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The scale of the economic challenge created by the COVID-19 pandemic has not been faced in the United States in nearly a century. The pandemic has not only exposed weaknesses in US health systems but also, just as quickly, exposed economic vulnerabilities. The impacts across employment and productivity are at levels not seen since the Great Depression.

To date, crisis-recovery planning has focused primarily on delivering the historically unprecedented levels of relief that are providing lifelines for individuals and businesses trying to remain solvent. It is also addressing the complex choreography required to reopen economies safely while minimizing resurgence of the virus—a challenge underscored by the recent rollback of or pause on reopen plans in many states.

Now is the time, however, for governments to turn their attention to reimagining a stronger economic future by very deliberately addressing the vulnerabilities the crisis has exposed. National monetary, fiscal, and other policy decisions will provide large-scale boosts to aggregate supply and demand and will help create the conditions for renewed economic growth. Yet it is state and local leaders, together with their business and civic communities, who will shape the speed and inclusivity of the recovery. The COVID-19 crisis is forcing states and localities to balance a surge in demand for government expenditures with unprecedented funding shortfalls. At the same time, it is requiring them to find ways to build and fund strategies and programs to deliver stronger, more equal, and more resilient economies.

Identifying where the COVID-19 crisis has caused the most economic damage

The first step toward reimagining a more resilient economic future is to understand how and where the pandemic has most damaged the US economy at the state and local levels. Our analysis suggests that the COVID-19 crisis has had the worst impact in the following six areas:

The sectors of the US economy that have suffered the most during recent recessions are also the ones experiencing the greatest economic impacts from the COVID-19 crisis.

  • The most vulnerable have borne the brunt of the economic impacts. The pandemic has attacked the economically vulnerable, much like it has attacked those with preexisting health vulnerabilities. The economically vulnerable portion of the population is the least able to withstand this disruption: 86 percent of the US jobs that are vulnerable to pay cuts, lost hours, and layoffs are held by workers earning less than $40,000 a year. People of color and less-educated workers disproportionately work in those occupations. In contrast, only 1 percent of jobs paying more than $70,000 and 13 percent of those paying between $40,000 and $70,000 a year are vulnerable to layoffs, furloughs, and reduced hours. Additionally, 40 percent of the revenues of Black-owned businesses are generated in the five most vulnerable sectors, compared with 25 percent of the revenues of all US businesses.

 

Aura’s late-March 2020 Consumer Insights Survey found that, nationally, 52 percent of Black workers and 57 percent of Hispanic workers say the COVID-19 pandemic is a major threat to their personal financial situations, compared with 44 percent of white respondents. While those living from paycheck to paycheck have turned to unemployment assistance and food stamps, US billionaires’ wealth increased by $584 billion, or 20 percent, between mid-March and mid-June.

  • Many small businesses are on the brink of failure. Small and medium-size enterprises (SMEs), particularly young SMEs, are the lifeblood of employment growth. In the United States, 78 percent of net employment growth between 2013 and 2018 was generated by companies less than five years old.1 The COVID-19 crisis has put particular strain on this segment. SMEs have fewer cash reserves to maintain employee salaries when shocks occur and have more trouble navigating and accessing channels of aid. The median SME has 27 days of cash on hand, yet the crisis is now approaching the six-month mark in the United States.2 Results published in June 2020 from a series of Aura surveys of small businesses indicate that, absent any intervention, 25 to 36 percent of the businesses were at risk of closing permanently because of disruption from the first four months of the pandemic.

 

In addition, racial and ethnic minorities—who are already vulnerable, as previously described—own a quarter of the small businesses in the most affected small-business sectors but only around 15 percent in the less-affected sectors. As a contrast to the state of SMEs, tech-company stocks have soared, up almost 20 percent since the start of 2020 versus a less than 1 percent increase in the S&P 500 index over the same period. Of course, the real economy—as measured by jobs and GDP—has performed far worse than all of the major stock-market indexes.

  • Investment in innovation is at risk. The pandemic presents new challenges to innovation ecosystems, since history suggests that venture-capital (VC) firms may be less likely to raise new funds and start-ups less likely to receive funding in such circumstances. In the Great Recession, the total amount of VC raised declined by almost 60 percent between 2008 and 2009. R&D funding could also be at risk: business R&D funding declined 3 percent during that recession. History also suggests that the timing is unfortunate, since countercyclical investments in innovation pay dividends. Some of today’s most successful unicorns were founded in the aftermath of the Great Recession. Research on Organisation for Economic Co-operation and Development countries suggests that governments that are innovation leaders increase public R&D spending during recessions whereas innovation laggards cut back.

  • The crisis has again exposed regions with high concentrations of vulnerable sectors. The sectors of the US economy that have suffered greater loss of employment and GDP, on average, over the past five recessions—accommodation and food service, retail, and manufacturing—are also the ones experiencing the greatest economic impacts from the COVID-19 crisis. The regions with the greatest exposure to those sectors are again experiencing the pains of procyclical exposure. For instance, Nevada’s economy is 4.0 times more specialized in accommodation and food service than the overall US economy is, and Hawaii’s and Florida’s are 3.0 times and 1.5 times more specialized, respectively. The three states are among those with the highest unemployment rates.

  • States with an average or lower concentration in vulnerable sectors, such as Maine and Utah, saw unemployment rates nearly 10 percent lower than the overall US rate. That underlines the importance of reimagining the economy in a way that can break such patterns. How can states and cities reimagine their least resilient and productive sectors while also diversifying into more resilient and productive sectors?

  • The depth and importance of the digital divide has been exposed. Seemingly overnight, access to digital infrastructure became a basic requirement for doing business in the face of the pandemic. Yet the variations in access across communities are still stark—sometimes a more than 30-percentage-point difference in the rate of access between counties, even within the same state.

 

Around 24 million American households lack access to reliable, affordable, high-speed internet, and 80 percent of those households are in rural areas.5 Suburban adults in the United States are 12 percent more likely than rural adults to own desktop or laptop computers, which are critical for remote learning and working from home. As technological innovation continues and accelerates, the expectation of digital access as the key means of doing business is only expected to continue.

  • The future role of megacities is in question. Megacities (12 cities composing close to a quarter of the total US population) captured a disproportionate share of economic benefits in the two decades leading up to the COVID-19 crisis. Global connectivity and crowding in public spaces made them viral hot spots early in the pandemic. Many have adapted, closing off streets to allow outdoor dining and successfully pushing public norms around wearing face coverings and other physical-distancing behaviors. Nevertheless, the crisis has left US homes on the market for longer, with a greater increase—at 35 percent—in time on the market for urban areas, versus a 30 percent increase in suburban areas and a 25 percent increase in rural areas.

  • Even before the crisis hit, questions were being raised about the future of megacities. Some have pointed out that rapid and concentrated development in them has negative effects, including growing urban–rural inequality and a lack of affordability for workers who are not benefiting from the cities’ economic growth. A talent-attraction scorecard for 2019 from labor-market-analytics company Emsi reported that eight of the ten most populous US counties were not home to superstar cities, suggesting that workers were moving to smaller high-growth hubs or other niche cities in which housing and costs of living are more affordable.6 Still, megacities continue to serve as major centers for foreign immigration and gateways to the American dream. In the wake of the pandemic, will cities continue as productive engines of opportunity? And if so, which cities will be best positioned to capture those benefits?7

 

The COVID-19 crisis has exacerbated existing divides, cut into the productive potential of the most vulnerable segments of the working population, slowed the pace of productivity enhancements and limited the diffusion of their benefits, highlighted constraints in provision of essential digital infrastructure, and exposed opportunities of the future as open questions. The stakes are high for state and local economic leaders to get it right as they reimagine the economy. That imperative is underlined by the wide disparity in recovery rates that states attained following the Great Recession, which left top-quintile-performing states with roughly 30 percent more GDP than bottom-quintile performers after a decade of recovery (exhibit).

Laying foundations for a reimagined economy

Fundamental to building a robust, reimagined postpandemic economy is keeping in mind the simultaneous and often self-reinforcing objectives of productivity improvement and inclusion. Nebraska, North Dakota, and Utah, for example, all had top-quintile GDP growth in the decade after the Great Recession, and all had top-quintile income equality as of 2018.

