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How to Invest in a Post-Covid "New Normal"

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A host of industries have been affected in material ways by the Covid-19 pandemic. Activities like air travel and other aspects of the broader leisure and hospitality space have been hit hard, but some have benefited as well.

Below we discuss only a few of the industries that have been so affected. The complete report, which goes into detail as to what industries will thrive at the other end of the pandemic, can be accessed by clicking here.


Restaurant Chains - Not Attractive

Sales and traffic trends have started to improve as dine-in options reopen, but we continue to expect restaurant unit sales, particularly for family and casual-dining players, to remain below pre-Covid levels for the next two to three years.

The only exception to this projection is the scenario in which an effective therapeutic or vaccine is developed quickly, which we don’t believe will be the case.

Fast-food establishments have a much faster recovery path given their well-established drive-through and digital offerings, but the outlook for the in-house dining service remains challenging given social-distancing constraints. We believe that the pre-Covid restaurant business model will need to undergo major changes to attract customers.

In addition to emphasizing takeout and home delivery, as is now becoming common, we expect that restaurants will need to redesign their layouts to limit the number of diners a restaurant can serve at any time, which will raise costs per meal in a major way.

The question is whether restaurants will have the pricing power to pass on the higher costs to diners? Perhaps diners will see the higher prices as the ‘safety premium’ that they need to pay, particularly at the premium end of the market. But middle market sit-down establishments will likely struggle over the next two or three years. In any case, restaurant unit growth will slow down in a major way, both for company operated as well as franchised models.

Related to any discussion of this space is the home delivery of restaurant food, which is an expanding business, with exceptional long-term value. This is still a ‘young’ industry, with the battle between Instacart, Postmates, Uber Eats and many others expected to intensify.

Retail: Those With Strong Digital Very Attractive

We see a permanent material drop in traffic at brick-and-mortar retailers as they are forced to manage crowding into their physical stores, and a permanent 40% increase in online buying.

The shift to digital got a boost from the pandemic, though it was already in place in the pre-Covid world. Brick-and-mortar presence is not necessarily a liability in responding to the digital challenge, as we have seen with Walmart (WMT - Free Report) , Target (TGT - Free Report) and others, but it has got to be an essential component of their value proposition to consumers (watch out, Costco [(COST - Free Report) ]).

Supermarkets - Positive

It is reasonable to expect supermarket profitability, which got a boost from the shelter-in-place policies, to get back to normal on the other side of the pandemic. But they will continue to benefit from increased cooking at home even as businesses reopen since people will be hesitant to travel and patronize crowded eating establishments.

The online grocery segment gets a boost from this backdrop, with a variety of online delivery concepts taking hold. While no company has ‘cracked the code’ in this space yet, entrenched e-commerce players like Amazon (AMZN - Free Report) , Walmart and others do enjoy advantages.

Airlines - Not Attractive

Air traffic dropped by close to 95% in the immediate aftermath of the pandemic, but appears to have modestly ticked up since then.

Airlines are announcing a number of measures aimed at passenger and staff safety, including temperature checks, elimination of the middle seats, and mandatory masks, but confidence restoration of the flying public will likely be a slow process.

Most of the gains thus far have been on the domestic, leisure side, with business and international demand still depressed. Management teams are projecting business travel starting to resume from September onwards, but a lot will depend on infection trends over the summer months.

Before Covid, airlines were a worldwide business generating $612 billion in passenger revenues last year, per IATA. We strongly feel that the International Air Transport body’s current projection of -61% decline in passenger revenues in 2020 may be on the optimistic side, reflecting favorable assumptions about the pandemic’s course and lifting of international travel restrictions.

We expect total airline miles to drop permanently by perhaps 20%, but the hope is that most airlines will be able to raise prices and return to profitability by mid-to late-2021.

Even moreso than restaurants, the changes airlines have to implement to raise the confidence of the flying public, including reduced seat density, will come at the expense of profitability. After getting the CARES ACT funds and spending a few quarters attempting to attract flyers with very low prices, we expect the industry to stabilize at a new normal, with prices for air travel permanently -- and dramatically -- higher than they were in 2019.

We expect business travel airline miles to return to their pre-Covid levels by end of 2020, but leisure travel to drop to a new permanent 60% of its pre-Covid level. So, we expect total airline miles to drop to 80% of their pre-Covid levels by mid- to late-2021.

The complete report, titled Zacks Long-Term Recommendations for the Post-Covid New Normal Economy, can be accessed by clicking here.