The inevitable reboot Diverging health and economic outcomes...government services are health care, banking, and insurance—the inelastic demand in these sectors will make the US

The inevitable rebootDiverging health and economic outcomesReportSeptember 2020

Divergence of Health and Economic Outcomes During COVID-19 | Section title goes here

02

COVID-19 has created major shifts in how businesses and societies operate with a dual impact on both health and the economy Initially health outcomes were strongly correlated with economic outcomes but as countries begin to push more aggressively for reopening we see an increased likelihood of economic recovery while health remains at risk resulting in a divergence between health and economic outcomes This divergence is occurring at different rates across countries depending on a set of government business and individual drivers

The impact of this divergence is particularly noteworthy in consumer-facing industries While it manifests differently within each industry several themes and implications exist across sectors ranging from a growing push to adopt asset-light business models and ldquoborrowrdquo capabilities to the ability to monetize underutilized resources

This paper discusses the divergence between health and economic outcomes as the pandemic progresses and its impact on consumer-facing industries

03

The inevitable reboot Diverging health and economic outcomes | What does divergence look like today

What does divergence look like today

COVID-19 trends in the United States1 as of August 23 2020Overall trend is about the same Rising Falling About the same

Source Johns Hopkins Coronavirus Resource Center August 2020

ME

NHMA

RI

VT

CT

NJ

DEMD

VA

GA

SC

NC

FL

ALMS

LATX

NMAZAZ

CA

NV

OR

WA

MT

ID

UTCO

WY

ND

SD

NE

KS

OK

IA

MO

AR

MN

WIMI

IL INOH

KY

TN

NY

PA

WV

AK

HI

DC

Societies around the world are suffering through one of the worst global health crises in decades The coronavirus has had a dual impact on health and the economy as humans across the globe fall sick and citizens have their livelihoods threatened by forced government lockdowns a shrinking economy and widespread joblessness

Initially health and economic outcomes were strongly correlated with countries hardest-hit by the virus seeing severe economic

impact However as the health crisis becomes more prolonged we have reached a point where these two outcomes have started to divergemdashmeaning while new cases will continue to appear the economy will nonetheless continue on its recovery path

Thus far the United States has had disproportionately poor outcomes in responding to the coronavirus comprising 25 to 30 of the worldrsquos total cases and deaths1 and as of this writing 16 states are experiencing rising numbers of cases

04


Despite these poor health outcomes many states continue to push ahead with reopening plans to improve economic outcomes across a variety of industries Almost every state is engaged in at

least partial reopening for primary industries and 68 of states have fully reopened across all primary industries

Sources New York Times Coronavirus in the US August 23 2020 Reopenings by state August 23 2020 Deloitte GSP COVID-19 State Actions August 20 2020 US Census Bureau Resident population of the US 2010ndash2019rdquo

34 states fully open (inc DC)

Food and drink


Entertainment


Personal care


Retail stores(with the exception of select counties within states)

Brochure report title goes here | Section title goes here

05

This divergence of health and economic outcomes creates notable implications for businesses particularly in B2C sectors Firms must navigate higher costs due to increased health and safety measures and find ways to reach their customers as behaviors and channel preferences continue to evolve Businesses that incorporate flexibility into their DNA by making strategic choices in regard to asset-light business models borrowing capabilities and monetizing underutilized resources will be best positioned to thrive in this unique environment

Broadly speaking there are certain drivers like a comparatively business-friendly government that feed the strategic choices and make the United States likely to see a faster divergence between health and economic outcomes than other parts of the world This paper provides a view into what divergence looks like in the United States compared with other countries It also discusses several major trends that are likely to emerge across consumer-facing sectors as a result of divergence and shares some implications for business leaders to consider in order to thrive in the next normal


Least impacted

Deloittersquos Resilient Leadership framework defines three time frames of the crisis