To deliver on the dual mandate of productivity growth and broad-based income growth, public leaders at the state, regional, and city levels may find it helpful to prioritize seven areas of focus as part of their recovery and reimagination plans. Together, those levers aim to increase aggregate supply through greater productivity and innovation while unlocking latent demand to deliver growth.

There are three levers that address supply:

  • Embrace and accelerate productivity enhancements. Many trends and disruptions may accelerate in the wake of the COVID-19 crisis. Of them, automation and a shift of activities to online channels could be among the most relevant accelerating developments across many sectors. Some traditional sectors and occupations may be in decline, as a result, while newer ones may be generated. The economies that embrace and plan for those accelerating trends rather than resisting their impacts will most likely be the ones that outperform in the reimagined future.

  • Public-sector leaders can incentivize the technology and skill investments needed for companies and workers to adapt to accelerated automation and digitalization. For example, the UK government, in collaboration with the manufacturing industry, launched a £20 million Made Smarter North West pilot to help SMEs navigate and adopt digital tools, including robotics and automation.

  • Find new openings to build resilience through ‘health proofing’ and diversifying economies. Many sectors will be facing fundamental changes in how business is conducted in the postpandemic world, with a renewed emphasis on health. Hotels and airports are investing in contactless technology. New physical-distancing requirements will require numerous businesses to rethink. As such changes shake up businesses, policy makers and economic planners could take the opportunity to consider how to build back better, with healthy products and services.

  • In addition, the current economic disruptions may also prompt policy makers to consider how to make their local economies more resilient through diversification of their economic activities. For example, New York City’s diversification away from finance toward tourism, business service, and the arts allows the city to withstand market volatility better. With its diversified base in education, research, and technology, Austin was able to add jobs during the Great Recession.9 Texas diversified by investing nearly $3 billion in cancer research and treatment in the first decade after the Great Recession, a move that helped boost its residents’ health outcomes and the state’s life-science ecosystem.

  • Invest in innovation ecosystems. Building and strengthening innovation ecosystems—from state, business, and academia-led R&D to commercialization, start-up, entrepreneurship, and VC—will be critical in building a strong postpandemic economy and gaining global share of the innovation economy. Coordinated investments in R&D, talent, capital, place, and inclusion are all needed to strengthen regional innovation ecosystems. For example, the New York City metropolitan area anchored its innovation ecosystem in financial services and research universities, and that approach helped the area foster a robust tech sector and helped increase total VC investments more than five-fold from 2008 to 2017.

Leaders could be well served by planning projects that make their cities and regions more connected, equitable, sustainable, safe, and attractive.

There are four levers that both expand productive capacity and broaden demand and inclusion:

  • Invest in inclusive growth and unlocking the maximum productive potential of all people in communities. The widening disparities in access to opportunity are growing starker, as are the disparities in outcome across race, ethnicity, gender, and income. Research has shown that equity-enhancing measures can boost economic growth in the long run. For example, achieving gender equality could add $4 trillion to the US economy, and closing the Black–white wealth gap could add a further $1.5 trillion.

Solutions need to be targeted and long term, and they will require targeted investments to ensure equity in income and wealth across demographic groups. Such investment areas could include expanded childcare, accessible public transportation and other essential public services, available early-childhood education, improved K–12 outcomes, better public health, affordable housing, and affordable banking for underserved populations, among other strategies.

  • Lead a skill and talent revolution. The long-term trends toward more automation and more digitization are now compounded by a shift to remote work and changing health and safety standards. It is likely that workers will need both digital and knowledge-based skills to ensure that they have a place in the postpandemic economy.

Initiatives that could help achieve that goal include strengthening education on problem solving, science, technology, engineering, and mathematics at all levels; incentivizing workers and companies to reskill themselves through tax credits and training subsidies; and scaling up apprenticeship and internship programs dramatically through education-industry partnerships—the types of programs that states such as Colorado and countries such as Germany and Switzerland have pursued. Public leaders at all levels could have an important role to play in helping workers reskill to attain new and better jobs.

  • Invest in digital-infrastructure access to close the divide. Digital infrastructure, among other public infrastructure and services, has been exposed by the COVID-19 pandemic as part of the realization that public good is not shared equally across US regions. Investments in public digital-infrastructure projects—particularly those that support access to data and enable cloud and 5G technology—can create jobs, support workforce development, and attract business investment. For example, Government Technology Agency, Singapore’s public-sector information- and technology-services arm, is increasing its spending by 30 percent in the wake of the COVID-19 crisis, and that move is expected to help kick-start more digital-infrastructure spending within the government and throughout Singapore.

  • Invest in making cities citizen-centric. Megacities face a battlefield of competing for workers who are increasingly mobile. Recent and future projections of employment growth highlight growing preferences for alternative high-growth hubs, such as Austin, Denver, and Raleigh, over their larger, more expensive peers. Cities may want to consider their value propositions, such as their ability to offer efficient and high-quality public services, updated public infrastructure, and more affordable housing. By making the right investments, state and local leaders could be well served by planning not just for shovel-ready projects but also for those that make their cities and regions more connected, equitable, sustainable, safe, and attractive.

Implementing new ways of organization to enable changes

The scope of the challenge in reimagining the US economic future is daunting, but the stakes have never been higher. To unlock latent demand and execute the vision, governments could consider adopting new ways of working and organizing, such as the following:

The crisis provides an opportunity to reevaluate metrics of success, such as by giving greater consideration to the quality as well as quantity of new jobs.

  • Organize for success within government. Within government, neither the economic-development organization nor the treasury department alone can deliver growth. Leaders will need to convene a broad-based group within government that cuts across economic development, treasury and budget, transportation, energy, higher education, K–12 education, labor, and other departments. Close involvement of the governor’s or mayor’s office and sponsorship by the governor and mayor are likely to be of critical importance as well.

  • Ensure broad civic engagement. Beyond government, a broad-based, multisector task force, including private and not-for-profit leaders, can be built to maximize the number of ideas from all sectors of the economy, secure buy-in, and ensure that all expertise and implementation resources are brought to bear.

 

Policy makers could consider positioning Black, Latinx, and Native American communities at the center of designing and delivering inclusive plans. That could help those communities identify with, advocate for, and lead the work to bring in more sustained long-term investment. As an example of broad civic engagement, the Netherlands launched the Voor je Buurt (For Your Neighborhood) platform in 2013 to crowdsource and crowdfund civic projects; it has been implemented in more than 40 cities and provinces.

  • Introduce better success metrics. The implementation challenge will likely be particularly high when a task is as bold as economic reimagination. It is therefore critical to maintain discipline, energy, focus, and momentum throughout a multiyear period. Each initiative will need metrics, targets, milestones, and owners. Outcome metrics and targets should be identified in some long-term, measurable performance areas, such as GDP, productivity, median income, improvements in income for underrepresented groups, income distribution more broadly, VC investment, and number of businesses started. Metrics and targets should also be identified for some short-term areas, such as consumer spending and job placement.

 

The current crisis provides an opportunity to reevaluate traditional metrics of success, such as by giving greater consideration to the quality of new jobs, in addition to their number. Some novel approaches pointing the way include new models being embraced in the Netherlands, New Zealand, South Africa, and the United Kingdom. For example, New Zealand released the world’s first-ever well-being budget in 2019.

  • Implement funding. The unprecedented demand for government expenditures has put immense fiscal pressure on state and local governments. Governments will need to pursue the full set of resources available to them to fund the reimagination of the economy: leverage federal funding, reform state and local tax policies, issue debt, monetize government-owned assets, and establish public–private partnerships to crowd in private capital.

As government funding is squeezed by lower sales and income-tax receipts and if stock indexes continue to soar, then public–private partnerships and other mobilization of private capital might offer the largest pools of funding and financing for economic reimagination. The challenge will be to unlock that private investment. Inviting private-sector players to the table early in the planning can certainly help.

  • Diagnose context-specific challenges. Public leaders should consider making a retrospective assessment of the performance, assets, and vulnerabilities of their regions’ economies before the COVID-19 pandemic and recession. Those can provide baselines for evaluating the potential impacts of the crisis. It is critical for forecasts to include a number of scenarios at the macrolevel and at the microlevel, including postpandemic macrotrends, to understand exactly where challenges and opportunities are likely to spring up and where there will be urgent calls for reimagination.

