COVID-19: Asia Supply Chain & US Demand Impact

Insight by

Oliver Chen, Cowen’s Retail and Luxury Goods Analyst speaks with Stanley Szeto, Chairman,  Hong Kong Textile Council and Executive Chairman, Lever Style, to discuss key risk factors to consider for the supply chain and current developments and learnings from China and Hong Kong.  They also explore potential implications for the specialty retail industry as retailers plan for summer/fall inventories.

Mr. Chen also hosts Kathy Sheehan, Senior Vice President, Cassandra.  They discuss insights into Generation Z from newly conducted survey work on how the younger generation is thinking about the coronavirus impact and how social distancing is changing their consumer behavior.

Press play below to listen to their discussion.

Host: 

Oliver Chen is a Managing Director at Cowen and a senior equity research analyst covering retail and luxury goods. 

Speakers:

Stanley Szeto is the Executive Chairman of Lever Style and the Chairman of the Hong Kong Textile Council.  Mr. Szeto is based in Hong Kong and works with factories in China as the chairman of apparel supplier Lever Style.

Kathy Sheehan is the Senior Vice President at Cassandra.  Ms. Sheehan leads the Cassandra team within ENGINE Agency, which is focused on helping clients build culturally relevant brands through leveraging insights from trendsetting young consumers.

Transcript

Speaker 1 (00:07):

Welcome to Cowen Insights, a special look at the coronavirus and its effects on sectors across the economy as well as the policy arena. You will hear the latest insights from leading experts about where things stand and what’s around the corner.

Oliver Chen (00:30):

Thanks so much, Seb. Good morning everybody, I hope you and your families are doing well. Thank you for joining us for our Asia Supply Chain & U.S. Demand Impact panel with Stanley Szeto, he’s the executive chairman of Lever Style and Kathy Sheehan, the senior vice president of Cassandra. So our call here is organized into two parts, the first part will be supply chain oriented. Stanley’s based in Hong Kong, he’s an important supplier with factory relationships across Asia. After Stanley, we’ll move onto Kathy. Kathy will highlight her recent survey work on Generation Z’s perception of the virus and social distancing. Hi, it’s Oliver Chen, I’m Cowen’s retail and luxury analyst.

Oliver Chen (01:15):

The format of this will be a fireside chat with me. Regarding Stanley, a quick introduction about Lever Style. Lever Style is an apparel manufacturer for several U.S. based apparel brands, that includes digitally native brands, such as Everlane, Mizzen+Main and Stitch Fix. Plus designer brands such as Vince, AllSaints, Fila, rag & bone, Theory and others. They have a centralized operations hub in Shenzhen, China. Stanley Szeto is the executive chairman of Lever Style and also the chairman of the Hong Kong Textile. Question, so Stanley, we appreciate your time and consideration here and thanks for being engaged with us and clients, we would love an update on the progress regarding capacity ramp-up in China, as well as the flow of raw materials from China to other neighboring countries.

Stanley Szeto (02:10):

Hi. Good morning everyone and thanks, Oliver, for having me. Yes, I guess as a quick update on the Chinese capacity ramp-up. China’s been locked down for most of February and the early part of March but now, things are coming back onstream and we’re seeing capacity somewhere probably between 60 to 90% back to the normal levels. Of course, that’s from a very slow start, so just giving my own office as an example, it’s not a factory, it’s an office, in Shenzhen. Our office was allowed to open on February 14th, Valentine’s Day, which was about two weeks after when we normally would have opened it after Chinese New Year. And when we were first allowed to open, we could only bring in 20% of the staff. After a couple of weeks, it went up to 50% and now, I understand it’s about maybe 90%. So China is slowly getting back to normal in terms of productivity.

Stanley Szeto (03:16):

And as I’ve shared with Oliver before, this problem is not only with China. I know of course, we have a lot of production in Southeast Asia. For example, Vietnam is our company’s biggest production base but Vietnam is not immune from all this because Vietnam’s main source of raw material and in our industry, it’s fabric, they come from China or the majority of it comes from China. So when Chinese fabric mills were not producing and not shipping in February, Vietnamese factories wouldn’t be getting the raw materials and Vietnamese workers would not have anything to do. Of course, there’s probably a one month lag time to that. But I guess the fabric mills are now catching up as well and I understand that for the things that were in a rush, fabrics were shipped or were actually airfreighted over to Vietnam to make up on lost time. So the situation, it hasn’t completely returned to normal but it’s in decent shape already.

