The continued rotational action from growth to value in US equities bodes well for brick and mortar businesses and the “re-opening economy”. Mass vaccinations, stimulus money, and a fed funds rate capped at 0% for the next three years are creating the perfect storm for a retail explosion, bookending the perfect storm implosion suffered at the onset of the pandemic this time last year.
Data trickling out from payments processors focused on brick and mortar segments, including travel, entertainment, and hospitality, suggests the main street economy is poised for a major rebound, with substantive February 2021 over February 2020 increases in payments volume and transactions.
If the trend continues, there’s not much doubt that we’re now entering into a new period of equilibrium between the gains of pandemic winners and the lost ground of the pandemic’s most hard-hit businesses. Of particular interest is how the current uptick in brick-and-mortar activity will redound to, or against, e-commerce’s surge to dominance during the worst months of the pandemic. Will the post-pandemic economy “grow the economic pie”, or will there merely be a shift back to brick-and-mortar dominance?
Fundamentally, the answer to this question will be tied to consumer behavior; more specifically, consumer decisions based on needs and wants as a function of time and money. How this ultimately plays-out isn’t knowable, but clearly there’s a developing trend towards more in-person, physical commerce. Another factor that will contribute to answering this question is whether the post-pandemic world will be a return to the pre-pandemic world, or one which only resembles it. If the post-pandemic world is characterized by wide-spread mask use and social distancing of a voluntary nature, and not by government prescription, this bodes well for a more balanced consumer spend between brick-and-mortar and e-commerce. If the consequence of mass vaccinations manifests itself in extremely buoyant consumer confidence, then it stands to reason that we’re headed back towards brick-and-mortar dominance.
There’s also a need to consider consumer savings behavior which ought to show a strong correlation with both the unemployment rate and the status of rent and mortgage relief. Unless consumer savings behavior swings back to pre-pandemic levels, when savings rates were much lower, it’s not clear that the amount of total consumer spending will rise. As of today, it seems that rent and mortgage forgiveness will continue for a while, with no expiration in sight. And despite what on all accounts appears to be an extremely consumer-centric Congress and administration, the rate of unemployment remains stubbornly high.
And yet alternatively, if the current trend in increased brick-and-mortar spending holds, this will necessarily produce an uptick in hiring. Though not as pronounced in retail, the labor report released in early March did show a large hiring increase in hospitality and other service-centric areas. Further, a continued trend in increased brick-and-mortar spend will go a long way towards bolstering small businesses’ financial health and ability to make rent and mortgage payments when the forgiveness programs expire.
My take:
Properly anticipating brick-and-mortar consumer spending is critical for investors in B2B fintech and software. For many existing investors, the crushing economic blow dealt to the brick-and-mortar end-users of their products caused an existential threat. The precarious financial health of end-user clients infected the service providers themselves, stymying growth and dragging down valuations. Many fintech and software firms had to secure capital investment just to maintain and or retool. New investment capital, in turn, was directed towards pandemic winners such as open banking, digital wallets, and e-commerce, of which the latter was one of the greatest beneficiaries.
But the dynamic is changing.
The data needed to properly assess consumer discretionary money flow is to a large degree right in front of our eyes. We can literally see it; packed shopping mall parking lots, restaurants at full capacity, and rising airline bookings are happening. Collectively, this is the brick-and-mortar indicator, and right now, it’s indicating that investors need to keep a watchful eye on this continuing trend to optimize investment strategies and capital allocation, and best position their firms for the next 12 months.
– Adam T. Hark, Managing Director, Wellesley Hills Financial, LLC
