The consumer demand recovery and lasting effects of COVID-19

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Consumer spending, a major source of economic activity, collapsed as the first wave of the pandemic swept across countries in early 2020. All of a sudden, consumers were forced to change behavior, companies to transform business models, and governments to adjust regulations. And just as the coronavirus has affected regions and individuals in vastly different ways, the economic impact has also been very uneven. Employees able to work from home have maintained jobs and income, accumulating more savings while forced to cut back on spending from lock downs, travel restrictions, and health fears; others lost jobs and income or closed down businesses and have struggled to pay the bills.

While there is reason to be optimistic for a robust recovery in consumer spending once the COVID-19 virus is controlled due to pent-up demand and a significant accumulation of savings, the pandemic, like other crises, will leave lasting marks. Understanding what that means for consumer behavior and the recovery in consumer spending—a critical factor for the global economic recovery—is the focus of this report.

In our analysis, we examine consumer spending in China, France, Germany, the United Kingdom, and the United States. We divide consumers into nine segments based on age and income to determine the size and shape of the consumer demand recovery. Then, drawing on in-depth analysis of six case studies from sectors that cover almost three quarters of consumer spending and encompass a broad spectrum of consumer life, we determine how the mix of consumer demand is likely to evolve and which pandemic-induced behavioral changes are likely to “stick.”

The exceptional nature of the shock provides reasons to be optimistic for the recovery

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 consumer spending across China, the United States, and Western Europe, ranging from 11 to 26 percent in the initial months of the pandemic, resulted mainly from cutbacks to in-person services, especially travel, entertainment, and dining (Exhibit 1).

The consumption shock was triggered by lockdowns and health fears that severely curtailed spending on services, setting it apart from past recessions.

These categories have been growing over the long term, and consumer surveys indicate a likely strong demand rebound after the pandemic. The massive ten- to 20-percentage-point spike in the savings rate across the United States and Western Europe (amounting to a doubling of annual savings in the United States in 2020) left many households in a strong position to spend (Exhibit 2).

Spending restrictions and stimulus payments boosted savings in 2020, more than doubling US household savings from 2019 to $3 trillion.

That means an effective vaccine rollout to bring the pandemic to an end could restore consumer demand to pre-pandemic levels, fueled by rising consumer confidence, pent-up demand, and accumulated savings. China’s robust consumer spending recovery after gaining control of the COVID-19 virus is another reason for optimism for most countries.

But the recovery is likely to be uneven, especially in the United States

Assuming the pandemic is brought under control, we expect a strong recovery in the United States but an unequal one with variations among income and age segments (Exhibit 3). While many higher income households emerge largely unscathed financially, low income households have lost jobs or face income uncertainty, particularly from changes in the labor market caused by digitization and automation.

The recovery in consumer spending is likely to be more uneven between income and age cohorts in the United States than in Europe.

As a result, the polarization of consumption between higher and lower income cohorts may increase. We expect spending by mid- and high-income cohorts to bounce back to pre-COVID-19 levels between 2021 and 2022, while spending by low income cohorts could drop below pre-COVID levels once stimulus measures expire. (For more details, see sidebar “Our macro methodology”). Consumption is expected to shift toward older and richer segments, because of both a growing share of the population over 65 and a slower post-pandemic recovery for low-income cohorts. However, we emphasize, this is highly dependent on how quickly health risks recede with vaccinations and whether governments provide further economic support.

Our macro methodology

In this report we divide consumers into nine segments based on their disposable income and age, as both criteria shape the size and structure of consumption. We do this for four countries: France, Germany, the United Kingdom, and the United States. For income, we took a distribution-based approach and classified households into low income (first and second quintile), middle income (third and fourth quintile), and high income (fifth quintile) for France, Germany, and the United Kingdom. For the United States we used fixed income brackets due to data limitations where low income is <$40,000; middle income, $40,000–$100,000; high income, >$100,000. For age, we divided households into three groups based on head-of-household age: young (<35, for the United Kingdom only <30), middle age (35–64, United Kingdom 30–64), and older (65+). By cross-tabulating income and age criteria, we arrive at nine consumer segments that we use to assess the shape of post-pandemic consumption.