Oliver Chen (04:25):

Stanley, what are you seeing in terms of the United States’ demand now? And what can U.S. companies do in relation to what’s happening here with what’s in their control and their relationships with factories and production and shipments?

Stanley Szeto (04:41):

Well, I can perhaps just share what’s happening to the demand side. I guess everybody was worried about the supply shock, coming back onstream, what happens if I don’t get my goods on time? Am I going to miss some kind of a selling season? However, in the last maybe just… It’s been very drastic, just the last few days, the last week, the narrative has completely flipped. I guess a lot of the brands, the Western brands… Even Nike’s closed its shops. Apple, not in apparel but Apple, so nobody’s buying iPhones in these couple of weeks when they have their stores closed. And we’re seeing brands telling the supply chain, “Hey, hold on. We don’t need these goods so quickly. Anything that hasn’t been cut yet, the fabric hasn’t been cut yet, please delay on cutting. For things that have already been made, please delay on shipping it to us.”

Stanley Szeto (05:40):

And therefore, “Normally, we’d put in repeat orders, you can expect repeat orders later on, right now, all bets are off, don’t worry about that.” So ironically, while even just up to a week ago, we were worried about supply shortage and supply chain disruption, now it’s completely flipped and there’s now more capacity. So even at 60 or 80% of normal capacity, that’s actually a higher figure than what the demand side is needing. So there’s been a collapse in demand from the Western brands and retailers. So right now, the whole focus is on, how do we manage the demand side? And I believe that the demand shock coming from this virus is going to be much more impactful and more long-lasting than the supply shock that we saw for basically, let’s say a month, month and a half.

Oliver Chen (06:36):

What are your thoughts on this unknown situation as it unfolds and the nature of this demand shock? Retailers are just starting to instantly close doors till end of March but this could go on to April and May based on our own assumptions we made in some model updates we did this morning.

Stanley Szeto (06:59):

Yeah, this is really unchartered territory, so I don’t think anybody will have a very high confidence in predicting when this will all end but we can use China as an example. China basically got into lockdown at Chinese New Year, which is end of January, let’s say early February and only now, in the second half of March, are we seeing a renewed activity and shops are reopening, restaurants are opening again. So there’s been at least a month and a half, let’s say two months, worth of time when there was very little commercial activity. Except the online guys, so Alibaba was probably making out like bandits and Tencent was selling all these mobile games because people at home just play mobiles, these games. So certainly, some companies were benefiting but not the normal brick-and-mortar retailers.

Stanley Szeto (07:55):

So if China’s experience is any indication and the U.S. is just getting into it, a month and a half, two months, it’s probably the best guess that any of us can make. However, it’s important to bear in mind how China and the U.S. differed in their approaches to control the virus. China, as soon as it got wind, they’ve got a problem in Wuhan, basically locked down the entire country to prevent the spread of the virus from Wuhan to the other places. So of course, Wuhan was the… You get all these tens of thousands of cases or something but the rest of China is actually not that badly affected considering. Of course the numbers are high but if you look on a per capita basis, China is 1.4 billion people, so even the major cities like Beijing, Shanghai, Shenzhen, Hangzhou, the number of people infected was probably lower than you would expect, given these cities have…

Stanley Szeto (09:02):

And because of China’s very draconian measures in locking down its population, not letting people even go out and do their normal thing, they controlled the virus relatively well and so therefore, it took a month and a half, two months, for commercial activity to resume. In the U.S., in the Western liberal democracy, it’s much harder basically keeping people on house arrest at home, it doesn’t work that way. And so the virus is probably spreading faster than it was in China and how long is this going to take is anyone’s guess. And I guess bear in mind, there are lots of variables. Let’s say if all of a sudden, in two weeks’ time, some pharmaceutical firm comes up with a treatment that is very effective or something unexpected, the vaccine comes out unexpectedly early, that can change the game totally as well.

Stanley Szeto (10:06):

There’s also the weather factor. A lot of people, the medical experts, are saying that such corona viruses tend to be much less active in warm climates. So as we hit spring and we get into April and May, that maybe the warmer parts of the country will get out of it first but this is all speculation because nobody knows because this virus is a new one. But its cousins have been known to be less effective in high temperatures. But I guess in short, nobody knows and I guess, Oliver, your guess is as good as mine or even the medical experts.

Oliver Chen (10:50):

That’s very helpful, Stanley. Stanley, any other thoughts on what at large the U.S. could also learn from what was done in China, in terms of policies that seemed to work really well there?

