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January 2021 Grant Faint / SeventyFour / Getty Images The next normal arrives: Trends that will define 2021and beyond The COVID-19 pandemic has changed the world, and its effects will last. Here are some factors that business leaders should keep in mind as they prepare for the next normal. by Kevin Sneader and Shubham SinghalBusinesses have spent much of the past nine months scrambling to adapt to extraordinary circumstances. While the fight against the COVID-19 pandemic is not yet won, with a vaccine in sight, there is at least a faint light at the end of the tunnelalong with the hope that another train isnt heading our way. 2021 will be the year of transition. Barring any unexpected catastrophes, individuals, businesses, and society can start to look forward to shaping their futures rather than just grinding through the present. The next normal is going to be different. It will not mean going back to the conditions that prevailed in 2019. Indeed, just as the terms “prewar” and “postwar” are commonly used to describe the 20th century, generations to come will likely discuss the pre-COVID-19 and post-COVID-19 eras. In this article, we identify some of the trends that will shape the next normal. Then we discuss how they will affect the direction of the global economy, how business will adjust, and how society could be changed forever as a result of the COVID-19 crisis. Part one: How the COVID-19 crisis and the recovery are shaping the global economy The return of confidence unleashes a consumer rebound There are lines outside stores, but they are often due to physical-distancing requirements. Theaters are dark. Fashions are in closets rather than on display. If the Muse du Louvre were open, the lack of tourists might even create the opportunity for an unobstructed view of the Mona Lisa. In these and other ways, consumers have pulled back. As consumer confidence returns, so will spending, with “revenge shopping” sweeping through sectors as pent-up demand is unleashed. That has been the experience of all previous economic downturns. One difference, however, is that services have been particularly hard hit this time. The bounce back will therefore likely emphasize those businesses, particularly the ones that have a communal element, such as restaurants and entertainment venues. That isnt to say that consumers will act uniformly. McKinseys most recent consumer survey, published in late October, found that countries with older demographics, such as France, Italy, and Japan, are less optimistic than are those with younger populations, such as India and Indonesia. China was an exceptionit has an older population but is conspicuously optimistic. But Chinas profile proves a larger point. The first country to be hit by the COVID-19 pandemic, it was also the first to emerge from it. Chinas consumers are relievedand spending accordingly. On Singles Day, November 11, the countrys two largest online retailers racked up record sales. That wasnt just a holiday phenomenon. While manufacturing in China came back first, by September, so had consumer spending. Except for international air travel, Chinese consumers have begun to act and spend largely as they did in precrisis times. Australia also offers hope. With the pandemic largely contained in that country, household spending fueled a faster-than-expected 3.3 percent growth rate in the third quarter of 2020, and spending on goods and services rose 7.9 percent. 1 How fast and deep confidence will recover is an open question. In late September, for example, the US consumers surveyed were more optimistic than before but still cautious, reporting that they planned to buy holiday gifts for fewer people and keep an eye on discretionary spending. 2 Only around a third had resumed out-of-home activities, compared with 81 percent of consumers in China, 49 percent in Franceand just 18 percent in Mexico. New lockdowns and, critically, the rollout of COVID-19 vaccines have and will affect those numbers. The point is that spending will only recover as fast as the rate at which people feel confident about becoming mobile againand those attitudes differ markedly by country. 2 The next normal arrives: Trends that will define 2021and beyond 1 Jamie Smyth, “Australias economy powers out of COVID-19 recession,” Financial Times, December 1, 2020, . 2 “Survey: US consumer sentiment during the coronavirus crisis,” December 2020, McKLeisure travel bounces back but business travel lags People who travel for pleasure will want to get back to doing so. That has been the pattern in China. The CEO of one major travel company told us that, beginning in the third quarter of 2020, business was “pretty much back to normal” when referring to growth. But it was a different normal: domestic travel was surging, but international travel was still depressed given pandemic-related border restrictions and concerns about health and safety. In China as a whole, hotel occupancy and the number of travelers on domestic flights were more than 90 percent of their 2019 levels at the end of August, and over the October Golden Week holiday, more than 600 million Chinese hit the road, around 80 percent of last years figure. 