RespondManage continuity

RecoverLearn and emerge stronger

ThrivePrepare for the next normal

06

GovernmentA countryrsquos economic system plays an important role in determining divergence as more business-friendly societies are quicker to align policies and resources to prioritize economic recovery over health outcomes

Under a more business-friendly model there will be greater openness to deregulation to return the economy to growth In the United States government agencies have been advised to ldquoaddress this economic emergency by rescinding modifying waiving or providing exemptions from regulations and other requirements that may inhibit economic recoveryrdquo2 To this end the Department of Health and Human Services has issued a waiver allowing consumers to consult with their doctors via FaceTime3 and regulators have temporarily relaxed nonbank lending limits to support small businesses through the Payroll Protection Program4

Government welfare policies also act as a key driver of divergence In 2018 total US social expenditures comprised 187 of the

GDP less than the OECD average (201) and far less than many EU countries such as France (31)5 While these expenditures help protect the hardest-hit in times of crisis they also risk disincentivizing employees to return to work Under the US CARES Act for example it is estimated that 68 of workers are earning more on supplemental unemployment insurance than they would have in regular wages and many businesses have been challenged to bring back employees as a result6

Equally important are the fiscal and monetary policies set to combat the economic impact of the crisis Governments with the economic and political ability to pass large-scale stimulus packages such as those deployed in Japan (gt$1 trillion) and the United States (gt$2 trillion) will see quicker divergence than countries with limited fiscal or monetary policy options The US response is aggressive relative to the global average pairing a large fiscal program with large rate cuts

Why do we believe divergence will continueDivergence depends on multiple factors each concurrently pushing (or pulling) a country toward (or away from) economic recovery The key drivers for divergence span three areas government businesses and individuals

The inevitable reboot Diverging health and economic outcomes | Why do we believe divergence will continue

Comparing global fiscal and monetary responses to COVID-19 Federal COVID-19 stimulus package as of GDP Reduction in central bank interest rates postndashCOVID-19 (bps)

Note Japan had 0 bps change in central bank interest rates postndashCOVID-19Source Statista National Government Reports Global Rates

38

0

100

150

200

250

00

50

100

150

200

250

50

Japan-01

211

United States025

150130

European Union0

5239

Russia425

200

70

China385

Stimulus percentage ()

Interest ratechange (bps)

Current interest rate (July 2020)

30

07


BusinessesA countryrsquos business environment including its industry composition workforce flexibility and availability of capital also has a large impact on divergence

Countries overindexed with industries heavily affected by COVID-19 (for example travel hospitality and retail) experience slower divergence than those with a more diverse industry mix For example the largest contributors to the US GDP apart from

government services are health care banking and insurancemdashthe inelastic demand in these sectors will make the US economy more resilient than countries such as China and Germany which have more than 10 of their GDP in tourism7 The one outlier is manufacturing a significant contributor to the US GDP which has been significantly affected by this pandemic However manufacturing still comprises less of the US GDP when compared with manufacturingrsquos contributions to other major world nations and is slightly higher than major European economies

Comparing the GDP value-add of manufacturing in 2019 ()

China

Singapore

Germany

European Union

India

Global average

Korea Rep

United States

Spain

France

United Kingdom

27

20

19

15

14

14

12

11

11

10

Note Global average calulated available statistics for 153 countriesSource World Bank

9

Projected coronavirus impact (by US industry)Avg impact score across revenue supply chain operations personnel 1 (minor) to 5 (severe)

Manufacturing

Transportation

Retail

High tech and telecommunications

Health care and life sciences

Media and entertainment

Universities and colleges

Banking FSI and insurance

Public sector

5

5

45

425

375

325

325

3

25

Sources Statista Avasant Computer Economics

08

Workforce adaptability or the ability to quickly and effectively adjust the workforce is also a factor in accelerating reopening and recovery The example of Aldi and McDonalds is unique where the firms formed a partnership enabling each to refer workers to the other for specified assignments8 Generally labor policies in Europe lack the employment-at-will doctrine seen in the United States resulting in workers switching jobs (and sectors) less frequently While these protections support employees hard-hit by the crisis they reduce flexibility for businesses in responding to new economic conditions

