The effect of COVID-19 on the digital economy
The impact of COVID-19 has been dissected far and wide, across geographies, industries and business sectors. We may not know the complete picture of the impact for years to come here in Canada or elsewhere in the world, but one thing we do know is that the economic tailwinds moving us towards a digital economy have picked up tremendous at speed. It’s also worth stating that while this is a novel coronavirus, there is nothing new about these digital trends.
Looking back, the workplace has already been changing for years. As WeWork and Regus grew by catering to evermore episodic office needs, large tenants realized that accommodating work from home and introducing more hoteling would reduce cost by reducing square footage leased. While no one could have predicted a global pandemic, one can only wonder how many people who have experienced working from home will end up making this new way of working permanent.
On the consumption side, we have already been digitizing for years. Amazon was already the largest company in the world before COVID-19 ever reared its ugly head, but with consumers having limited options during the peak periods of shelter-in-place, they were forced to try new things like grocery shopping online, and as a result millions of consumers have crossed the great hurdle – they tried a new way of engaging in commerce. Customer acquisition costs were effectively wiped out. Consumers filled their shopping carts for the first time with orders that can simply be re-ordered in the future. COVID-19 shot consumers through the marketing funnel, past awareness, consideration, acquisition and conversion, and companies who were the best prepared took advantage. Now those same companies will be tested by how well these new customers are retained.
While these digital trends were happening for years, COVID-19 has really given us an opportunity to review how well organizations were prepared for this spike in digital demand. On the supply side we can look at how some industries had bright spots with winners and losers.
Small businesses naturally are the biggest losers in this game. It’s no surprise why Shopify has become the largest company in Canada, as millions of small businesses jumped on the digital bandwagon a little too late. Larger retailers like Home Depot and Walmart took advantage of their click & collect programs to boost their sales despite their customers not being allowed inside their stores. Even then, while having the infrastructure in place, some products simply ran out. Take the example of the home-fitness revolution. As Peloton’s stock has tripled since March lows, the price of home gym equipment has skyrocketed. Not all problems can be solved with digital preparedness, but some retailers reacted quickly with “pre-order” functionality which enabled them to capture demand while their stock was (and in many cases remains) out.
By now, virtually all banks have moved a majority of routine transactions to digital. However, very few have successfully converted complex interactions involving sales and advice to digital. Anecdotally it was only very recently that I started seeing a call to action on my own personally banking app to open a new bank account in app. I still cannot close a bank account on the app however (I wonder why?). A majority of complex transactions are still being done in branch or on the phone. However, there have been some who invested carefully and were very successful. For example, a Bain study shows that while new account openings fell by 23% on average in the United States during COVID-19, there were two banks that actually increased their account openings by 45% and 43% respectively. These two banks invested wisely in the account origination process, and by developing a deep understanding how some episodes affect customer value, created genuine value for customers and reaped the rewards.
In the case of the public sector, we do not have to look far for a COVID-19 related digital demand story. Close to a million applicants filed for the Canadian Government’s Canada Emergency Response Benefit (CERB) within 24 hours in a process that took less than 5 minutes. Responses from the public were numerous and ecstatic, with notable quotes like “It’s so easy I thought it was fake”. While the feedback on the program so far has been extremely positive, I wonder why public sector is an area that is typically considered a lagging sectors when it comes to innovation and digital readiness. When push came to shove, the Canadian government was able to rapidly handle the surge in demand from its citizens. Unfortunately, if we examine this more closely, while the government’s speed was commendable, it might end up coming at a cost. Was there any validation or risk controls in place? How did they account for fraud? If the government was held to the standard of private sector, perhaps there would have been more options like citizens selecting that they would pay back the loan or request higher amounts for shorter periods. While the reception of the program was strong, perhaps as citizens we set a very high bar in our expectations for other industries and a lower one for the public sector.
So, what is the moral of the story? The result from COVID-19 is that there have been some winners and losers. From an economics perspective, this has been the ultimate test of digital strength and if there were any weaknesses, they became brutally evident. Demand for digital services surged to volumes never seen before. For those that were prepared, they were able to capture and take advantage of unprecedented demand, for those that were not prepared, we can look to the extensive casualty list of bankruptcies that have come out of this global pandemic. For those that faltered but have survived, this is an opportunity. This is a chance to accelerate efforts to become “digital first”, convert your brick and mortar customers to digital with a fantastic user experience, convert your workforce to digital work from home teams with new digital collaboration tools and lower overhead costs. Fear not, for these were not trends, but simply tailwinds driving us to a destination that we were already heading. The digital economy is here to stay.