In the past year, I’ve written several times about changes taking place and likely to be long lasting in the wake of the COVID-19 pandemic. One area I’ve touched on, but haven’t delved into much, is distribution.
Producers of all kinds have had to create new ways of connecting with their customers. Restaurants lost and had to contend with severely curtailed access to their primary distribution channel, the dining room. Countless manufacturers lost and had to contend with complete loss of their primary distribution channel, small retail and department stores. Digital products like movies lost and had to contend with severely curtailed access to their primary distribution channel, theatres.
Producers have responded by finding, creating and reprioritizing alternative means of distribution. All restaurants (well, those still in business) increased their distribution through take-away meals. eCommerce retail sales from groceries to gadgets skyrocketed last year. In December, Warner Communications announced they will distribute movies simultaneously to theaters and on their HBO streaming service in 2021.
And the opportunities to innovate in distribution are far from over. To wit: in December, the FAA relaxed guidelines for drone delivery, expanding the potential for commercial drone use in the US (and of course, drone delivery has expanded in the rest of the world).
Distribution will be among the primary ways the chattering classes characterize the post-pandemic world. To what extent do people return to old - largely physical - forms of distribution? Are the new forms of distribution long-lasting, or are they just phenomenon of their times, like Sherry served at Christmastime in Britain?
Change is like a regenerative fire. Fire needs three things: fuel, spark, and accelerant.
The fuel is policies in response to COVID-19 and, in turn, the individual and business reaction to them. Companies need to sell and people want to buy. The longer those policies remain in place, the more significant these new forms of distribution become to producers. Those policies also depress the prices for assets tightly coupled to past forms of distribution, things like commercial airplanes and shopping malls.
The spark is the realization that businesses don’t need to operate in the ways that they have for decades, e.g., expenses don't need to be so high, a company doesn’t need as much square footage or needs to be able to use its physical space differently. The evidence exiting 2020 supports this: even though revenues declined in 2020, earnings per share for the S&P 500 for the year look great.
The accelerant is cheap capital: Fed policy will maintain cheap capital for the foreseeable future. This creates liquidity that has to go somewhere, and will find every nook and cranny.
Distribution has changed. Policy is entrenching those changes. The businesses that didn’t collapse survived in large part because they found new distribution channels. Innovation in distribution is accelerating. Cheap capital will finance more innovation in distribution. It’s a reinforcing cycle. And it’s just beginning.