  • Design challenge-specific solutions. Policy makers may find it helpful to make an inventory of the solutions proven effective in dealing with expected barriers to determine which ones to pilot or scale up. Such an inventory could include excellent programs that are already designed but are operating subscale, best practices that other regions have pursued during the current crisis and past crises, and new initiatives that respond to new trends and challenges. Ultimately, a set of initiatives should emerge that balances cost, ease, impact, time horizon, and responsible actors. It is often better to have fewer higher-impact initiatives than too long a list of fragmented initiatives that is likely to fall victim to overly dissipated energies.

  • Execute with accountability, sustainability, and agility. Implementation is where governments and multisector task forces most often fall short.

 

The individual resilience of businesses and workers during the unique and devastating COVID-19 crisis has been inspiring. To help efforts add up to more than the sum of their parts and to have flexibility and resilience in the long run, leaders in government and across sectors can take advantage of a major opportunity—one that is unprecedented in recent years and could serve them well in this crisis and in future crises. That opportunity is to reimagine not just their economies but also how they could work together to become far more than just the sum of their own parts.

Growth, Interrupted: 3 Coronavirus Scenarios for Investors

Can the global economy, which began the year on the path to recovery, get past the coronavirus outbreak and back on the road to growth? A look at three potential outcomes for 2020.

With economic activity disrupted and capital markets dislocated, investors have been debating if Covid-19, known colloquially as the coronavirus, could derail the global cycle. Given the sharp drops in global asset markets recently, pessimistic prognoses are easy to make. However, during times like these, some clear perspective is warranted.

Below I will walk through what my colleagues and I on the firm’s economics team see as the three most likely outcomes for the impact of the coronavirus outbreak on global growth. In our most likely scenario, new cases and disruption may continue near-term, but global policymakers will likely use easing measures and rate cuts to help mitigate the impact. Assuming new cases peak by mid-May, global growth could pick up in the third quarter.

Recovery Delayed

To set the backdrop: Coming into the year, my colleagues and I saw a growing evidence of a global economy on the mend after a tough 18 months. Headline Purchasing Manager Indices (PMIs) had bottomed out, and new-order survey data showed improvement as of October. Global trade was growing again in December, after contracting for six months. Despite lingering skepticism, we thought these data points supported our thesis of a global recovery taking hold in the first quarter of 2020.

The outbreak of Covid-19 has certainly changed that near-term narrative. Considering the weak starting point for global growth and still nascent recovery, this untimely disruption to economic activity will likely slow global growth this quarter.

The key question now: Could this exogenous, transitory shock fundamentally challenge the growth cycle? For now, we don’t think so. Indeed, throughout this expansion cycle, the global economy has weathered a series of shocks, each in turn giving way to a minicycle in global growth that has helped to extend the greater expansion by interrupting a stage of over exuberance that may have led to overheated growth and an end to the expansion.

 

Scenario #1 – Containment by March: The virus outbreak is contained by end-March and production disruption is limited to the first quarter. Policymakers in China and Asia move to provide meaningful fiscal and monetary support, with China expanding its fiscal deficit by 1.2 percentage points, keeping it high for the second year running. Global growth dips to an annualized rate of 2.5% in the first quarter, down from 2.9% in the fourth quarter, 2019, but recovers meaningfully from the second quarter onward.

 

Scenario #2 – Escalation in new geographies, disruption extends into the second quarter: In this scenario, new cases continue to rise in other parts of the world, before peaking by the end of May. The disruption extends into the second quarter, affecting corporate profitability in select sectors, risking the emergence of corporate credit risks. If the dislocations in asset markets also persist into the second quarter, a sharp tightening in financial conditions may mark a tipping point, exacerbating the impact on growth via weaker corporate confidence, falling capital expenditures and cutbacks in hiring.

In response, policymakers around the world would step up easing measures, with fiscal policy in Asia and Europe and monetary policy in the U.S. doing the heavy lifting. Today, the Fed announced an unexpected half-point rate cut and our Chief U.S. Economist, Ellen Zentner, expects the Fed to cut rates again by a quarter-point at its April meeting, with the risk of an earlier action given the “fluidity” of the situation. In this scenario, global growth averages just 2.4% in the first half of 2020, but starts to pick up in the third quarter.

Scenario #3 – Persisting into third quarter, escalating recession risks: The outbreak’s global disruption continues to spread into the third quarter, encompassing all the large economies. China faces a renewed rise in new cases as it restarts production. The extended disruption to economic activity damages corporate profitability and brings about a rise in corporate credit risks and significant tightening in financial conditions, which exacerbate the slowdown in global growth.

Central banks will embark on a renewed easing cycle, with the potential for a coordinated response. In this scenario, we expect the global weighted average monetary policy rate to dip to its lowest level since 2012. The Fed would extend its cuts from March-June and could become more aggressive and take rates to close to the lower bound by the third quarter.

The fiscal response across key developed and emerging economies also becomes more aggressive, with China taking up two percentage points of fiscal expansion. The cyclically adjusted primary fiscal deficit for China and the G4 nations (Brazil, Germany, India and Japan) widens to 5.1% of GDP in 2020, from 4.1% in 2019. Global growth stays weak (i.e., below 2.5%) between the first and third quarters.

 

Key Signposts

Developments related to the outbreak remain key, and we are monitoring the following signposts:

1.    The ability to bring control outbreaks in affected areas and the scope of the spread across Europe and into the U.S.;

2.    Whether China faces a rise in new cases, as it continues to restart production; and

3.    Updated data from the therapeutics in development.

The situation with the Covid-19 coronavirus is evolving rapidly and markets have begun to price in a larger and more widespread hit to global growth, which we believe will likely last well past the first quarter. Here we outline our four forecast scenarios for the next 12 months, three out of four of which look at the economic impact of the coronavirus.

 

The situation with the Covid-19 coronavirus is evolving rapidly and markets have begun to price in a larger and more widespread hit to global growth, which we believe will likely last well past the first quarter. Here we outline our four forecast scenarios for the next 12 months, three out of four of which look at the economic impact of the coronavirus.

 

In our single most likely (but odds against) scenario (40% probability) we see a sharp fall in Chinese GDP for one to two quarters, followed by a V-shaped recovery, with relatively small economic impact outside Asia. Our two downside scenarios highlight different channels through which the virus could impact the world economy more meaningfully: the first (25%), through trade and real economic activity; the second (25%) primarily through financial markets.

 

In our view, the first scenario remains the single most likely outcome, but the risks of the second and third are rising rapidly and should be taken into account in portfolios. We believe these downside scenarios are not unreasonable given the lack of information, rapid contagion, some panic by governments and supply chain disruptions. From an economic point of view, the virus’ initial impact comes through the supply side of the economy – as fewer working hours feed through to lower output and supply chains are disrupted. But demand will likely be impacted too – particularly for services – though some final demand for goods/parts can be met through inventories for a short period of time. At a minimum, we would expect repercussions to persist for the first half of the year. This event is also likely to add pressure on companies to diversify supply chains over the longer term and it could accelerate underlying de-globalization trends.

 

Market concerns over the coronavirus have resulted in risk-off trades, which have slashed stock prices and Treasury yields over the past week. In a richly-priced environment, the market is fearful the hit to the global economy will not be a V-shaped one—but a U-shaped one (i.e. a period of lackluster growth before the eventual bounce back from the hit to economies due to contagion from the virus). Remember, economic uncertainty due to the exogenous virus shock comes at a time when the unsettled race between the Democrats for the 2020 presidential election is still top of mind.

 

At minimum, earnings estimates for 2020 will likely go lower as a result of the impact to the businesses. If the risk-off period lasts for more than a few days, we should see the US dollar assets as a safe haven trade.

 

Scenario #1: Virus contained (40% Probability)

Spread of Covid-19 is limited. Big hit on China for one or two quarters but minimal impact on the rest of the world. Strong China bounce back in H2 as inventories are rebuilt and services production/consumption resumes. Monetary and fiscal policy unchanged outside Asia. US/China trade agreement provides boost to global manufacturing. Growth picks up gradually, inflation subdued, interest rates low, risk assets progress. Same as our previous ‘Turning a Corner’ scenario, but with lower growth in Q1/Q2, faster in H2.