3 Because of confidence in the countrys health and safety measures, domestic travel is almost back to the level seen prior to the pandemic, and high-end domestic travel is actually ahead of it. By definition, leisure travel is discretionary. Business travel is less so. In 2018, business-travel spending reached $1.4 trillion, which was more than 20 percent of the total spending in the hospitality and travel sector. 4 It also brings in a disproportionate share of profits70 percent of revenues globally for high-end hotels, for example. During and after the pandemic, though, there is a question about business travel: Exactly when is it necessary? The answer is almost certain to be not as much as before. Video calls and collaboration tools that enable remote working, for example, could replace some onsite meetings and conferences. The larger context is also informative. History shows that, after a recession, business travel takes longer than leisure travel to bounce back. After the 2008 09 financial crisis, for example, international business travel took five years to recover, compared with two years for international leisure travel. Regional and domestic business travel will likely rebound first; some companies and sectors will want to resume in-person sales and customer meetings as soon as they safely can. Peer pressure may also play a part: once one company gets back to face-to- face meetings, their competitors may not want to hold back. All told, however, a survey of business- travel managers found that they expect business- travel spending in 2021 will only be half that of 2019. 5 While business travel will return at scale, and global economic growth will generate new demand, executives in the field think that it may never recover to the 2019 level. In short, leisure travel is driven by the very human desire to explore and to enjoy, and that has not changed. Indeed, one of the first things people do as they grow more prosperous is to travelfirst close to 2021 will be the year of transition. Barring any unexpected catastrophes, individuals, businesses, and society can start to look forward to shaping their futures rather than just grinding through the present. 3 The next normal arrives: Trends that will define 2021and beyond 3 Anniek Bao, “Travel rebounds over Chinas national day holiday,” Caixin Global, October 9, 2020, ; Monica Buchanan Pitrelli, “More than 600 million people traveled in China during Golden Week,” CNBC, October 9, 2020, ; Guang Chen, Will Enger, Steve Saxon, and Jackey Yu, “What can other countries learn from Chinas travel recovery path?,” October 2020, McK. 4 World Travel ditto for Japan. Britain is somewhere in between. A survey published in November 2020 of 1,500 self-employed people found that 20 percent say they are likely to leave self- employment when they can. 8 At the same time, however, the number of new businesses registered in the United Kingdom in the third quarter of 2020 rose 30 percent compared with 2019, showing the largest increase seen since 2012. 9 On the whole, the COVID-19 crisis has been devastating small business. In the United States, for example, there were 25.3 percent fewer of them open in December 2020 than at the beginning of the year (the bottom was in mid-April, when the figure was almost half). 10 US small-business revenue fell more than 30 percent between January and December 2020. 11 But well take good news where we can get it, and the positive trend in entrepreneurship could bode well for job growth and economic activity once recovery takes hold. Digitally enabled productivity gains accelerate the Fourth Industrial Revolution Theres no going back. The great acceleration in the use of technology, digitization, and new forms of working is going to be sustained. Many executives reported that they moved 20 to 25 times faster than they thought possible on things like building supply-chain redundancies, improving data security, and increasing the use of advanced technologies in operations. 12 4 The next normal arrives: Trends that will define 2021and beyond 6 “Business and industry: Time series/trend charts,” US Census Bureau, December 15, 2020, census.gov. 7 Valentina Romei, “Pandemic triggers surge in business start-ups across major countries,” Financial Times, December 30, 2020, . 8 “Hours and incomes of self-employed workers stayed low over summer,” LSE, November 10, 2020, lse.ac.uk. 9 Andy Bounds and Chris Tighe, “Starting a business in the midst of a pandemic,” Financial Times, November 26, 2020, . 10 Opportunity Insights Economic Tracker, November 30, 2020, tracktherecovery. 11 Gwynn Guilford and Charity L. Scott, “Is it insane to start a business during coronavirus? Millions of Americans dont think so,” Wall Street Journal, September 26, 2020, . 