Opinion: Covid-19 will accelerate the growth of digital economy at an unprecedented scale

We launched Nuwa Capital earlier this year at the Step Conference, and given everything that’s happened since it certainly feels like a lifetime ago.

History will judge whether or not we were extremely unlucky in our timing to launch the firm or if, and without minimizing nor trivializing the victims of Covid-19 and its subsequent near-cataclysmic recession, we have been uniquely fortunate.

With a very healthy dose of self-serving optimism (given that we are in the process of fundraising from LPs), I’m very strongly inclined to believe the latter. Namely, that we are on the cusp of a once-in-a-generation transformation that will exponentially reshape our societies and our economies and accelerate the growth of the digital economy at an unprecedented scale.

I wanted to break out some early ideas we’ve been having at Nuwa Capital with regards to what the ramifications of the current crisis are and what may emerge at the end of it.

Crises are formative

While not wanting to appear callous, we’ve seen time and again that innovation and efficiency has tended to accelerate during economic downturns, either in the form of accelerated growth for innovative companies or new companies emerging to tackle difficult market realities.

The last economic downturn in 2008-2010 led to explosive growth in new innovative companies that have reshaped the industries they are in and become household names both globally and in MENA.

Tech companies created in 2008-2010 downturn

Accelerated digital adoption

The first-order effects of the current global and regional Shelter-in-Place directive are clear. With the near-worldwide shuttering of offline retail, millions of people especially in emerging markets are now entering the digital economy at unprecedented levels. Consumers who had never bought groceries online, ordered medication online or seldomly interacted with ecommerce in general are now forced to conduct all their buying activities online.

Dependence on Cash on Delivery (COD) is waning, particularly in our region as compromised supply chains mean that ecommerce companies can no longer subsidize returns and cancellations that COD enabled. Once social distancing rules are lifted in the coming weeks and months, there are whole new segments of society who will now be, for the first time, much more comfortable transacting online and no doubt this “stickiness factor” will drive the reformation of our consumer/retail experience.

This is clearly the first-order impact, the trick is to better understand what this might mean in the long run and how it will reshape existing industries. In other words, the key for building successful businesses in this brave new world is understanding what the second- and third- order effects might be and what that might mean for both entrepreneurs and investors.

Retail/ecommerce – a false dichotomy

Clearly, there are going to be some in that space that are deeply hurt. Traditional retailers that had been slow or reticent to build online channels are very clearly likely to be hit extremely hard. However, this will drive the following:

Firstly, the growth of omni-channel retail where online and offline experiences work in tandem rather than online simply being an extension of the physical store. We will see far fewer physical outlets for retail generally and what outlets remain will be driven by experience.

Secondly, I believe as consumers get more price sensitive in a recessionary environment, more and more will look to online platforms for easy price comparison.

Similarly, Direct-to-Consumer (DTC) products – private label products that are highly customizable – will flourish if they are able to come to market with a more effective cost structure, owing to the fact that they will primarily leverage online platforms and dispense, on the whole, with cost-heavy legacy of traditional retail (store fronts, etc).

This will most likely happen cross-sector from FMCG, to fashion, to eyewear. Consumers will care less about well-known branded products and look more to quality and price.

Thirdly, ecommerce in MENA/emerging markets has traditionally focused on the higher-income segments. As millions of new consumers enter the digital economy in a recessionary environment, there is a unique opportunity to build ecommerce for all income levels.

All of the above speaks to the collapse of a traditional offline/online dichotomy in retail and the creation of more of a holistic experience with a much lighter physical footprint.

Food & Beverage

F&B has already experienced significant change that is no doubt set to continue.

An early first-order effect is that F&B outlets, delivery and aggregators are suffering in the near term. I believe that in the long run, this will lead to the reshaping of the dining experience driven by the dislocation of traditional F&B. The industry will also head towards greater efficiencies whereby there is a focus on maximizing utilization of physical infrastructure (restaurants, branches etc). Players will look to use those fixed investments to build new revenue streams, while at the same time driving growth.

The opportunity in F&B will be defined by the ability of operators to build brands quickly and efficiently and drive their growth both online and offline. The lifecycle for F&B brands will be accelerated: the development of virtual brands will increasingly leverage the deep investments in infrastructure made in cloud kitchens across the world and the investments that aggregators have built in customer acquisition channels.

Virtual brand operators will ride on top of this infrastructure and look to develop a whole new and deeply customizable user F&B experience, where brands can appear and disappear and are built for the end-consumer particularly at efficient price points for delivery.

Similarly to retail – offline/online will meld together, it would not be unfathomable to believe that there will be far fewer physical outlets for F&B operators. Operators will leverage their physical space to double as kitchen capacity for virtual brands and lease out that capacity to increase its ROI on the space.

Similarly, new brands that are tested offline will appear and disappear quickly (if unsuccessful) and be subject to rigorous analytics. Online is where investors and operators will seek to better maximize their investment in brands.

Alternative employment

The drive by employers and corporates to rationalize cost in the short run will lead to a sizable dislocation in the labor market, as a large number of workers are made redundant. The second-order effect is that, more so than in previous downturns, a significant portion of this work will return in the form of contract work or non-permanent employment as companies look to fulfill requirements through digital platforms that facilitate freelance work.

While we did not see this materialize much in our region/Emerging Markets in the last downturn, we did see it in more developed markets. Given recent regulatory changes across MENA and the GCC, we will no doubt see the rise of alternative platforms that help connect freelance jobs with workers particularly in white-collar segments (design, translation, coding, marketing, etc).

Furthermore, we will also see the development of innovative and new ways in which individuals seek to capitalize on whatever assets they might have (similar to how Airbnb allows you to generate income from your home and Uber allows you to generate an income from your car). I believe that we will see further developments in that direction, the specifics of which remain unclear.

Localization of supply chains will be a recurrent theme

The crisis has shown that global supply chains can get easily disrupted. Corporates and governments will look to bring some of it locally, reshaping economies and markets along the way. It will be interesting to see what kind of companies emerge from that for local manufacturing and transacting across the supply chain particularly around agritech and healthcare.

Dark times ahead, but a chance to build a new prosperity

It is a unique moment where great entrepreneurs will seek to address the many market failures that we see and the many more that will become apparent in the coming weeks and as part of that, hopefully build new modes of exchange and value that will help propel our societies forward.

Editor’s note: The views and opinions expressed in this article are those of the author’s and do not necessarily reflect the views of MENAbytes.

This article was first published here and has been reproduced on MENAbytes with author’s permission. 

Khaled Talhouni
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