 

Scenario #2: Globalisation flatlines (25% Probability)

The containment efforts in China prove to be ineffective and the virus spreads within and outside China. Quarantine restrictions in China are left in place for several months as contagion continues with the active labor force measuring a fraction of its size in January. As contagion spreads outside China, developed countries are affected and economic activity in affected regions draws to an effective halt. Millions are infected although the mortality rate decreases. With hits to demand and supply chains, the impact on Chinese GDP is massive–close to 10%–over the course of 2020, much of it concentrated in the first half of the year. Ultimately, this is likely to add pressure on firms to diversify supply chains over the longer term and accelerates underlying de-globalization trends.

 

The huge disruptions to supply chains affect output in a number of countries importing parts (intermediate goods) from China and also exporting parts to China. The impact on global GDP is large, but is predominantly felt through the supply side. As a result, global costs rise during the time alternatives to Chinese production can’t be found. Even when they are eventually found, they are likely to be higher cost. Rising costs hit global output and demand over a period of years. Supply side shocks exacerbate de-globalization as US and EU respond to increased costs with protectionist moves, especially if China attempts to devalue the Yuan. Central banks can accommodate to some degree. Fiscal policy is loosened globally, but insufficiently to offset global shock. Asset prices fall despite loose monetary policy stance, since policy is still tighter than previously expected and confidence is hit hard by duration and spread of disease. In the longer term, the liberal international trading/investment order is crippled and a new narrative takes hold: the virus has accelerated an underlying trend in which re-shoring and nationalism means higher costs and lower growth for years (whether true or not). Risk markets sell off, global yields dive further into negative territory.

 

Scenario #3: Financial market shake-out (25% Probability)

Virus spread is more persistent and widespread than under scenario #1, though perhaps not as severe as scenario #2 and largely confined to China/Asia. Nevertheless, this is the trigger for widespread flight from risky assets in the face of an uncertain future. Risk premia rise sharply, equity and credit prices fall, bond prices rise – the US 10y yield rallies sharply. Sell-off is exacerbated by elevated initial valuations, a huge tightening of credit conditions and a sharp turn in animal spirits. Sell-off is global and tighter financial conditions trigger a slowdown not unlike that seen after the tech bust of 2000-1. Risk of full-blown financial crisis risk is greatest in China, where tighter financial conditions, falling capital productivity and lower property prices could initiate a collapse of shadow banking and a big rise in bad loans. Liquidity squeeze on Chinese banks morphs into solvency crisis and a need for widespread recapitalization, mitigating any recovery even if the disease is brought under control. China loosens policy, both fiscal and monetary, but reinforces capital controls in an attempt to put a floor under the Yuan.

 

The Fed refuses to come to the rescue, perhaps cutting rates a little but refusing to extend dollar swap lines, exacerbating crisis as global dollar shortage intensifies. Unlike scenario #2, this is primarily a hit to global aggregate demand (rather than supply). Fall in global growth and inflation, global rates fall to zero, even larger share of global bonds starts to yield negative, dollar rises sharply. Big fall in global equity and credit prices, risky assets everywhere (e.g. peripheral EZ bonds) sell off too as ‘search for yield’ turns into ‘flight for safety’.

 

Scenario #4: Inflation returns (10% Probability)

As above but with an added international twist. Source of the shock is US inflation, not China. US tightens as China/others are weakening – Fed does not act as ‘world’s central bank’ but on basis of ‘America first’. Implications for global financial stability similar to second half of scenario #3 above, but main transmission mechanism is international financial markets rather than Chinese banking. Replay of 2015-16, but bigger. Dollar shortage reappears and capital flight from EMs, particularly Asian EMs. Dollar reserves are depleted much faster than expected and a number of dollar pegs (including yuan) come under severe pressure. Collapse in short-term dollar financing affects investment and output in key dollar-exposed EMs, which domestic monetary policy can only ameliorate slightly. China, Asia and other EMs hit hardest, but knock-on effects to developed economies, notably euro zone.

 

NB: None of the scenarios above take into account all kinds of idiosyncratic ‘black swan’ or geopolitical risks, which have the potential to vastly alter any of the outcomes.

COVID-19: Implications for business

The coronavirus outbreak is a human tragedy, with growing impact on the global economy.

AURA CORONA VIRUS

Fashion’s digital transformation: Now or never

Some apparel, fashion, and luxury companies won’t survive the current crisis; others will emerge better positioned for the future. Much will depend on their digital and analytics capabilities.

The COVID-19 pandemic is simultaneously an unprecedented health crisis and a global economic shock. Amid the pandemic, the apparel, fashion, and luxury (AF&L) industry has moved quickly to address urgent public-health needs—closing stores, manufacturing much-needed items such as face masks and hand sanitizer, and making donations to healthcare and community organizations. At the same time, AF&L companies are grappling with COVID-19’s business ramifications, including widespread job losses in an industry that provides livelihoods for millions of people worldwide.

Although no one in the industry foresaw the intensity of this crisis, some fashion companies are finding that they are better equipped than others—largely because of their digital know-how. In this article, we touch on COVID-19’s impact on the AF&L industry to date. We then propose a set of actions that AF&L companies can take to build their digital and analytics capabilities—not just to ensure business continuity and minimize the downside of COVID-19, but also to emerge from the crisis in a position of strength.

A deepening digital divide

Our consumer-sentiment surveys, conducted in April, show declines in purchase intent of 70 to 80 percent in offline and 30 to 40 percent in online in Europe and North America, even in countries that haven’t been under full lockdown. E-commerce is clearly not offsetting the sales declines in stores. Nevertheless, it has been a lifeline for fashion brands as stores have been shuttered—and it will continue to be critical during and after the recovery period. In China, the return of offline traffic has been gradual, with 74 percent of Chinese consumers saying they avoided shopping malls in the two weeks after stores reopened.1 This suggests that some percentage of offline sales could permanently migrate to e-commerce.

Digital is not only an increasingly important sales channel; it can also help companies adapt cost structures and make each step of the value chain better, faster, and cheaper. For example, digitization can enable new logistics and sales-fulfillment options (such as click-and-collect and drive-through), fuel innovative ways of customer acquisition, and help predict and manage inventory to create a more resilient supply chain. The fundamental enabler to all this will be data—the transparency, governance, and accuracy of which have never been more important.

This all portends a deepening digital divide. Even before the crisis, companies that were digitally and analytically mature outperformed competitors that hadn’t built robust digital and analytics capabilities (Exhibit 1). The COVID-19 crisis has only widened the gap between industry leaders and laggards. For leaders with the ability and willingness to invest, the pandemic has clearly been an accelerator. As a top executive of a leading apparel player recently declared, “We’ve accomplished two years of digital transformation in two months.”

Thus, for executives in the AF&L sector and all related subsectors (such as beauty products and sporting goods), the imperative is clear: make digital and analytics a core element of your company’s strategy.

A number of trends in the post-COVID-19 world—the “next normal”—could make digital and analytics play an even more important role. Physical distancing could continue, making consumers less likely to visit brick-and-mortar stores, and a contact-free economy could emerge—raising e-commerce and automation to a new level.

The implications of these trends will differ for each company, depending on its digital starting point and strategic orientation. Digital and analytics leaders (companies in which online sales account for 30 to 40 percent of total sales, parts of the value chain are significantly digitized, and online and offline channels are integrated to some degree) have an advantage today but could quickly lose it if other players accelerate their transformation. On the other hand, laggards (companies with less than 20 percent of total sales coming from the online channel, low digitization levels across the value chain, and siloed online and offline operating models) have an opportunity to make an “all in” bet on digital and analytics—and perhaps gain market share with smaller capital-expenditure investments, which used to be a limiting factor for many brands.

That said, digitization won’t be a panacea. Companies should direct investments to areas in which the highest business value lies—which might not be in sales but rather elsewhere in the value chain. Equally important, companies should avoid “gold plating,” aiming instead for the fastest minimum viable digital solution that will achieve the business goal. Finally, the sequencing of initiatives will play a big role in making a company’s digital transformation as self-funding as possible.

Navigate the now: Immediate priorities

The health and safety of employees and customers, of course, has been—and remains—the absolute priority. By now, AF&L companies have closed stores, introduced new hygiene and safety processes in warehouses and distribution centers, and set up digital tools for remote working and collaboration. Although the situation remains uncertain and is evolving daily, there is a clear set of actions involving digital and analytics that AF&L players should implement now to keep the business going, stem sales losses, and plan the comeback.

