We are now in the midst of a prolonged pandemic with no end in sight. Not only has this pandemic led to a deep economic recession, but it is dramatically changing the economic landscape. As an economist, I foresee major transformations of business models in various industries because of COVID-19. A key reason for this is consumers and businesses have learned how to operate effectively amidst a pandemic and that learning will carry over even once COVID-19 ends. Indeed, despite the challenging economic times we are living in, the U.S. economy has shown amazing resilience as businesses have adapted to changing conditions and people have learned to work online, educate online, shop online, be entertained online and socialize online.
In this article, I discuss five industries where I expect to see rather dramatic changes in business models going forward. While these industries are some of the hardest hit by the pandemic, they also present the most exciting entrepreneurial opportunities since there is a great deal of uncertainty regarding the longer-term impact of the COVID-19 recession in these industries.
1. Travel and Hospitality – One of the hardest hit sectors by COVID-19 involves travel and hospitality. Airlines have experienced a dramatic reduction in passenger traffic and have been forced to reduce the number of flights while laying off numerous employees. Hotels have experienced unusually low occupancy rates, correspondingly low revenues and have downsized their workforce. Resort destinations like Las Vegas, Orlando and numerous beach destinations have experienced dramatic declines in tourist traffic as Americans have substantially reduced their travel. And the cruise line industry has simply been decimated by COVID-19. Improved safety measures have helped the travel and hospitality industry and will need to stay in place as Americans gradually become comfortable renewing their historical travel patterns.
Indeed, the stock prices for large hotel chains such as Hilton and Marriot have recovered a significant part of their price erosion in recent months. But the impact on this industry is likely to extend well beyond the end of this COVID-19 recession in part because of the length of this pandemic and the potential for other future pandemics and other potential adverse events. There is no doubt this will force accelerated consolidation in the various travel and hospitality business sectors, which will lead to greater dominance by the market leaders such as the major hotel chains and larger airlines. But the interesting economic question is what other winners will rise from the ashes?
Who Will Rise Above?
Online travel planning is obviously a key player which will continue to displace travel agencies. But I also predict that the movement towards non-hotel lodging, such as Airbnb and VRBO, will accelerate. No doubt this is a trend that has already been in the works – it has been estimated that Airbnb’s market capitalization is greater than the largest worldwide hotel chain, Marriott International. But I suggest this shift will accelerate as people shy away from the large crowds that assemble at hotels in favor of smaller more intimate alternatives. Similarly, I suggest that there will be a sustained drop in travel involving crowds via planes, trains and buses, and a corresponding increase in travel via automobiles. We will see how it all plays out but COVID-19 will undoubtedly lead to major changes in the travel and hospitality industry!
2. Sports and Entertainment – Perhaps no industry has been more impacted by the pandemic than sports and entertainment. Movie theaters have been closed for extended periods of time. Concert venues are empty. Major sports are slowly restarting but without fans (or with very little) in attendance at local stadiums. Meanwhile, the movement toward at-home and online entertainment is accelerating. While it is difficult to predict what will happen after COVID-19 passes, certain business models are clearly under transformation. Most notably, the traditional Hollywood business model which has historically heavily relied on box office sales to support movies will need to be altered. At home-streaming has gradually been replacing box office visits as the movie theater is being replaced by the home theatre – COVID-19 will only serve to accelerate this shift.
Football vs Golf
The days of movie theatres are likely to be gone, or at least substantially diminished in their importance, but the outcome with respect to sports is trickier – in part because of the great enthusiasm that Americans have for team sports such as football, basketball and baseball. These sports are returning but, without large crowds in attendance, they may lose their luster. Indeed, the Los Angeles area just opened the NFL’s latest state-of-the art football stadium which was built for a whopping $5 billion and hosts both the Rams and the Chargers — yet for the moment that stadium sits largely empty during game day! In contrast to team sports, COVID-19 has been more accommodating to sports such as golf, tennis and auto racing. In fact, golf ratings have reached all-time highs during this pandemic. Overall, while Americans’ passion for sports will no doubt remain high post COVID-19, the lingering effects of experiencing this pandemic may lead many to eschew attending crowded sporting events in favor of other forms of entertainment.