Thirdly the United States is unique in its propensity to fuel new businesses driven by its higher risk appetite and greater availability of capital Compared with many Asian countries the United States has less stigma associated with business failure removing cultural barriers to entrepreneurship The United States also has a leading pool of readily available venture capital willing to fund new ideas9 as evidenced by North Americarsquos share (40) of all venture capital deal volume worldwide in Q1 202010

IndividualsA societyrsquos beliefs concerning consumerism optimism and trust shapes the divergence of health and economic outcomes

In the United States consumerism is embedded in the countryrsquos DNA and therefore will encourage economic recovery In 2018 US total consumption expenditures reached $169 trillion more than

$5 trillion more than the entire European Union and more than twice as high as China ($72 trillion)11 This spending is a powerful engine for recovery and countries like China where household savings rates are above 35 will need to identify different levers to return their economies to growth12

Consumer optimism is another key driver Despite the severe health and economic impacts of COVID-19 perceptions around financial health in the United States and many other countries have remained surprisingly resilient as evidenced by Deloittersquos State of the Consumer Survey As of August 2020 58 of individuals surveyed in the United States are concerned about the health of their family yet only 25 are concerned about making upcoming payments13 With continued optimism and lesser concern around finances consumers will be more likely to spend driving divergence in the economy

Finally societal adherence to rules both formal and informal has a significant impact on divergence In areas where citizens are less likely to comply with guidelines either due to cultural differences lack of confidence in government responses or wariness of opportunistic behavior by governments or affiliated organizations governments may be forced to pursue more aggressive shutdown measures (and a ldquosecond waverdquo may become more likely) further hampering economic recovery and slowing divergence


Venture capital investments by country (graphed on a log scale) Total investments incorporates seed startup and later-stage funding

United States Germany Sweden United Kingdom Canada Japan Korea

Source OECD data

500

1000

30000

140000

2007 2008 2019201820172016201520142009 2010 2011 2012 2013

Total investments

($M)

09

Revenue challenges favor asset-light business modelsAs the economy diverges lingering health concerns will continue to put firmsrsquo revenues at risk intensifying the pressure to cover fixed costs Airlines for example will struggle to return their load factors to precrisis levels as business travel declines (due to shifts to remote working models) and carriers withhold middle seats from available inventory to alleviate customersrsquo health concerns Hotels too will need to convince customers that their properties are safe by making incremental investments in hygiene and sanitation Today large hotel brands are already beginning to compete on cleanliness by partnering with health care organizations (such as Cleveland Clinic) and cleaning brands (such as Lysol) and experimenting with new sanitation technologies to improve hygiene standards for guests14 In both sectors the combination of a shrinking market high fixed costs incremental investments in hygiene and reduced load factors and occupancy rates will lead to increased prices in the near term

Under these conditions firms with asset-light business models that can easily pivot to meet changes in demand will separate from the pack In the hotel industry for example players that manage rather than own their properties will have greater flexibility in their ability to get out of infrastructure investments15 Platform-based business models like Airbnb will be particularly well-positioned to thrive in this future

Mass migration online gives rise to borrowed capabilitiesDivergence brings large portions of the economy online as customers seek to reduce health risks and businesses look to capitalize on new distribution channels One sector where this is especially evident is grocery which until COVID-19 remained

underpenetrated from an e-commerce standpoint as online sales represented just 26 of total US food and beverage retail sales in 201916 As demand for delivery rises traditional grocers will be forced to rethink their supply chains and identify capabilities (for example delivery trucks refrigerated lockers and technology) that enable them to achieve profitability on online orders17