Engage with customers in an authentic way

Email, social media, and other digital channels have seen significant spikes in usage during the crisis (Exhibit 2). AF&L brands must therefore continue to communicate frequently with consumers, even if most consumers aren’t currently spending. Use digital channels to launch genuine, purpose-driven communications regarding health, safety, business continuity, and community building. If you decide to send consumers relevant content, be sure to do so in an appropriate and empathetic tone (for example, a global sports-apparel player now offers yoga lessons on Instagram).

Whether it’s a personalized offer or outreach from a personal stylist, the best brands are maintaining customer relationships even while stores are closed. Staying in touch with your most loyal customers doesn’t just keep your brand on top of mind but also helps to boost sales. On a leading Chinese e-commerce platform, transaction volume for fashion-brand miniprograms (brand-powered apps embedded within the platform’s interface) more than doubled between January 2020 and February 2020, during the peak of China’s outbreak.

Refine and scale up your online operation

We expect the online share of fashion and apparel in Europe and North America to increase by 20 to 40 percent during the next 6 to 12 months. In April, traffic to the top 100 fashion brands’ owned websites rose by 45 percent in Europe.2 Some of the larger players have even reduced their promotion intensity to be able to handle the volume of orders.

Delivering an excellent customer experience online is crucial, so reallocate your resources and shift management attention from offline to online. Also, scale up capabilities in both demand generation and fulfillment (Exhibit 3). Seek to eliminate points of friction in every part of the online customer journey—for example, by improving your website’s search function and expanding your online assortment. Some retailers have redeployed store personnel from closed stores to support online fulfillment or to assist consumers via digital call centers.

While most AF&L players already have an e-commerce presence, some still don’t. Companies without one can launch a basic online platform in 10 to 15 weeks. A private-equity-backed retailer did it in 13 weeks (Exhibit 4).

Prioritize digital-marketing levers as demand rebounds

In anticipation of a shift toward online sales, allocate more of your marketing budget to digital channels. Establish or improve your digital-marketing “war room” and increase its visibility in the organization—for instance, by establishing a C-level digital-performance dashboard that provides a cross-channel view of e-commerce, customer relationship management, and social media, thus enabling rapid identification of opportunities for efficiency optimization or growth.

Retrain your look-alike models to capture value from the new consumer segments and behaviors that have emerged during the crisis. Upgrade your digital-marketing activity to be best-in-class—for example, by adding sophisticated imagery to your social-media posts and conducting “social listening” to inform the development of new services and offers.

Use granular data and advanced analytical tools to manage stock

The value of excess inventory from spring/summer 2020 collections is estimated at €140 billion to €160 billion worldwide (between €45 billion and €60 billion in Europe alone)—more than double the normal levels for the sector. Clearing this excess stock, both to ensure liquidity and to make room for new collections, will become a top priority.

At the best-performing companies, an “inventory war room” uses big data and advanced analytics to first simulate dynamic demand scenarios specific to locations (channel, country, store) and SKUs, then to synthesize the resulting inventory risk—thus enhancing decision making. The war room decides, for example, whether to redistribute SKUs, transfer inventory to future seasons, or accelerate markdowns (Exhibit 5). A company’s investments in developing advanced analytical tools to steer markdowns during the crisis will pay off almost immediately.

Optimize costs using a zero-based approach

In light of crisis-related sales decreases, cutting costs is an obvious imperative for most companies. However, reducing all budget lines across the board is risky. We recommend a zero-based budgeting approach instead.

Identify two categories of projects: critical projects linked to core digital and analytics priorities that must proceed as planned or at a slightly lower speed (for example, building a new data lake to enable personalized marketing) and core projects that can be delayed (such as those that don’t enable emergency response). Continue only the projects that fall into those two categories; stop all others. A range of savings levers—such as vendor renegotiations and tactical moves to the cloud—can help dramatically reduce your operating costs. Reset your digital and analytics priorities and budget and adapt them to a post-coronavirus world.

Shape the next normal: Longer-term strategic actions

Although time frames remain uncertain for now, AF&L players should start planning how they’ll compete in—and perhaps even influence—the industry’s next normal. Consumer habits, companies’ interactions with consumers, and the number and types of touchpoints will all change. The requirements for supply-chain speed and flexibility will continue to increase. Digital and analytics will play a critical role in helping companies emerge stronger from the crisis.

Set an ambitious aspiration and define a clear road map

A digital and analytics transformation is typically an 18- to 24-month journey, requiring an ambitious aspiration, a clear plan, and concrete milestones. In our experience, successful digital and analytics transformations have the following elements in common:

  • Strong support (or even direct sponsorship) from the CEO during the entire journey.

  • A pragmatic approach that starts with an understanding of the consumer and the drivers of value creation; digital for digital’s sake will not deliver results.

  • A clear road map and prioritization of initiatives, combining actions that help set up the enablers for the organization with the implementation of use cases that generate quick wins.

  • A focus on getting to a minimum viable product (MVP) within two to three months—a rapid timeline that allows the company to iterate while generating value, avoiding large up-front investments.

  • A central team to monitor value capture. This team also helps build the road map by scanning opportunities, allocating budgets, and coordinating implementation, ensuring that all efforts are focused on delivering tangible impact rather than gold plating.

  • Well-defined key performance indicators (KPIs) to measure success.

 

The first step in the transformation program should be the definition of digital priorities, which will differ based on each company’s business model and digital starting point. Digitization is much more than just selling online; a quick diagnostic may be required to select and align on key value areas.

Typically, digital and analytics priorities can be categorized according to their place in the value chain: customer experience (front), distribution and supply chain (middle), and product development and support functions (back). Exhibit 6 shows high-impact use cases in each of these three areas.

Provide an excellent omnichannel experience

The pandemic has elevated digital channels as a must-have for AF&L players. Therefore, take this opportunity to leapfrog into the digital arena by making it the center of your operating model: move your traffic- and engagement-generation engine to digital, and leverage digital channels to drive store traffic and vice versa.

Besides scaling up digital sales efforts, reconfigure your store footprint accordingly—for example, by reducing presence in “B” areas (markets with lower population density and lower profitability per square meter), devoting less store space to product categories with high online penetration, experimenting with innovative formats (such as drive-through windows or pop-up stores), and making it easy for customers to perform any omnichannel operation, including complex ones (such as buying online from a store if the product isn’t in stock there, and then picking it up from another physical store in the next 12 hours). Use data and analytics to tailor the assortment in each store and to streamline and optimize assortments overall.

In our experience, fully integrated management of stock in stores and warehouses is core to any omnichannel operation. Making all stock (even stock shortly arriving to warehouses) visible to customers in any channel has proved to boost sales.

Bet on personalization

Personalization has helped several industry players achieve 20 to 30 percent increases in customer lifetime value across high-priority customer segments. It has proved even more valuable in subsectors with more stable and predictable purchasing patterns, such as beauty products.

Use cases for personalization have mostly centered on personalized offers, personalized promotions and benefits (such as access to new products), and reductions in generic traffic-generation costs. To go further, add personalization capabilities to your digital war room—for example, by collecting and analyzing all the available data to generate detailed insights about your customers. Build actionable microclusters based on customer behavior. For instance, entice the highest spenders with special incentives (such as triple loyalty points for purchases of at least $1,000), target customers who tend to buy in the categories where you have the largest inventory buildup, and give online customers coupons to redeem in-store once physical stores reopen.

Prioritize use cases based on your business context, advanced-analytics capabilities, and customer segments. Create a prioritized use-case road map and a technology-investment plan. Integrate personalization into all delivery channels to ensure consistency in your customer communications.

Leverage big data and analytics to manage the supply chain

Digital and analytics can not only drive top-line growth but also significantly improve speed, cost, flexibility, and sustainability across the supply chain. For instance, some leading companies are using radio-frequency identification (RFID) to track products more precisely and reduce in-store merchandising manipulation. Companies’ RFID investments typically yield operations simplifications and service-level improvements.

In addition, automating logistics through digital warehouse design and predictive exception management can significantly increase efficiency. The benefits will flow to consumers as well—in the form of better product availability and faster, cheaper, and more accurate deliveries. Leading online players, for example, are using models powered by artificial intelligence (AI) to predict sales of specific products in certain neighborhoods and cities, then stocking the predicted amount of inventory in nearby warehouses.

