The consumer demand recovery and lasting effects of COVID-19 By McKinsey Global Institute - March 2021 The COVID-19 pandemic caused an unprecedented consumption shock to the global economy in 2020. But what happens when the pandemic ends? In this report, we examine how the pandemic affected consumer demand in China, France, Germany, the United Kingdom, and the United States and what that means for the recovery. We divide consumers into nine segments based on age and income to determine the size and shape of the consumer demand recovery. We then determine how the mix of consumer demand could evolve and which pandemic-induced behavioral changes are likely to "stick." We find: The exceptional nature of the shock provides reasons to be optimistic for a fast rebound in consumer spending once the pandemic is over. Unlike previous recessions, this one involves no consumer debt overhang, bursting asset price bubbles, or long-term business cycle fluctuations. The sudden and deep drop in consumption across China, the United States, and Western Europe, ranging from 11 to 26 percent, resulted mainly from cutbacks to in-person services, especially travel, entertainment, and dining. These categories have been growing steadily, and consumer surveys indicate a likely strong demand rebound once the pandemic ends. The ten- to 20-percentage-point spike in the savings rate in the United States and Western Europe in 2020 (a doubling in the United States) left many households in a strong position to spend. China's consumer spending recovery after controlling the COVID-19 virus is another reason for optimism. But the recovery is likely to be uneven, especially in the United States, as higher-income households emerge largely unscathed financially, while lower-income households have lost jobs or face income uncertainty. Our analysis indicates a strong but unequal consumption recovery in the United States with variations among income and age segments and a more balanced although slower recovery in Europe. Demand from high-income households, which accounted for two-thirds of the consumption drop and roughly half of the savings increase in the United States, will be key to the strength and speed of the recovery. However, young and low-income households, disproportionally working in hard-hit service-sector jobs and occupations with accelerated digitization and automation, are likely to face purchasing power constraints when government stimulus ends. As a result, we may see widening polarization of consumer demand and an increase in inequality, especially in the United States. The pandemic will leave lasting marks on consumer behavior as longstanding habitsmore spending on services, greater digital adoption, and more time and money spent out of the homehave been interrupted, accelerated, or reversed. To determine whether these pandemic-induced behaviors might stick, we examined consumption shifts across consumer life using our stickiness test that takes into account actions by consumers, companies, and governments. The pandemic accelerated the adoption of digital products and services with a step change in healthcare, a near doubling of online grocery shopping, and widespread adoption of streaming services that will continue. Additionally, home nesting will remain an enduring lifestyle for many, facilitated by consumers' elevated rates of investment in home improvement and continuing opportunities to work from home, all of which have broadened thedefinition of home to include work, fitness, and entertainment. Our analysis indicates other behaviors that were interruptedleisure air travel, in-person education, and in-person dining will resume but with modifications like contactless restaurant menus or selective use of digital tools in education. While the consumer drivers we identify in our stickiness testvalue, experience, and investments are critical in determining what behavior will persist, company and government actions matter at least as much. Wider adoption of work from home may reduce business air travel by as much as 20 percent and that will have an impact on the routes and flights available for leisure travelers. In entertainment, where box office revenue globally in 2020 was only 20 to 35 percent that of 2019, our analysis indicates a lasting drop in demand for movie theaters, due to the likelihood of permanent theater closures and the shift to digital channels by movie studios. Government regulations surrounding virtual healthcare provisioning will largely determine how much consumers use telehealth. Al Tareeqah Management Studies - 2021 5 Companies and governments face challenges from an uneven consumer demand recovery and lasting effects of the pandemic, such as changes to the competitive landscape and increasing inequality. In preparation, companies could determine how a segmented rate of recovery, varying degrees of stickiness of consumer behaviors from COVID-19, and emerging innovations, business model changes, and a reshaped competitive landscape will affect their product and service offerings. Governments willface many challengesfinding the right balance of macro policies to support the consumer demand recovery, adjusting regulations in consumer markets to keep up with changes, and addressing lasting marks from the pandemic, especially on inequality.

Discuss the challenges that the organizations could face due to uneven consumer demand?