Leigh: And those that have been able to stay open, are going to be the ones that are best able to do that.

Jack: And typically, coming out of a recession, Leigh, we see folks rather frugal with their spending, trading down to less luxurious versions of things they may have had the appetite to spend on before. But there are a lot of different things about this disruption in the market here that might be different and less structural. You've talked about how folks aren't as levered as they were in the last crisis. They aren't as worried about things like the value of their home as they may have been in the last crisis. There may be worries there, but it has a different DNA, the psychology of this downturn.

Jack: So what do you expect on the other side? Are people really going to pull back on high end goods, items that signal their status and just get more frugal or might it be different this time?

Leigh: I think that typically what happens during a slowdown and recession is that flashy label, that flashy logo brand, those products become less attractive to the consumer. Because when the country is struggling and your neighbor is struggling or other family members are struggling, it just really is in poor taste to be demonstrating your wealth at a high level in front of others. And that's typically what we've seen in downturns.

Leigh: I actually think that that's going to be the same this time around, even to a certain extent more so, because people's priorities are going to be coming out of this as, people want to be able to see their family, they want to be able to see their friends, they want to be able to social. That's what's a little bit different about this phenomenon versus the financial crisis, is this really is people are not able to interact with others. Human beings are social beings and they're not able to do it.

Leigh: I think that when you come out of this the other side, you're just going to be so happy to see each other and be together. I don't think you're going to want to be demonstrating your wealth. I don't think you're going to be wanting to be showing off. I think you're just going to want to be welcoming and you're going to be so excited to be together, that you're not going to want to be turning off your friends, turning off your family by demonstrating your wealth.

Leigh: I think that it happens again this time around. I think it happens too, because we just are going to be so excited to be together again.

Rafe: Well, I hope you're right. Well, Leigh Todd, portfolio manager of Mellon's large cap growth equity strategy, and our in-house consumer guru. Thank you so much for joining Double Take.

Leigh: Great. Thank you guys. Thanks for having me.

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