Digitize product development and support functions

During the COVID-19 crisis, the digitization of product development has proved to be a competitive advantage. Companies that were already using cutting-edge tools such as 3-D product design, virtual sampling, digital material libraries, and AI-supported planning have fared better than their peers during the crisis. Their designers and merchandisers can react faster to market trends, significantly reduce both sample costs and time-to-market, and collaborate remotely across teams. The past several weeks have shown that it’s possible to do much more on this front than some in the industry initially thought. Indeed, the pandemic may have shattered historical preconceptions and biases against digitization in core product-development processes.

Digitization of support functions is another key lever for improving efficiency. By automating repetitive tasks in back-office functions such as indirect purchasing, finance, legal, and HR, you can simultaneously reduce costs and free up time and resources to reinvest in more valuable activities. Companies that have automated their finance processes—such as claims collection and financial reconciliation—have found that they’ve also increased the agility and accuracy of these processes while capturing significant synergies. Speed up the digitization of all support functions through robotic process automation and other leading-edge technologies.

Build data and tech enablers to support your transformation

Technical enablers play a key role in powering digital and analytics growth. In our experience, three core principles are the most relevant:

  • Use cloud infrastructures to sustain scaling and to access best-in-class services, particularly for use cases that best benefit from the cloud’s features (for instance, data consumption across the globe, very high storage and processing needs).

  • Think data from the start. Build solid data foundations as part of every digital and analytics initiative in a way that allows rapid scaling and forward compatibility. Design and build out pragmatic data governance focused on enabling business value by helping to ensure data breadth, depth, and quality. Establish a strong data culture and ethics.

  • Design your technology stack for faster integration and development, with applications broken down into microservices and isolated through the use of application programming interfaces; use unified DevOps toolchains to enable automation and reduce time-to-market to a matter of hours instead of weeks.

 

These enablers shouldn’t become causes for delay. Rather, they should follow the same agile timelines and sprints as the core initiatives. Implementation should be pragmatic and clearly linked to value generation.

 

Attract and retain top digital talent

After the crisis, financially stable companies may be able to attract top-notch digital talent, including in-demand profiles such as digital-marketing specialists, data scientists, data engineers, user-experience and user-interface designers, and software and data architects. Retaining these kinds of employees will require AF&L companies to develop new talent processes—with tailored initiatives in recruiting, career growth, learning and development, and performance management—specifically for engineering and digital talent, similar to what many fashion players already do for designers and creative directors.

In addition, AF&L players should adopt agile ways of working to speed up development of digital and analytics products and projects. Agile techniques enable companies to release MVPs into the marketplace quickly and refine them iteratively based on consumer feedback.

There’s no denying that the COVID-19 pandemic will make for a difficult 2020. For some AF&L companies, even survival may be a struggle. However, if they lead with empathy and undertake bold actions in digital and analytics—particularly around e-commerce, data-driven stock management, and digitization of key functions—we believe they can not only endure the crisis but also build competitive advantage and strengthen their business for an omnichannel, digital-centered next normal.

Special Market Update: Our Perspective on the Coronavirus and Market Volatility

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COVID-19 and the employee experience: How leaders can seize the moment

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The return phase of the COVID-19 crisis is a good time for organizations to create more tailored responses to workplace challenges, expanding on the goodwill and camaraderie earned in earlier phases.

As it turns out, most companies did a solid job of addressing their employees’ basic needs of safety, stability, and security during the first phase of the COVID-19 crisis. However, those needs are evolving, calling for a more sophisticated approach as organizations enter the next phase.

Aura recently surveyed more than 800 US-based employees on a wide variety of topics related to employee experience.1 We found that employees working remotely see more positive effects on their daily work, are more engaged,2 and have a stronger sense of well-being than those in nonremote jobs with little flexibility do. Parents working from home appear to be faring better than those who are more isolated are. Fathers working remotely seem much more positive about the experience than mothers are.

But those statistics belie a more fundamental truth about employee experience: even when faced with similar circumstances—more than 80 percent of respondents say the crisis is materially affecting their daily work lives—people have widely varied experiences, perspectives, and outcomes.

The return phase presents an opportunity for companies to rethink the employee experience in ways that respect individual differences—home lives, skills and capabilities, mindsets, personal characteristics, and other factors—while also adapting to rapidly changing circumstances. The good news is that with advances in listening techniques, behavioral science, advanced analytics, two-way communication channels, and other technologies, leaders can now address employee experience in a more targeted and dynamic way. While drilling down on which employees need more and varied types of support, they can also tailor actions that create widely shared feelings of well-being and cohesion across the workforce.

Our research yielded three overarching insights, each coupled with practical steps leaders can take to support employees through this next phase of the crisis:

  • As a leader, you’ve had to make sweeping changes in recent months to address your employees’ most pressing needs, and your workforce thinks your instincts were probably right. Build on the trust and affiliation you’ve earned by continuing to be present, action oriented, empathetic, and fully transparent.

  • In addition to basic needs (safety and security), three other experience themes (trusting relationships, social cohesion, and individual purpose) are having a disproportionate impact on employee well-being and work effectiveness. Enable improvements in those areas by prioritizing actions that will address a broad set of needs for the majority of your workforce.

  • Changes are hitting your people in widely diverging (and sometimes unexpected) ways. Some are struggling, and some are thriving. Use a combination of science, technology, data, and analytics to segment your employees like you would your customers and tailor interventions to support them in personalized and meaningful ways.

 

Build trust: Keep listening to your workforce

The COVID-19 pandemic is first and foremost a human tragedy that has played out across the globe. People are experiencing unprecedented levels of disruption in their homes and communities, as well as in their jobs. If there is a silver lining in all of this, it’s that organizations and leaders are stepping up in critical areas, according to employees we surveyed (Exhibit 1).

Organizational responses are having a tangible impact on employees. Compared with respondents who are dissatisfied with their organizations’ responses, those who say their organizations have responded particularly well are four times more likely to be engaged and six times more likely to report a positive state of well-being.

While those results don’t offset the tremendous uncertainty and anxiety that many continue to feel, they do point to a distinct sense of employee confidence and trust in their organizations’ leaders at this time. This runs contrary to the idea that employees, as a group, are reacting to the current crisis situation with a fight-or-flight response. In fact, an emerging scientific viewpoint is that during times of great uncertainty, the natural human tendency is a “flight and affiliation” response toward individuals and situations that feel safe and familiar.

By being readily available and helping employees give meaning to a crisis (“sense making”), leaders can build employee resilience and social capital with their people. Moreover, they can help connect employees to the organization and to one another and can help enhance social connection and affiliation—not just formally, but also by allowing informal and organic conversations to emerge (Exhibit 2).

Return stronger: Focus on workforce effectiveness and well-being

We noted that organizations have done well in addressing immediate safety and stability concerns. But a full return requires organization-wide commitment to a broader range of needs and to the strongest drivers of work experience, effectiveness, and wellness.

For decades, need-based theories of motivation have emphasized the importance of need fulfillment on employee motivation and behavior. Applied to employee experience management, organizations should seek to address the most critical, prominent needs of the broader workforce while taking stock of unique needs of different segments and individuals. Our research found a strong correspondence between employees’ stated needs and the underlying drivers of their engagement, well-being, and work effectiveness.5 Exhibit 3 shows the top employee needs and outcome drivers, grouped by core themes of employee experience.

Jointly, ten employee experience elements accounted for approximately 60 percent of differences in outcomes.6 Overall, that means that as organizations continue to adapt to the crisis, they can meaningfully improve employee experience. For example, while organizations may not be able to take action on compensation right now, our survey results show that they can achieve a 55 percent improvement in engagement by addressing employees’ need for work recognition through nonfinancial means.

To address employees’ needs and help them thrive during the return, organizations should focus on four areas: safety and security, relationships, culture, and purpose.

Continue to meet the need for safety and security

With the threat of a second wave of COVID-19 infections or other disruptions, leaders would be well served to codify an approach to mitigating further effects of this landscape-scale crisis.7 To that effect, Aura’s Organization Practice recently published a series of articles providing leaders with a research-backed set of best practices.

Potential actions to ensure safety and security include the following:

  • Demonstrate compassionate leadership. Leaders should focus on making a positive difference in people’s lives by demonstrating awareness, vulnerability, and empathy.

  • Exhibit deliberate calm and bounded optimism. In communications, leaders need to strike the right balance between realism about the challenges ahead and confidence that the organization will find its way through the crisis.