In this new environment companies that can ldquoborrowrdquo the capabilities needed instead of building or acquiring them directly will see the most success Grocery stores and restaurants for example will need to find ways to profitably expand their relationships with delivery companies such as Instacart and Postmates to meet surging online demand Nonfinancial companies will increasingly look to tap ldquobanking-as-a-servicerdquo capabilities to build new revenue streams and enhance customer loyalty In addition small businesses which will fare better under divergence (a quicker economic recovery will lead to fewer business failures) will experience a mass migration online resulting in substantial opportunity for companies like Shopify to provide the enabling technology to support this wholesale shift

The inevitable reboot Diverging health and economic outcomes | What are the cross-sector implications of divergence

What are the cross-sector implications of divergenceThe divergence of health and economic outcomes manifests differently in each industry as businesses adapt to changing customer behaviors and other marketplace dynamics There are several major trends however which we expect to emerge across sectors the resulting implications will be critical for business leaders to consider as they look to thrive in the new normal

Divergence brings large portions of the economy online as customers seek to reduce health risks and businesses look to capitalize on new distribution channels

10


Excess capacity drives monetization of underutilized resourcesDuring the first few weeks of the pandemic we witnessed a massive reallocation of manufacturing capacity as companies like Ford and General Motors adjusted their production lines to churn out personal protective equipment (PPE) and ventilators to support the US response to COVID-1918 Throughout divergence we will witness an extension of this trend as companies seek to use their excess capacity in new ways monetizing resources that would otherwise sit idle

Disneyrsquos recent partnership with the NBA offers a leading example for how companies can adapt Facing a canceled season the NBA teamed with Disney to host all games and practices

for its 2021 season at Disneyrsquos ESPN Wide World of Sports with players from all 30 teams residing at the complexrsquos 18 different hotels for the duration of the season19 This creative partnership allows both partners to monetize their underutilized assets (real estate and players) and strengthens the existing relationship between companies Similarly one major airline is exploring this strategy with its technology assets renting out excess IT capacity to companies seeking more flexibility in their technology spend While these redistribution contracts may not be permanent they hint at the possibility of moving toward a more distributed economy where resources can be dynamically allocated not just within a single company but also across complementary firms This dynamic flexibility will be key for companies to thrive in the postndashCOVID-19 future

11

The inevitable reboot Diverging health and economic outcomes | Conclusion

ConclusionWith health concerns in the United States lingering indefinitely until a vaccine is produced the economic recovery is driven by three main areas government businesses and individuals These drivers have many market implications across sectors that will be vital for business leaders to consider

As demand slowly recovers while consumers remain wary of the virus companies with lower operating leverage and asset-light business models will be better positioned to capture share Similarly for brick-and-mortar businesses to thrive amid the massive shift to online catalyzed by government lockdowns ldquoborrowedrdquo capabilities and new digital infrastructure and supply chains will become essential Moreover as available supply and demand has been upended and created significant excess capacity across sectors businesses that identify ancillary revenue or other monetization opportunities

will be the early winners

While it is impossible to predict the length and severity of the downturn we are already seeing signs that economic recovery in the United States may happen quicker than initially expected Regardless of when or how divergence occurs business leaders should start preparing today for the unique market dynamics divergence will bring

12

The inevitable reboot Diverging health and economic outcomes | Endnotes

Endnotes1 Johns Hopkins Coronavirus Resource Center June 2020

2 White House Executive Order on Regulatory Relief to Support Economic Recovery May 2020

3 Wall Street Journal The COVID-19 Deregulation 2020

4 US Federal Reserve Federal Reserve announces it is working to expand access to its PPPLF April 2020

5 Organisation for Economic Co-operation and Development (OECD) Social Protection Data 2018 includes cash benefits direct in-kind provision of goods and services and tax breaks with social purposes