Stanley Szeto (11:09):

Well, in China… I live in Hong Kong, so we’ve been practicing basically what they call social distancing. So just not going to crowded places, just being away from other people, not using public transport as much. Even in trains now, it’s much more sparse than what it used to be. So as long as you keep a certain distance, it’s much harder to infect I guess or get the infection from strangers or people you have a meal with if you’re not seated that closely together and you’re not really… Pardon the language but not spitting into each other’s faces. And I guess practicing good hygiene, all the experts have been saying, “Make sure you wash your hands or use sanitizers.” But one thing, I think it’s a cultural thing, in China, people are much more willing to… And actually, not just China but Korea, Japan and other parts of Asia, people are much more willing to use surgical masks.

Stanley Szeto (12:25):

Surgical masks, don’t really… Experts say this, they don’t really stop you from getting infected by the virus if somebody next to you has it and then sneezes and basically, the droplets get through the sides of it but it will greatly reduce the possibility of you infecting somebody else. Of course, if you feel that, I’m feeling fine, I’m not sick, why should I bother with it? But for this virus, there is a one week incubation period when you actually are… What do we call it? There is no symptoms. So somebody who appears to be very healthy… I’m fairly healthy right now but who knows if I had got infected by this virus a few days ago? Symptoms won’t have come up yet but I will be infecting others. And I guess in the East Asian culture, when the authorities say, “Hey, everybody wears a mask,” so that it’s a sign of civic responsibility, then the vast majority of the people do it and then that stops the transmission of the virus.

Stanley Szeto (13:35):

Again, it keeps you from infecting others, rather than it helps you in keeping safe but if everybody does that or most people do that, then the rate of transmission is going to be much lower. In the U.S., the stigma of wearing a mask is… There is a stigma and I’m not in New York right now but I bet that if you go down in Manhattan, the vast majority of people are not wearing masks and that’s a very different situation from Asia. Maybe if the government or whoever has the influence and credibility to tell the American public, “Hey, wearing these things actually do help the country as a whole to reduce the rate of transmission,” that’s something that may be helpful but changing cultural biases is difficult of course.

Oliver Chen (14:30):

And the hot topic is payment terms and working capital, do you expect that these may change? And how are you thinking about U.S. businesses and negotiating payments and their credit and their ability to pay?

Stanley Szeto (14:51):

Well, when shops are being closed, businesses definitely have the cash flow and ironically, it’s like banks. If you go borrow money from a bank, if you don’t need the money, that’s when they most want to lend you the money. When you’re really desperate, you’re short on cash, that’s the time when they’re least likely to extend credit to you. And I think that payment terms is the same way. During normal times, people may be a little bit more aggressive in extending payment terms but during this kind of crisis, when all the customers are seen to be high risk, that’s the time when suppliers are least likely to extend payment terms or to negotiate or to provide long payment terms.

Oliver Chen (15:37):

And Stanley, what are usual payment terms in the industry? And are you basically saying that there’s unlikely to be a lot of flexibility here?

Stanley Szeto (15:52):

Yeah, I would think that there’s unlikely to be a lot of flexibility for new orders. For orders that have already been shipped then, let’s say if somebody’s on an open account’s 30 day terms and it comes to the 31st day or the 60th day and they don’t pay, unless the supplier want to sue them, there’s little that the supply can do. But what people can do is say, “Hey, if you haven’t been paying, for the new orders, we don’t want to even take the orders.” Because everybody’s going to be very concerned about cash flow, it’s a matter of survival. So if there is a perception that this is a high risk account, a lot of suppliers are probably not going to be very amenable to setting longer payment terms than normal.

Oliver Chen (16:47):

What are your thoughts on inventory and the inventory in the stores now and the inventory coming, relative to what your customers can do and changing the inventory flow and the backup situation?

Stanley Szeto (17:03):

Well, whatever’s in the store now is in the store now and whether it can be sold and at what price, I think you guys are experts in that much more than we are. But I guess what we’re seeing is brands telling their suppliers, “Hey, don’t ship. Delay shipment,” and basically saying, “We have more inventory than we need at the moment, let’s be conservative, let’s take in less inventory for now.” And if let’s say there’s a V-shaped recovery, that’s a good problem to have, not having enough goods. Right now, the fear is having too much goods and that’s going to tie up all the working captial and it’s going to put too much cash flow strain on the company.

Oliver Chen (17:49):

Stanley, on shipping costs and also labor and raw material costs, do you have any thoughts on how that might trend in the near and medium term? This is such a dynamic situation.