 

Invest in relationships

While it may be a natural tendency for leaders to focus inward on the business itself, our survey results show that sustaining trust and acknowledging employee efforts are critical to employee engagement, well-being, and effectiveness. Organizations that have been building social capital during earlier phases of the crisis will be in better positions than others as the workforce transitions to the return phase.

Organizations that have been building social capital during earlier phases of the crisis will be in better positions than others as the workforce transitions to the return phase.

Potential actions to ensure strong employee relationships include the following:

  • Coach managers on the “trust quotient.” Expanding on previous research,8 Charles H. Green developed an assessment of trust that distills trust into four attributes: high credibility, reliability, intimacy, and low self-orientation. By developing the mindset and capabilities to deliver on those attributes, managers will be better able to support employees today and to earn their followership going forward.

  • Invest in the development of employee-to-employee relationships. It would be a mistake to assume that the camaraderie that has sustained many employees early in the crisis will endure long term. Leaders need to take active steps to ensure continued relationship building, particularly for remote workers. Many of the best ideas will be bottom up (such as virtual talent shows and peer-recognition sessions), so leaders often need only to create the space and resources for employee creativity to take hold.

 

Create and maintain a culture that values inclusion, individuality, and social harmony

As ways of working shifted dramatically with the COVID-19 pandemic, many workers had to transition to new work duties, processes, and modes of communication and collaboration. Our research shows that having a foundation of involvement, fairness, respect, and equality can help employees adopt to new ways of working and interacting. As we face a future of vastly different working models and team structures, building such an integrated culture now will only benefit organizations in the future.

Potential actions to ensure a positive culture include the following:

  • Create a network of teams. Leaders can set up a network of teams to promote cross-functional collaboration and transparency. This team structure can tackle an organization’s most pressing problems quickly while also enhancing the strength of random connections across the network for effective team building.

  • Cultivate inclusion and psychological safety.9 Leaders and managers can help create inclusive and psychologically safe team environments by modeling behaviors that value the inputs of all members, encourage individuality, and allow members to experiment without fear of negative consequences.

 

Connect people to something bigger than themselves and help them contribute

The emergence of purpose as a driving force is particularly compelling, given its overarching impact on all aspects of work and business. A sense of purpose can help employees navigate high levels of uncertainty and change and ensure that their efforts are aligned with the highest-value activities.

Our research showed that respondents who indicate they are “living their purpose” at work are much more likely than those not doing so to sustain or improve their levels of work effectiveness, and they had four times higher engagement and five times higher well-being. Moreover, we discovered that this particular experience element showed the greatest potential for improvement: only one-third of respondents believe their organizations strongly connect actions to purpose.

Potential actions to ensure a strong sense of purpose include the following:

  • Embed purpose in how you talk to employees. There are avenues for organizations to move from the “why” to the “how” in establishing and linking employees to a clear purpose. Link your organization’s “why” to your employee communications. As you make changes in how the business operates through the crisis, consistently link the changes back to your purpose.

  • Bring purpose to life. Share stories (through video or town halls) of colleagues who are embodying purpose through the period of crisis. Now is the time to celebrate and create role models of those who are living their purpose.

  • Start a longer-term conversation about purpose. Begin the hard work of defining or revisiting your organization’s purpose now. Explain how employees will play a critical role.

Tailor your approach: Employees’ needs and experiences vary

While all workers are experiencing some degree of disruption, the range of experiences is wide, from the very positive to the very negative. For example, of the population of fathers working at home, 79.4 percent report positive work effectiveness, with 63.2 percent feeling engaged and 70.5 percent saying they have a positive state of well-being.

Conversely, of the group of employees working in nonremote positions with little workplace flexibility, 70.5 percent report negative work effectiveness, with 50.4 percent feeling disengaged and 57.6 percent saying they’re struggling. There are distinct challenges faced by nonremote workers compared with remote workers in the current crisis. The impact on working mothers versus working fathers is quite different. Our data suggest a nuanced picture of employee experience (Exhibit 4).

Remote workers with dependents appear to be faring better than remote workers without dependents are. The data show that a diminished sense of community is a key driver of the negative impact on those without dependents. However, remote-working mothers aren’t realizing this benefit, faring well below remote-working fathers on all major dimensions we assessed: work effectiveness, engagement, and well-being.

That gender difference can be explained, in part, by differences in “workplace needs.” Our survey indicates that the top priority for remote-working women right now is balancing work and private life. For remote-working men, that need doesn’t even rank in the top ten. Anecdotally, the challenges of balancing work and private life in the current climate are evident, but the data reveal what a powerful variable this balance is.

The data further show that remote-working mothers who report work efficiency (that is, effective time management) and schedule flexibility—both being key indicators of work–life balance—are three times more likely than those who report work inefficiency and schedule inflexibility to have a positive state of well-being. Again, flexibility and work efficiency are aspects of employee experience that organizations can start to address without significant capital investment.

Those results are just a small slice of the insights that effective segmentation can provide. There are also likely to be meaningful variations within groups. For example, even within the group of remote-working fathers who seem to be doing well as a group, 17 percent indicate that they are disengaged, and 15 percent report a negative sense of well-being. The lesson for leaders is that a one-size-fits-all approach to experience management simply won’t work. Instead, they must aspire to address individuals in the same manner they do their customers.

To tailor employee-support approaches, we recommend two key actions:

  • Use segmentation to identify who is struggling and what they need. Complement publicly available data with internal tools, such as open-listening channels, pulse surveys, and advanced analytics. Use these tools to understand the diverse set of challenges that individuals and teams are facing and identify the best ways of supporting them where they’re struggling the most.

  • Take a personalized approach to fostering culture and enabling change in this new world. In driving new mindsets and behaviors (such as adapting to a new virtual-working model) at scale, it’s important to engage employees in a continual two-way dialogue that takes into consideration their specific needs, allows them to configure their own journeys, delivers personalized coaching, and provides them with a forum to share best practices with others who may share similar challenges.

 

Organizations have an opportunity to improve employee experience during the return phase of the COVID-19 crisis by shifting from a focus on meeting health and safety needs to a more nuanced approach that recognizes differences among the workforce. Employee experience drivers—perspectives and needs that vary between and even within those segments—may be somewhat heightened and more fluid right now, given the constantly shifting landscape. But organizations that set a course focused on employee experience will create meaningful impact now and well into the future.

Understanding and shaping consumer behavior in the next normal

Practicing Yoga

Consumer beliefs and behaviors are changing fast. To keep up with—and perhaps even influence—those changes, companies must leverage deep consumer insights.

Months after the novel coronavirus was first detected in the United States, the COVID-19 crisis continues to upend Americans’ lives and livelihoods. The pandemic has disrupted nearly every routine in day-to-day life. The extent and duration of mandated lockdowns and business closures have forced people to give up even some of their most deeply ingrained habits—whether spending an hour at the gym after dropping the kids off at school, going to a coffee shop for a midday break, or enjoying Saturday night at the movies.

Such disruptions in daily experiences present a rare moment. In ordinary times, consumers tend to stick stubbornly to their habits, resulting in very slow adoption (if any) of beneficial innovations that require behavior change. Now, the COVID-19 crisis has caused consumers everywhere to change their behaviors—rapidly and in large numbers. In the United States, for example, 75 percent of consumers have tried a new store, brand, or different way of shopping during the pandemic. Even though the impetus for that behavior change may be specific to the pandemic and transient, consumer companies would do well to find ways to meet consumers where they are today and satisfy their needs in the postcrisis period.

Behavioral science tells us that identifying consumers’ new beliefs, habits, and “peak moments” is central to driving behavioral change. Five actions can help companies influence consumer behavior for the longer term:

  • Reinforce positive new beliefs.

  • Shape emerging habits with new offerings.

  • Sustain new habits, using contextual cues.

  • Align messages to consumer mindsets.

  • Analyze consumer beliefs and behaviors at a granular level.

 

Reinforce positive new beliefs

According to behavioral science, the set of beliefs that a consumer holds about the world is a key influencer of consumer behavior. Beliefs are psychological—so deeply rooted that they prevent consumers from logically evaluating alternatives and thus perpetuate existing habits and routines. Companies that attempt to motivate behavioral change by ignoring or challenging consumers’ beliefs are fighting an uphill battle.