Our main objective was to understand how consumer demand by segment was likely to recover after the pandemic. To do this, we made assumptions about disposable income, savings, and consumption mix evolution as well as behavioral assumptions about the likely consumption rebound after the pandemic ends. We relied on McKinsey’s economic scenarios developed in collaboration with Oxford Economics as the basis for our macroeconomic assumptions. Those scenarios provide a range of key aggregate variables related to consumer spending (for example, disposable income, employment, private consumption) and are developed based on a set of assumptions regarding virus control and economic response to the crisis. In this report, we focus on three scenarios perceived to be among the most likely by our global business leader panel at the time of writing the report—A1, A2, and A3—all of them assuming no structural damage to the economy, yet a different pace of recovery.

While we have taken a scenario approach given the high degree of uncertainty surrounding the trajectory of the virus, the extent of government stimulus, the extent of perceived health risks, and the level of precautionary savings, risks to these scenarios remain. However, while forecasts presented in this report might change in terms of pace of the recovery, conclusions regarding the underlying drivers and relative performance of consumer segments are likely to remain broadly unchanged.

Our aggregate income and consumption projections to 2024 do not explicitly consider the impact of changes in the mix of disposable income sources (wages, assets, or transfers), nor make assumptions about the impact of changes in consumption mix on specific consumer segments. In our savings calculations, we focus on the difference between household disposable income and consumption, neglecting non-consumption expenses such as transfer payments, fines and interest payments given their small size and stability over time—about 4 percent of consumption value over the past decade. Lastly, we focused on income and did not analyze the overall impact of the pandemic on household assets and net worth.

We expect a slower but more balanced recovery in Europe, with less pronounced inequality than in the United States. As short-time work programs have helped to protect employment (although with shorter working hours), there is a higher chance for employees to maintain their jobs and avoid a drop in disposable income in 2021. However, there is uncertainty over what might happen to jobs once government support is withdrawn. Still, we expect the stronger safety net (including more stable employment contracts and more expansive labor protection) as well as mechanisms to protect low-income segments to support the recovery of discretionary consumption.

On the other end, high-income consumers did not experience as large an increase in savings as in the United States and the consumption drop was more severe in Europe. As a result, high income households may not accelerate their spending as quickly as in the United States, in line with past recoveries including the one following the great recession. Because of increased economic uncertainty, savings rates are expected to remain slightly elevated after the pandemic, a pattern observed after past downturns.

But there are country variations: Germany, with initially the most effective COVID-19 response (both health and economic) and a strong labor market in both the service and industrial sectors, may recover first, followed by France and the United Kingdom. However, the United Kingdom may have an opportunity to reopen sooner and recover faster, helped by its vaccination campaign, which in early 2021 was the fastest in Europe.

Once the virus is brought under control and reopening is under way, we expect three factors to determine the strength and sustainability of the consumer demand recovery: the willingness to spend by high-income households, income constraints on low-income cohorts, and what happens to savings. What mid- and high-income households do with their accumulated savings (over $1.6 trillion more savings in the United States in 2020 and about $400 billion in Western Europe) after the pandemic—consume, hold, invest, or repay debt—will have an impact on the consumption recovery. The investments made in real estate or other long-term assets do not have a large direct multiplier effect and may take years to add to aggregate consumption.

The pandemic will leave lasting marks on consumer behavior

Long-standing consumer habits—more money spent on services, greater digital adoption, and more time and money spent out of the home—have been interrupted, accelerated, or reversed during the pandemic. To determine whether these pandemic-induced behaviors are likely to stick, we examined six consumption shifts that cover a broad range of consumer life and are drawn from sectors that cover almost three quarters of consumer spending.

These include an acceleration of e-grocery shopping, a sharp decline in live entertainment, the emergence of home nesting (that is, spending on items such as home gyms, backyards and gardens, and gaming equipment), a decrease in leisure air travel, a switch to remote learning, and an increase in virtual healthcare visits.

Our stickiness test

To evaluate behavioral stickiness, it is important to understand shifting dynamics across three broad categories: consumer response (for example, do consumers find value in it? How satisfied are they with the end-to-end consumption experience? Have they made durable investments?), industry response (How have companies responded? What is the impact of underlying or emerging industry structure?), and the role of government (Has the government provided economic support? What is the impact of regulations?).

For each category, we have identified a set of key indicators to understand the forces at play behind behavior (Exhibit 5).