Stanley Szeto (18:02):

Well, on shipping costs, I remember a week ago I was sharing that we were expecting a spike in shipping costs and everybody was rushing out stuff and if things were delayed, they put it on the plane. And I was hearing that airfreight costs was more than double of what it normally was. But going forward, if there’s such a demand shock and people don’t need to rush things anymore and you don’t need to ship things, whether by sea or by air, shipping costs will probably come back down but we haven’t seen that yet. I think the demand shock, we’re just starting to… For orders that were already placed and things that were being shipped, it’s already on the boat, so it’s a done deal. Right now, we are hearing brands telling their supply, “For things that are not cut yet, don’t cut.” And that means that these are things that were supposed to be shipped let’s say a month from now.

Stanley Szeto (19:03):

So I think right now, freight costs are probably still going to be high but I think in a month’s time or two months’ time, they will definitely adjust. Labor costs, I have a feeling that labor cost inflation will moderate significantly. I’ve been in this industry for 20 years and in China, labor cost increases have been basically double-digit every single year for the last 20 years and this year, we’re hearing people freeze salaries, whatever, just because the economy is so poor. So if workers’ salaries are frozen, that means that there’s a negligible labor cost inflation.

Stanley Szeto (19:47):

Of course, Vietnam is still having labor shortages, so labor costs will continue to go up. But if the demand shock is going to be so severe and everybody’s fighting for orders, the labor cost inflation in all these different countries may be moderating as well. Although not as much as China because China was always the most expensive player in the developing world. So it was already expensive, so it needs to maybe have a freeze. The other countries may not have a freeze per se but instead of growing double-digits, maybe it’s just mid to single digits or something but who knows? It’s just pure speculation.

Oliver Chen (20:33):

Stanley, one question we had from a client is back to school holiday period, if you had to think about that now and it’s a little ways off but how do you see that evolving with the nature in which your clients are placing orders or canceling orders?

Stanley Szeto (20:49):

Right now, we’re hearing people delaying the placement of orders, so that includes the back to school period. But the selling seasons, during the summer, a lot of things can change by then. For example, the virus suddenly… Because of the heat, it tapers off in May, then maybe you won’t really see that much of a reduction for back to school season and people at that time could be scrambling for inventory. But right now, we’re seeing a pretty sharp reduction or delay in orders for the back to school season.

Oliver Chen (21:30):

And Hong Kong retail trends, have you seen any noticeable pickup in retail, physical or e-commerce? Would love your thoughts on that region.

Stanley Szeto (21:42):

Well, Hong Kong’s retail’s been dead for nine months, starting with the protests last year and right now, we’ve got the virus and we’re not seeing a big pickup in retail. Although, I think F and B, slowly people are starting to go back out to restaurants and so forth. But I heard that in China, retail’s picking up a little bit. Definitely not at the same level where it was before, a few months ago but it’s picking back up and hopefully, if the trend continues, it could get back to pretty normal in the foreseeable future. However, one potential problem is that China’s economy is still very export dependent. So I forgot what the percentage is but it’s probably let’s say, 40, 50%. A significant chunk of Chinese economy’s dependent on export and if the West imposes a huge demand shock, China’s factories may not be running as much and there may be unemployment. And if that changes the mood of the consumer, then the domestic Chinese retail will be affected but I guess it’s still too early to tell.

Oliver Chen (23:03):

Stanley what about DCs? Because we’re even seeing e-commerce operations at different retailers pause DCs and e-commerce orders and even processing priorities. Big players like Amazon are changing. Did you see that happen in China as people look to protect the welfare of workers in DCs as well?

Stanley Szeto (23:27):

Yeah. Well, in China, I heard from a friend that the logistics system broke down for a couple weeks basically, during the most severe times. And when you order from Taobao or Tmall, normally, you get your stuff in a couple of days but there was time when it was a two week delay but I heard things are slowly getting back to normal now.

Oliver Chen (23:56):

Thank you, Stanley and lastly, any other personal or professional or investment advice for us as we close out? Appreciate all your views.

Stanley Szeto (24:05):

Well, right now, I guess everybody feels that it’s a crisis and it is a crisis but I guess we’ve learned from crises in the past that what looks really, really dire now may not be the case in a few weeks or a few months’ time. So sometimes, I think we tend to… Being investors or being even executives, we tend to overreact and I guess it’s important to just look at the big picture and just not panic, so that we can hopefully make the right decisions for the investors and for the company.