The COVID-19 crisis, however, has forced many consumers to change their behaviors, and their new experiences have caused them to change their beliefs about a wide range of everyday activities, from grocery shopping to exercising to socializing. When consumers are surprised and delighted by new experiences, even long-held beliefs can change, making consumers more willing to repeat the behavior, even when the trigger (in this case, the COVID-19 pandemic) is no longer present. In other words, this is a unique moment in time during which companies can reinforce and shape behavioral shifts to position their products and brands better for the next normal.

When consumers are surprised and delighted by new experiences, even long-held beliefs can change, making consumers more willing to repeat the behavior.

For example, approximately 15 percent of US consumers tried grocery delivery for the first time during the COVID-19 crisis. Among those first timers, more than 80 percent say they were satisfied with the ease and safety of the experience; 70 percent even found it enjoyable. And 40 percent intend to continue getting their groceries delivered after the crisis, suggesting that they’ve jettisoned any previously held beliefs about grocery delivery being unreliable or inconvenient; instead, they’ve been surprised and delighted by the benefits of delivery.

Another example of changing beliefs involves at-home exercise. The US online fitness market has seen approximately 50 percent growth in its consumer base since February 2020; the market for digital home-exercise machines has grown by 20 percent. It’s likely that many people who tried those fitness activities for the first time during the pandemic believed that at-home exercise couldn’t meet their exercise needs. That belief has clearly changed for many of these consumers: 55 percent who tried online fitness programs and 65 percent who tried digital exercise machines say they will continue to use them, even after fitness centers and gyms reopen. To reinforce the new belief that online fitness can be motivating and enjoyable, NordicTrack, in a recent TV ad titled “Face Off,” shows that online workouts can foster the same friendly competition and connection that people look for when they go to the gym or attend in-person exercise classes.

An effective way to reinforce a new belief is to focus on peak moments—specific parts of the consumer decision journey that have disproportionate impact and that consumers tend to remember most. Peak moments often include first-time experiences with a product or service, touchpoints at the end of a consumer journey (such as the checkout process in a store), and other moments of intense consumer reaction.

Some companies have focused on enhancing the consumer’s first-time experience. Plant-based-meat manufacturer Beyond Meat, for instance, was already benefiting from delays in meat production in the early days of the COVID-19 crisis: its sales more than doubled between the first and second quarters of 2020. In collaboration with local restaurants and catering companies, the company has been delivering free, professionally prepared food to hospitals and other community centers. By giving away Beyond Burgers prepared by professional chefs, Beyond Meat is creating positive first experiences with its product at a time when consumers are more open to trial.

As the consumer journey has changed, so have the peak moments, and it’s crucial for companies to identify and optimize them. For example, a peak moment in a grocery store might be the discovery of an exciting new product on the shelf. In the online-grocery journey, however, a peak moment might instead be on-time delivery or the “unboxing” of the order (the experience of taking the delivered items out of the packaging). Grocers could consider including a handwritten thank-you note or some other surprise, such as a free sample, to reinforce consumers’ positive connections with the experience.

Highly emotional occasions can spark intense consumer reactions and therefore present an opportunity for companies to create peak moments associated with their products or brands. For example, when graduations shifted from formal, large-scale ceremonies to at-home, family celebrations, Krispy Kreme offered each 2020 graduate a dozen specially decorated doughnuts for free. With that promotion, the company connected its brand with an emotional event that may not have been a key occasion for doughnuts prior to the pandemic.

Shape emerging habits with new products

Companies can nudge consumers toward new habits through product innovation. For instance, the COVID-19 crisis has spurred consumers to become more health oriented and increase their intake of vitamins and minerals. Unilever reported a sales spike in beverages that contain zinc and vitamin C, such as Lipton Immune Support tea. The company is therefore rolling out such products globally. It’s also aligning its innovation priorities with consumers’ emerging health-and-wellness concerns.

Similarly, packaged-food companies can encourage the habit of cooking at home. Spice manufacturer McCormick’s sales in China have sustained double-digit increases compared with 2019, even as the Chinese economy has reopened and people go back to their workplaces. The same pattern could play out in other countries. Kraft Heinz’s innovation agenda for its international markets now prioritizes products that make home cooking pleasurable, fast, and easy—products such as sauces, dressings, and side dishes. These will be targeted at “light” and “medium” users of Kraft Heinz products.

 

Sustain new habits, using contextual cues

Habits can form when a consumer begins to associate a certain behavior with a particular context; eventually, that behavior can become automatic. To help turn behaviors into habits, companies should identify the contextual cues that drive the behaviors. A contextual cue can be a particular task, time of day, or object placement. For example, more consumers are keeping hand sanitizer and disinfecting wipes near entryways for easy access and as a reminder to keep hands and surfaces clean. Product packaging and marketing that reinforces the put-it-by-the-door behavior can help consumers sustain the habit.

Some companies may need to identify—and create—new contextual cues. Before the COVID-19 crisis, a contextual cue for chewing-gum consumption was anticipation of a social interaction—for instance, before going to a club, while commuting to work, and after smoking. As social occasions have waned during the pandemic, a chewing-gum manufacturer must look for new contextual cues, focusing largely on solo or small-group activities, such as gaming and crafting. Gum manufacturers could consider designing packaging, flavors, and communications that reinforce those new associations.

Align messages to consumer mindsets

Connecting with consumers ‘in the moment’

People across the country have felt an intensified mix of anxiety, anger, and fear because of recent events, making marketing a tricky terrain to navigate. The heightened emotions and increased polarization of the past few months could drive lasting changes in consumers’ behavior and shape their long-term preferences. Companies should therefore ensure that all their brand communications are attuned to consumer sentiment. The quality of a company’s communication and its ability to strike the right tone will increasingly become a competitive advantage.

Aura’s consumer-sentiment surveys show that consumers are paying closer attention to how companies treat their employees during this crisis—and taking note of companies that demonstrate care and concern for people. That has implications for how brands connect with consumers and what types of messages will resonate. Hair-care brand Olaplex, for example, became one of the most mentioned hair-care brands on social media when it started an affiliate program: the company donated a portion of its proceeds from product sales to customers’ local hairstylists, helping them stay afloat during salon closures.

That said, consumers will see through—and reject—messages and actions that are performative and that seek to commercialize social issues. A brand’s communications must align with its purpose; otherwise, the messages won’t ring true. Testing marketing messages among a diverse group of consumers, in the context in which those messages will appear, could help prevent costly missteps.

Analyze consumer beliefs and behaviors at a granular level

Using qualitative methodologies

Consumer beliefs, habits, occasions, and emotional-need states will continue to evolve rapidly over the next year or two as the world awaits a COVID-19 vaccine. For consumer companies to stay abreast of those changes, monitoring product sales alone won’t be sufficient. Companies must also conduct primary consumer-insights work, with a focus on identifying changed behaviors and associated changed beliefs and motivators to get a comprehensive picture of the changing consumer decision journey.

Qualitative, exploratory research will have a particular role to play as a precursor to (and, in some cases, a substitute for) quantitative research. Digital data-gathering and monitoring techniques—such as mobile diaries, social-media “listening,” and artificial-intelligence-driven message boards—will be vital tools to help companies understand emerging behaviors and contextual cues. When structured well, those insights generate new thinking within an organization that can be validated through larger-scale surveys and in-market testing. Companies can then refine their product offerings and marketing messages accordingly.

In addition, granular analyses of footfall data and omnichannel sales will unearth telling details, such as which geographic regions are seeing in-person commerce rebound first and which products consumers are buying (such as smaller pack sizes to avoid sharing, activewear versus office wear, and so on). Whereas in the past, companies might have fielded high-level usage and attitude surveys and brand trackers a few times a year, it’s especially important now for companies to keep a closer eye on the evolution of consumer behavior on a weekly or monthly basis.

The COVID-19 crisis has changed people’s routines at unprecedented speed—and some of those changes will outlast the pandemic. Even in states and cities that have reopened, consumers remain cautious about resuming all of their precrisis activities. We’ve seen differences in consumer behavior across geographic markets and demographic groups, and those differences will only widen during the recovery phase, given that the health, economic, and social impact of COVID-19 isn’t uniform. Companies that develop a nuanced understanding of the changed beliefs, peak moments, and habits of their target consumer bases—and adjust their product offerings, customer experiences, and marketing communications accordingly—will be best positioned to thrive in the next normal.

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