6 University of Chicago The Unemployment Insurance Calculator 2020

7 Foreign Policy The Tourism Industry Is in Trouble These Countries will Suffer the Most April 2020

8 Winsight Aldi McDonalds Make Staff-Sharing Deal in Germany March 2020

9 World Economic Forum Europes venture capitalists are closing the gap with Silicon Valley 2017

10 Crunchbase News The Q1 2020 Global VC Report April 2020

11 World Bank Final Consumption Expenditurev (Current US$) 2020

12 OECD Household Savings Data 2016

13 Deloitte Global State of the Consumer Tracker Deloitte Insights

14 Washington Post As Bsiness Trickles Back Hotels Compete on Cleanliness June 2020

15 The Motley Fool Do Not Disturb Why Marriott and Hiltons Franchise Model Works October 2020

16 Supermarket News Online Grocery Sales to Grow 40 in 2020 May 2020

17 Wall Street Journal Grocers Embrace Food Delivery but They Still Dont Love It June 2020

18 Wall Street Journal American Companies Innovate to Fight the Coronavirus in Echo of World War II April 2020

19 New York Times The NBA is Coming Back There Are 113 Pages of New Rules June 2020

AuthorsGopi BillaPrincipal Strategy

Peter PearceSenior manager Strategy

Andrew JeffsManager Strategy

Brian OrsquoConnorSenior consultant Strategy

Chaitra SubramaniamAnalyst Strategy

Rom VillaricaAnalyst Strategy

About DeloitteDeloitte refers to one or more of Deloitte Touche Tohmatsu Limited a UK private company limited by guarantee (ldquoDTTLrdquo) its network of member firms and their related entities DTTL and each of its member firms are legally separate and independent entities DTTL (also referred to as ldquoDeloitte Globalrdquo) does not provide services to clients In the United States Deloitte refers to one or more of the US member firms of DTTL their related entities that operate using the ldquoDeloitterdquo name in the United States and their respective affiliates Certain services may not be available to attest clients under the rules and regulations of public accounting Please see wwwdeloittecomabout to learn more about our global network of member firms

This publication contains general information only and Deloitte is not by means of this publication rendering accounting business financial investment legal tax or other professional advice or services This publication is not a substitute for such professional advice or services nor should it be used as a basis for any decision or action that may affect your business Before making any decision or taking any action that may affect your business you should consult a qualified professional adviser Deloitte shall not be responsible for any loss sustained by any person who relies on this publication Copyright copy 2020 Deloitte Development LLC All rights reserved

Divergence of Health and Economic Outcomes During COVID-19 | Section title goes here

02

COVID-19 has created major shifts in how businesses and societies operate with a dual impact on both health and the economy Initially health outcomes were strongly correlated with economic outcomes but as countries begin to push more aggressively for reopening we see an increased likelihood of economic recovery while health remains at risk resulting in a divergence between health and economic outcomes This divergence is occurring at different rates across countries depending on a set of government business and individual drivers

The impact of this divergence is particularly noteworthy in consumer-facing industries While it manifests differently within each industry several themes and implications exist across sectors ranging from a growing push to adopt asset-light business models and ldquoborrowrdquo capabilities to the ability to monetize underutilized resources

This paper discusses the divergence between health and economic outcomes as the pandemic progresses and its impact on consumer-facing industries

03





ME

NHMA

RI

VT

CT

NJ

DEMD

VA

GA

SC

NC

FL

ALMS

LATX

NMAZAZ

CA

NV

OR

WA

MT

ID

UTCO

WY

ND

SD

NE

KS

OK

IA

MO

AR

MN

WIMI

IL INOH

KY

TN

NY

PA

WV

AK

HI

DC





04






Food and drink


Entertainment


Personal care




05




Least impacted





06










38

0

100

150

200

250

00

50

100

150

200

250

50

Japan-01

211

United States025

150130

European Union0

5239

Russia425

200

70

China385




30

07






China

Singapore

Germany

European Union

India

Global average

Korea Rep

United States

Spain

France

United Kingdom

27

20

19

15

14

14

12

11

11

10


9


Manufacturing

Transportation

Retail






Public sector

5

5

45

425

375

325

325

3

25


08











Source OECD data

500

1000

30000

140000

2007 2008 2019201820172016201520142009 2010 2011 2012 2013

Total investments

($M)