Oliver Chen (24:45):

Stanley, one last thing is, do you feel like China’s in the clear? Or do you think that we may see more waves because it’s just clearly not under control in other regions of the globe?

Stanley Szeto (24:58):

Yeah. Well, actually, before this week, China seemed to be… Things seemed to be under control but with the rest of the world, the virus blowing up in the rest of the world, there’s a strong fear that there’ll be a second wave of mostly imported cases. So for example, in Hong Kong, in recent days, there’s been just a huge surge in number of cases because schools in the West were closing. So students who were from Hong Kong, study in the U.S. or whatnot, they were returning home and they would bring the virus with them. And then also, Hong Kong actually imposed a 14 day self-quarantine for all foreigners arriving in Hong Kong, actually starting today, on the 19th, so starting today.

Stanley Szeto (25:56):

And as you can imagine, when that announcement was made, maybe late last week or early this week, everybody was trying to get back, to beat the deadline, to escape, to not have to be subject to self-quarantine. And I guess maybe because of that, flights coming back to Hong Kong were stuffed full. My friends were having difficulty getting tickets for their kids and then that coincides with a huge spike in number of cases and I think I was told that 80, 90% of those new cases are all imported. So basically, people who got infected overseas and they came to Hong Kong and they brought the virus with them.

Oliver Chen (26:42):

Well, Stanley, thanks a lot. Thanks again for the update, we appreciate this being on the ground. So we’ll move on now to Kathy. Seb, if you could also bring Kathy into the call, that would be great. And Stanley, thanks again.

Stanley Szeto (26:58):

Thank you, Oliver. So I’ll sign off now then. Thank you.

Oliver Chen (27:01):

Great. Kathy-

Kathy Sheehan (27:01):

Hey, Oliver.

Oliver Chen (27:04):

Hey, Kathy.

Kathy Sheehan (27:05):

Yeah, I’m here. How are you?

Oliver Chen (27:06):

We’re excited to have you. Kathy leads the Cassandra team within the ENGINE agency, it’s focused on helping clients build culturally relevant brands through insights from trendsetting young customers. She’s an expert in identifying cultural trends that drive successful innovation. We’re more than happy to share her contact information and Kathy’s given us really great insight on the younger customer across the United States. Kathy, could you give us an update on your latest survey and how you’re seeing Generation Z and millennials think about the situation and how it is different? Because you’ve been surveying customers for the past week, thank you.

Kathy Sheehan (27:46):

Yeah, yeah, that’s right and Oliver, nice to be here, thank you for having me again. So just a little bit of background. So we went into the field and did some qualitative work on March 10th and 11th, which I shared with you on our call last Thursday. And at that call, I said I felt like last Wednesday, at least in the United States, was very much a tipping point in terms of public sentiment because you had… It seems like it was much longer ago but it was really only eight days ago, with the NBA ending the season, celebrities like Tom Hanks coming out saying they were testing positive. So we went back into the field because we were very curious to see how some of these very pointed public events were… If they were changing perceptions among youth.

Kathy Sheehan (28:39):

So what we did is we did a recontact study of the young people, ages 14 to 34, that we had spoke to last Monday and Tuesday and we spoke to them again this past Tuesday and Wednesday, so yesterday and the day before. And we want to do this to see A, how quickly are attitudes shifting and we wanted to get a better handle on how young people were adapting, what we’re seeing, what we can advise our clients in terms of potential behavioral changes. Obviously there’s going to be short-term behavioral changes but we also want to understand what are the potential for long-term, more fundamental shifts, in terms of young people and the consumer psyche.

Kathy Sheehan (29:29):

So this was all qualitative research, I’m not really going to share any number except the first one I’m going to kick off with is, one of the things we did ask people was, on a scale of one to 10, in terms of one being, I’m not worried at all and 10 being, I’m completely freaking out, how worried are you about the corona outbreak? And among our sample, we have people saying that they are at a seven or eight, so there is certainly heightened levels and anxiety. We did not ask that question a week ago, so unfortunately, I can’t compare it to say whether it’s gone up or down. But one of the things I do see and I mentioned on our call last Thursday, was there was quite a bit of polarization among young people.

Kathy Sheehan (30:15):

So you had roughly half of our sample saying they weren’t really concerned and then the other half being very, very anxious. And we continue to see that, so some of the… I was thinking that we were going to see a real deterioration in terms of, after last Wednesday, people being a lot more concerned. Certainly, I do see that but I still see a substantial number of folks that we’ve interviewed saying that they’re really not that concerned. And I’m going to read you a few of the quotes that we have and I’ll tell you who’s sharing, the age of the young people that are sharing this with me.