3. Apparel – Even prior to COVID-19, department stores and upscale clothing retailers were struggling amidst the expansion of clothing sales both online and at clothing discount chains. For example, e-commerce accounted for an estimated 20% of total fashion sales in 2018. However, unlike in other industry categories, online fashion sales are not increasing, but are declining because overall fashion sales (both in-store and online) have experienced a significant drop-off in demand during COVID-19. As a result, various department stores and clothing specialty retailers are struggling to weather the pandemic. JCPenney and Neiman Marcus have closed hundreds of stores and have declared bankruptcy. The same is true for national clothing store chains such as Brooks Brothers, Ann Taylor, Lane Bryant, J.Crew and Men’s Warehouse.
The Hidden Costs of Manufacturing Abroad
In the meantime, clothing manufacturers are being stuck with huge amounts of excess inventory, including fashion that is going out of season. All of this is leading to a potentially fundamental redesign of the traditional fashion model that currently involves manufacturing large amounts of supply abroad well in advance of demand. A continued expansion of e-commerce will no doubt be a key part of the changing business models, but the current oversupply will likely cause many fashion companies to rethink their approach to business – potentially shifting to alternatives such as just-in-time manufacturing. While it is supposedly much cheaper to manufacture clothes abroad, the pandemic is exposing the hidden cost of doing so. As a result, it is conceivable that some apparel manufacturing may relocate back to the U.S. Regardless, the traditional fashion business models will need to better match supply with demand in order to avoid future supply gluts such as this one.
4. Education – Across the U.S. and elsewhere, teachers and students at all levels (grade school to college) have been forced to create online learning environments. It has been estimated that over 1.2 billion students globally are now learning out of the classroom. This, in turn, is forcing our educational systems to confront a fundamental issue: online learning has potential advantages over in-person learning. This is not to say that you can replace the effectiveness that many of us experience by learning in-person. But online learning has been shown by some studies to increase retention rates, particularly for older students, such as teenagers and adults. Online learning can also be much more convenient and time efficient compared to in-person learning. This prolonged pandemic is now vastly expanding the online learning environment so the advantages and disadvantages of online learning will likely be exposed even further. Some observers are suggesting that what will likely emerge is a hybrid model that combines in-person and online learning. Regardless, this pandemic may well be the trigger that revolutionizes education for the future.
5. Real Estate – Real estate is another industry that is likely to be dramatically transformed as a result of COVID-19. While the recession has hurt the residential and commercial real estate markets in many geographic areas in the short-run, the more interesting economic question is what will happen after COVID-19 ends? I believe that COVID-19 will lead to major changes in the value of real estate properties – with some experiencing substantial appreciation while others experience substantial depreciation. One key learning from the current pandemic is that many businesses have been able to operate effectively with their employees working remotely. As a result, businesses post-pandemic will likely rethink their commercial real estate choices while employees rethink their residential real estate choices. After all, why do certain businesses need to carry high real estate costs when their employees can work as effectively in the comfort of their homes? And why do employees want to bother commuting into the office if they can work as effectively at home?
COVID-19 will also impact geographic locational choices, likely leading to an even more accelerated movement away from areas hit hardest by the pandemic, including dense urban living environments. Commercial real estate in certain key categories such as retail, hospitality and office may experience a sustained decline in values as a result of COVID-19. And residential real estate may again experience sizable appreciation as people place greater value on their homes because they are spending much more time there.
Another industry impacted by COVID-19 is the retail sector. For more on details, check out my previous blog post – The Changing Competitive Landscape Due to COVID-19: The Impact on the Retail Sector.