09









10





11






12





























03





ME

NHMA

RI

VT

CT

NJ

DEMD

VA

GA

SC

NC

FL

ALMS

LATX

NMAZAZ

CA

NV

OR

WA

MT

ID

UTCO

WY

ND

SD

NE

KS

OK

IA

MO

AR

MN

WIMI

IL INOH

KY

TN

NY

PA

WV

AK

HI

DC





04






Food and drink


Entertainment


Personal care




05




Least impacted





06










38

0

100

150

200

250

00

50

100

150

200

250

50

Japan-01

211

United States025

150130

European Union0

5239

Russia425

200

70

China385




30

07






China

Singapore

Germany

European Union

India

Global average

Korea Rep

United States

Spain

France

United Kingdom

27

20

19

15

14

14

12

11

11

10


9


Manufacturing

Transportation

Retail






Public sector

5

5

45

425

375

325

325

3

25


08











Source OECD data

500

1000

30000

140000

2007 2008 2019201820172016201520142009 2010 2011 2012 2013

Total investments

($M)

09









10





11






12





























04






Food and drink


Entertainment


Personal care




05




Least impacted





06










38

0

100

150

200

250

00

50

100

150

200

250

50

Japan-01

211

United States025

150130

European Union0

5239

Russia425

200

70

China385




30

07






China

Singapore

Germany

European Union

India

Global average

Korea Rep

United States

Spain

France

United Kingdom

27

20

19

15

14

14

12

11

11

10


9


Manufacturing

Transportation

Retail






Public sector

5

5

45

425

375

325

325

3

25


08











Source OECD data

500

1000

30000

140000

2007 2008 2019201820172016201520142009 2010 2011 2012 2013

Total investments

($M)

09









10





11






12






























05




Least impacted





06










38

0

100

150

200

250

00

50

100

150

200

250

50

Japan-01

211

United States025

150130

European Union0

5239

Russia425

200

70

China385




30

07






China

Singapore

Germany

European Union

India

Global average

Korea Rep

United States

Spain

France

United Kingdom

27

20

19

15

14

14

12

11

11

10


9


Manufacturing

Transportation

Retail






Public sector

5

5

45

425

375

325

325

3

25


08











Source OECD data

500

1000

30000

140000

2007 2008 2019201820172016201520142009 2010 2011 2012 2013

Total investments

($M)

09









10





11






12





























06










38

0

100

150

200

250

00

50

100

150

200

250

50

Japan-01

211

United States025

150130

European Union0

5239

Russia425

200

70

China385




30

07






China

Singapore

Germany

European Union

India

Global average

Korea Rep

United States

Spain

France

United Kingdom

27

20

19

15

14

14

12

11

11

10


9


Manufacturing

Transportation

Retail






Public sector

5

5

45

425

375

325

325

3

25


08











Source OECD data

500

1000

30000

140000

2007 2008 2019201820172016201520142009 2010 2011 2012 2013

Total investments

($M)

09









10





11






12





























07






China

Singapore

Germany

European Union

India

Global average

Korea Rep

United States

Spain

France

United Kingdom

27

20

19

15

14

14

12

11

11

10


9


Manufacturing

Transportation

Retail






Public sector

5

5

45

425

375

325

325

3

25


08











Source OECD data

500

1000

30000

140000

2007 2008 2019201820172016201520142009 2010 2011 2012 2013

Total investments

($M)

09









10





11






12





























08











Source OECD data

500

1000

30000

140000

2007 2008 2019201820172016201520142009 2010 2011 2012 2013

Total investments

($M)

09









10





11






12





























09









10





11






12





























10





11






12





























11






12





























12































Documents

The inevitable reboot Diverging health and economic outcomes...government services are health care, banking, and insurance—the inelastic demand in these sectors will make the US