Kathy Sheehan (31:06):

So one person, who is a male named Connor, aged 22, we interviewed him a week ago and did a recontact with him, he was not concerned then and not concerned now. He says, “In no way have my feelings or outlook changed with this. There is no actual threat to someone my age in good health, practicing good hygiene. Just as I was told last week by my brother, that is a doctor and my aunt who works here in Atlanta at the CDC, it is not anything I need to worry about.” So we are still seeing that there are segments of the population that this is not a concern. I’m sure many of us saw this on the news last night, what was happening in Miami with lots of people ignoring the heed to engage in social distancing, being on the beach. I can now see why those activities are happening when you look at some of the insights that we’re getting from young people about not necessarily being particularly concerned.

Kathy Sheehan (32:11):

But we also do see that again, there’s a significant portion of the population that is concerned. So one person, this was Jonathan, who’s 30, he wrote back that, compared to last week, I’m feeling much more concerned about the recent changes that have taken place because of COVID-19 than I did a week ago. The closing of schools… Now, remember, we’re talking to people who are 14 to 34, so middle school, high school, college. The closing of schools I think has been something that… When I look at people making a generalization, in terms of anxiety levels, I think the closing of schools has been really what is hitting this population particularly hard.

Kathy Sheehan (32:55):

So a young woman aged 17 wrote, I’m so much more frustrated now and I highlight that word, frustrated, that came up a few times. So not only is there anxiety but frustration is being articulated through different areas. So she writes, I’m much more frustrated now. My school has been closed until the 30th of March and as of now, my ballet studio has also closed for two weeks. My friends who had been saving up for a class trip this last year, the trip got canceled and they’re only getting 40% of their money back. I’m worried prom might be canceled and that was something I was really looking forward to. So I think for young people, what’s happening with schools… And I’ve heard of many universities closing, graduations being canceled, that is something that is certainly hitting home for this Gen Z and younger millennial population.

Kathy Sheehan (33:52):

And I read a statistic, I believe it came out of The Economist yesterday, that they estimate close to a billion students around the globe right now have had their schools close. So this is not something that’s only happening in the United States but obviously going to really impact this generation that is still of school age. So in addition to asking young people about their overall levels of concern and anxiety, we asked them additional questions that we had not asked last week. We asked about their faith and confidence in the government to handle the situation and once again, I’m going to use that term polarization, we see that there’s a lot of differences in terms of how people are feeling about the government reaction.

Kathy Sheehan (34:51):

One young person wrote, I believe that all levels of government will do their best to contain the virus that is affecting most of the states here in the United States. So several people will quite confident and another quote from a young man aged 22, the Federal Government can coordinate a collective response but this will be solved on the ground at a much finer level of resolution. And then other people saying, “I don’t think that the government is well informed or prepared for this kind of pandemic, I think the local government is following suit to the instructions that have been given to them by state governments and higher.” So certainly, it is politicized in terms of people, their perceptions of how the government is handling the situation.

Kathy Sheehan (35:46):

And then we also asked, impact on future plans and Oliver, when you and I spoke last week, I talked a lot about the usual suspects of where we were seeing changes in travel, eating out, there’s a lot about gyms and people pulling back on that. When we asked people this week about future plans, travel comes up everywhere. So everybody is talking about either short-term travel plans that were anticipated for May and June, we see people talking about travel plans that they had in the fall, nervous about… Even if they don’t have travel plans, one person, a young woman aged 29, said, “I’m nervous about buying flights if I don’t feel well or I don’t know what the situation is.” So I think we’re going to see quite a bit of a hangover in the travel category. So that really popped up in this research.

Kathy Sheehan (36:51):

The last two questions that we asked that I think really gets to more of the category behaviors, we asked people, “If you were to shelter or be quarantined for two weeks, what would you be doing?” And this news is probably great for Netflix because Netflix is mentioned everywhere. We see the idea of binge watching TV shows that I haven’t been able to watch for a while, some people have talked about some of the new content that’s been made available early, such as Frozen 2 being available on Disney+. So there is a lot in terms of the entertainment space. I think one area is fitness at home, so lots of people talking about how they are trying to exercise at home, they’re getting content, again, streaming content that might be of exercise and wellness nature and trying to do that.

