Discretionary consumption will change in 2020 due to COVID-19 as food, health, clothing, and shelter will take over high-end consumption in terms of lifestyle and adornment, Morgan Stanley said in a note.
The COVID-19 outbreak, the current lockdown, and social distancing measures for the next few months will hurt pockets of discretionary consumption.
"In our view, the COVID-19 outbreak will bring in a shift in behaviour of not just the consumer but also the businesses, and the lower-end discretionary consumption products could do better than the higher-end. One of the fallouts of COVID-19 is social distancing and, thus, indulgences will need to be more digital-driven than non-digital", it added.
The report said that the COVID-19outbreak is going to change consumer behaviour – health, social distancing, and saving will be a priority. "Simply put, food, health, clothing, and shelter will take over high-end consumption in terms of lifestyle and adornment", the report said.
Separately, the outbreak will make companies across the spectrum re-think their business strategy. Essential activities (e.g., travel) may become non-essential activity. Companies may re-think costs that are fixed in nature and convert them to more variable.
In the last decade, discretionary stocks (such as Jubilant and Titan) have outperformed the Sensex by over 6 times given upgrades in the Indian household lifestyle.
There is a consensus view that this story will continue to unfold over the longer term with rising per capita income. Nevertheless, over the next 12M, we think the ongoing Covid-19 outbreak will bring in a shift in behaviour of not just the consumer but also the businesses, and lower-end discretionary consumption products could do better than higher-end.
"While Titan will likely find it challenging to weather the downturn, we think Jubilant is better positioned, underscoring the benefits of a modified business strategy and higher delivery sales mix", it said.
QSRs will be among the first beneficiaries of the recovery in discretionary consumption after the sharp slowdown due to the nationwide lockdown.
"We think the ongoing outbreak-related slowdown does not corroborate completely with any of the previous slowdown periods. While this is as global as the global financial crisis (GFC) of 2008-09, it is also as local as the Demonetisation in November 2016", Morgan Stanley said.
In the current environment, job losses and an income slowdown (in an already tepid macro environment) will make high-end discretionary spend less likely. "We think Titan's business will slow given the macro headwinds, and the nationwide lockdown and social distancing will hurt its business even more sharply. Weddings that were originally scheduled from 1QF21 have now likely been postponed due to the lockdown, and social distancing measures will create uncertainty around re-planning, which usually starts one or two quarters before the event", the report said.
It added that social distancing also works against Jubilant's business, but food is part of essential businesses and has not been shut completely. Further, QSRs are at the lower end of the discretionary consumption pyramid, enabling a quicker recovery cycle for Jubilant's business.
"Our India economist expects GDP growth to slow to 0.5% in F21, a 40-year low in growth. Consumption growth is likely to follow this trend, particularly discretionary consumption due to income and job losses and consumer downtrading. While QSR demand and retail sales have slowed due to the lockdown, we expect recovery to pickup once the lockdown measures are eased but shopping mall visits may not see a pickup. Meanwhile, jewellery demand could be deferred for some time, in our view, due to social distancing", it said.
"Chinese consumers are back on the streets, but they are still showing a propensity to avoid social and discretionary shopping activities. It has now been six weeks since the lockdown was eased in China", Morgan Stanley said.
Discretionary and retail-based consumer categories were hit the most during the country's lockdown. Most of these categories have recovered to 60-70% by March (four weeks post the lockdown). In terms of offline channels such as restaurants, 90-95% of the stores have opened but traffic is lagging at 40-50%. Among restaurant categories, QSRs have seen faster recovery.
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