12 “How COVID-19 has pushed companies over the technology tipping pointand transformed business forever: McKinsey Global Survey results,” October 2020, McKHow all that feeds into long-term productivity will not be known until the data for several more quarters are evaluated. But its worth noting that US productivity in the third quarter of 2020 rose 4.6 percent, following a 10.6 percent increase in the second quarter, which is the largest six-month improvement since 1965. 13 Productivity is only one number, albeit an important one; the startling figure for the United States in the second quarter was based in large part on the biggest declines in output and hours seen since 1947. That isnt an enviable precedent. More positively, in the past, it has taken a decade or longer for game-changing technologies to evolve from cool new things to productivity drivers. The COVID-19 crisis has sped up that transition in areas such as AI and digitization by several years, and even faster in Asia. A McKinsey survey published in October 2020 found that companies are three times likelier than they were before the crisis to conduct at least 80 percent of their customer interactions digitally. 14 That evolution has not always been a seamless or elegant process: businesses had to scramble to install or adapt new technologies under intense pressure. The result has been that some systems are clunky. The near-term challenge, then, is to move from reacting to the crisis to building and institutionalizing what has been done well so far. For consumer industries, and particularly for retail, that could mean improving digital and omnichannel business models. For healthcare, its about establishing virtual options as a norm. For insurance, its about personalizing the customer experience. And for semiconductors, its about identifying and investing in next-generation products. For everyone, there will be new opportunities in M by July 2020, it had hit 33 percent of total retail sales. 16 To put it another way, the first half of 2020 saw an increase in e-commerce equivalent to that of the previous ten years. 17 In Latin America, where the payments and delivery infrastructure isnt as strong, e-commerce use doubled from 5 to 10 percent. In Europe, overall digital adoption is almost universal (95 percent), compared with 81 percent at the start of the pandemic. In normal times, getting to that level would have taken two to three years. Strikingly, the biggest increases came in countries that had previously been relatively cautious about shopping online. Germany, Romania, and Switzerland, for example, had the three lowest online-penetration rates prior to the COVID-19 crisis; since then, usage increased 28, 25, and 18 percentage points, respectivelymore than in any other markets. Dig a little deeper, though, and there are some cautionary notes, such as the conspicuous lack of brand loyalty among online buyers. Perhaps most telling, in a recent McKinsey survey, only 60 percent of consumer-goods companies say they are even moderately prepared to capture e-commerce- growth opportunities. 18 As one executive told us, “when it comes to selling directly to consumers, we dont really know where to start.” That concern is certainly valid. Direct-to-consumer selling requires the development of new skills, capabilities, and business and pricing models. But the trend is clear: many consumers are moving online. To reach them, companies have to go there, too. Supply chains rebalance and shift Think of it as “just in time plus.” The “plus” stands for “just in case,” meaning more sophisticated risk management. The COVID-19 pandemic revealed vulnerabilities in the long, complicated supply chains of many companies. When a single country or even a single factory went dark, the lack of critical components shut down production. Never again, executives vowed. So the great rebalancing began. As much as a quarter of global goods exports, or $4.5 trillion, could shift by 2025. Once businesses began to study how their supply chains worked, they realized three things. First, disruptions arent unusual. Any given company can expect a shutdown lasting a month or so every 3.7 years. Such shocks, then, are far from shocking: they are predictable features of doing business that need to be managed like any other. Second, cost differences among developed and many developing countries are narrowing. In manufacturing, companies that adopt Industry 4.0 principles (meaning the application of data, analytics, humanmachine interaction, advanced robotics, and 3-D printing) can offset half of the labor-cost differential between China and the United States. The gap narrows further when the cost of rigidity is factored in: end-to-end optimization is more important than the sum of individual transaction costs. Thats one reason why agencies such as the US Department of Defense are diversifying their networks of suppliers for essentials, such as in healthcare manufacturing and microelectronics
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