Kathy Sheehan (38:00):

And then the other area… So a lot of, again, entertainment, reading. The other area that really popped is a reversion to arts and crafts. So lots of folks saying… I think one of the trends that we’ve been tracking among Gen Zs is this notion of the more bespoke, more interest in things that are perhaps not as mass produced. So you see that there’s one young person, this was again, a woman, aged 21, she said, “I have this garden and I’m going to make it flourish this year. I haven’t had time to do it but it’s going to be beautiful this year.” We see another person, again, this is a young man, 26, “I’m going to do all the things I want to do, I want to do crafts, sewing, watching movies, making popcorn.” So there’s almost an enthusiasm and energy around staying in and having the opportunity to perhaps put a pause on some of the things that you have to do and have an opportunity to do some of the things that you’ve wanted to do but maybe necessarily haven’t had the time before.

Kathy Sheehan (39:27):

So really interesting, that’s a dynamic of lots of frustration but also, I think there’s evidence of some enthusiasm. This one was also, I thought, a cool one. Someone had mentioned, “I’m doing my Rosetta Stone,” so that idea of betterment and self-actualization comes through too, in terms of what people might be doing. And then the last question we asked was, “Thinking about your favorite brands, what do you want to hear from them in this situation? Please tell us what you want to hear and why and if you don’t want to be hearing from brands about this, tell us why not.” And this was a really interesting mixed bag of responses. There are some young people that are really expecting brands to step up.

Kathy Sheehan (40:23):

So for example, young man, 19, “I want all my brands to donate to causes that can support and make a vaccine for this virus to save us all and help the people without immunity to this virus actually live and be cured.” So there’s high expectations that brands should be stepping in. But then on the flip side, again, we have differing opinions here. This is a great one, “The brands that I consume are not experts, scientists or doctors, therefore, there’s no reason for me to hear from them about this.” So again, that notion of polarization out there. Some other comments that I wanted to share. There is this sense… So this 25 year old man wrote, I have no idea what my favorite brands could do or say to make anything better, make this health pandemic anything better.

Kathy Sheehan (41:25):

So some are looking for brands to help in this situation. There were several mentions of, not necessarily helping from a health perspective but having brands step up so that employees are not hurt. So they’re hearing about layoffs, the potential of mass layoffs, that brands should be really, not only thinking about how are they helping in this but also, how are they protecting their workers and how are they more broadly protecting the economy? Certainly, I think the one thing is, certainly, people have strong opinions on this. So one 26 year old wrote, I think this is a woman, I want to hear about how brands are going to protect their workers. I’ve worked for a lot of companies that are on the small side and they are not taking care of them. Times like this, everybody deserves paid leave and the good companies will be doing this.

Kathy Sheehan (42:41):

So definitely, the concerns are not only around the health and what brands can be doing to educate but are brands doing the right thing by their employees? Thinking about the economy is important and then there were also some mentions about some of the shortages, right? So there was one here, I thought this was a little tongue-in-cheek but it was funny. So what can a brand do? The toilet paper manufacturer can get us some product. So again, echoing that frustration that we’re hearing on the part of some consumers. So Oliver, I didn’t have any slides, this is a quick dip into what we’re hearing from people but I’m happy to answer any questions that you or folks on the call might have.

Oliver Chen (43:33):

One of the questions we have is just the reality of store closures and malls and discretionary spending. Do you have any thoughts on what may happen with respect to spending if this is lost versus pent-up and what companies that we cover, such as The Gap and Limited Brands and others, may do or may be able to do in this situation?

Kathy Sheehan (44:01):

Yeah, yeah. Yeah, it’s interesting because I was talking to one of our clients about this notion of pent-up demand, are we going to see, whenever we come out of this, pent-up demand? And there’s two things, I think people are going to want a return to normalcy and even one of the folks on our team here at Cassandra canceled a trip to Vietnam that she was going to be taking and we were talking about that and that’s not something that… We’re talking about behavioral changes, what is sustained and what’s a sustained behavioral change and what is a short-term behavioral change? And clearly, that desire to travel is something that when the time is right, is going to be… I think we’re going to see pent-up demand because that was an aspiration and a return to normalcy, that is what this person saw as normal and what they wanted to do.

Kathy Sheehan (45:05):

I think in the retail environment, you’re going to want to see that on one hand, if people are working from home and wearing things that they’ve been wearing if they’re working from home for four to six weeks and when we come out on the other side, will there be some pent-up demand and some retail therapy? I think probably yes, whether that will make up for what’s been lost, I don’t have an answer to that question, that’s a really tough one. I do think people will want to revert back to normal as soon as they can. And I mentioned that this word frustration is coming up a lot in our research and effectively, we’re about a week into this or a week to 10 days really into this. So if people are expressing frustration a week to 10 days, what are we going to see when we’re a month in? So I think there will be some desire, a desire to get back to normal. We will see some pent-up demand. It really depends on how long this goes too, how long people are stuck at home. So I wish I had an answer on that but I think it’s going to be a very mixed bag.

Oliver Chen (46:33):

And within your survey, between younger and older within your survey, have there been dynamics that have been interesting or consistent with those different cohorts?

Kathy Sheehan (46:46):

Yeah. So certainly in our last survey, we saw that millennials were a lot more concerned about the whole panic buying, especially in fast moving consumer goods, makes complete sense because your millennials are your parent generation, household formation. So they’re going to be much more in tune with primary grocery shopper, all of this thing. So they are much more likely to be concerned about shortages, being anxious about what’s on shelves. Whereas the younger cohorts, Gen Z, I think a week ago, we weren’t seeing as pointed a response coming out of Gen Z and as I started my comments, I think that’s really starting to shift with school closures. So I think with the school closures, this is when it became more real to the Gen Zs. I think also, some of the things I talked about in terms of self-actualization and some of the trends we see with Gen Z in terms of how they define themselves, that they’re defining themselves… Their identity is more about what they do than what they buy, you’re starting to see that come through in some of these statements that people are making in terms of, “Hey, if you’re holed up in your house for a while, what are you going to do?”

Kathy Sheehan (48:17):

And we didn’t see a lot of people say they’re going to do retail therapy online. We saw that they’re going to be consuming a lot of content, a lot of entertainment content and they’re going to be doing things… At least they say, we’ll see if this pans out, they’re saying that they’re going to be doing things that help educate themselves, so I’ll turn to that Rosetta Stone example. They’re going to be trying to exercise at home, they’re going to be dedicating more time to the things that they see as part of their identity as young people, like the hobbies, the arts and crafts, the things that speak to what they like to do and who they are and how they identify themselves.

Oliver Chen (49:03):

Kathy, our last questions are, what have been lately, the biggest surprises in what you’ve been evaluating? And then in closing, any other advice that you have to us as both investors and professional or personal advice related to the data you’ve been seeing?

Kathy Sheehan (49:23):

Yeah. I think for me, the biggest surprise and this may not be a surprise to you, given our talk last Thursday, I thought we were going to get this new data back and I was going to see a pretty C change in terms of the concern that young people had about this. And I didn’t see that as dramatically as I thought I would. So as I said, there’s still people who are saying, “I’m young, I’m healthy, this is not something that I’m particularly concerned about.” And we’re seeing that echoed in the Federal Government response. I think two days ago, they were talking about how if we’re going to flatten the curve, it’s going to be millennials who flatten the curve. They are the ones who are the carriers. So even if you’re not concerned for yourself, you should be concerned for your parents or your grandparents or the broader world around you.

Kathy Sheehan (50:29):

So it’s interesting we see that in our data and we see those messages now coming out more and more from governmental authorities, in terms of how to flatten the curve. So that was surprising to me but now, it all ladders up and makes sense in terms of the messages that I’m personally seeing in the media and some of the attitudes we’re tracking. So that to me was the biggest surprise, that I didn’t see more of a dramatic shift in the past week, I thought I was going to see more of that. And then in terms of advice for brands, I think it is really… When I look at some of these statements in terms of what young people want brands to do, I think it again gets back to being very, very sensitive and thoughtful in terms of our messaging.

Kathy Sheehan (51:36):

One person, I didn’t read this quote but they’re like, “I don’t expect a brand to come out and send me an email that they’re now cleaning their whatever more often, I expect them to do that. They don’t need to tell me that they’re doing that. Hey, that’s an expectation.” So I think there is a tremendous… We should all be very sensitive to potentially anything that could be seen as exploiting a bad situation because I think people’s antennae are really up. I do think people are very anxious, so in literally the last 48 hours, I’ve seen a lot around different celebrities, musicians, all kinds of people, offering respite and there’s a lot of tremendous negative news out there and being sensitive to that and providing relief and comfort I think is probably something that definitely, people are seeking out right now. So that would be maybe some of my advice.

Oliver Chen (52:49):

That’s really helpful. Well, Kathy, we really appreciate the update, thanks for giving us a really concise and excellent proprietary first party read into how younger customers are thinking about it and we appreciate your time.


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