MGI's stickiness framework predicts whether changes in consumer behavior will last and takes into account industry and government actions on consumers.

1. Consumer response

Value: How much value consumers perceive to gain or lose when they adopt a new behavior is critically important to its long-term stickiness. For consumers, value is often evaluated in relation to prior behaviors and alternatives. For example, leisure air travelers have experimented with alternatives to flying for vacations and visiting family for holidays during the pandemic, but these are poor replacements for the real thing.

Experience: Consumer experience with a behavior is also critical to long-term stickiness. Beyond the inherent value of new habits, the end-to-end experience, from ease of purchase to the simplicity of use and the efficacy of the product or service in satisfying consumer needs, matters greatly. For example, many households have enjoyed the ease and expanded selection of digital entertainment at home, while remote K–12 education has been widely criticized as inadequate compared with in-person learning. And as with other components of stickiness, the underlying infrastructure plays a role in consumer experience, as the limitations of digital and other infrastructure shape how consumers can and do interact with new products and services.

Material commitment: Another driver of stickiness is consumer investment in assets that enable consumption behaviors. For example, many households have invested in home offices or gyms or upgraded gaming devices during the pandemic. Those investments in fitness equipment and multiple months of building an at-home exercise habit are likely to impact the willingness of some past gym members to renew their membership once the pandemic is over.

2. Industry response

Industry players’ response: In response to the COVID-19 pandemic, companies across industries were forced to very quickly adjust their operations and business models. How well they responded to the new challenges shaped consumer choices and experience. While in many cases, industry players’ responded with new products and services, some less obvious responses, such as increased supply chain resilience, also played a role. For example, in e-grocery, discounters had limited online capabilities before COVID-19, and their lean model impaired efforts to rapidly stand up new capabilities or pushed them to outsource e-Grocery to third party logistics players, albeit at a cost. Mainline grocers (especially major urban players), on the other hand, already had an online presence and delivery relationships and were ready to take advantage of the demand expansion.

Industry structure: Industry structure, the nature of competitive dynamics and changes in competition, broad availability of distribution and consumption models, and the underlying resilience to shocks induced by COVID-19 have implications for consumers’ consumption choices in the future. For example, in entertainment, movie studios responded to consumer apprehension for in-person entertainment by bypassing traditional distribution channels with a direct-to-consumer model. Reduction in business air travel is putting pressure on airline profitability and may lead to higher prices or reduced routes available for leisure air travelers.

3. Role of government

Economic policy: Economic policy choices, including pandemic-related economic support to businesses and individuals, often impact consumption both directly and indirectly. For instance, $25 billion of the $2 trillion CARES Act stimulus infusion in the United States softened airlines’ initial economic pain. In contrast, live independent entertainment venues have been hard hit, yet did not initially receive industry-specific initial government support in 2020, likely causing long-term changes in supply options for consumers. Billboard reported that more than 90 independent venues in the United States were forced to permanently close as of September 2020. The situation in Europe was similar, with Live DMA reporting that its 2,600 members, which include subsidized private nonprofits and government-supported entities, earned only about a third of anticipated total 2020 revenues. Finally, the indirect impact of infrastructure policy also plays a role in consumer life. For instance, at least 39 states pledged to use CARES Act funding for infrastructure development, focused on bridging the digital divide in education.

Regulatory policy: Existing and future regulatory policy is also an important facet of stickiness. For instance, in response to the pandemic, the US government was quick to allow previously restricted reimbursement of telehealth services, facilitating virtual healthcare visits. Similarly, the US government initially limited Supplemental Nutrition Assistance Program (SNAP, formerly known as food stamps) payment use for online grocery purchasing to selected retailers in certain states. However, it is now rolling the program out to additional markets, facilitating greater adoption of e-grocery after a bumpy start.

Across our five countries, for each of the factors outlined above, we assess the extent to which a factor increases the likelihood of lasting change, decreases the likelihood of lasting change, or has a neutral impact. This allows us to attribute individual factors to the root causes of behavioral shifts, to triangulate the overall likelihood of stickiness based on the strength of each factor, and to determine what factors to track for stickiness in the future.

Based on our case study findings, we developed a “stickiness test” that identifies factors that determine whether a behavior will persist (For more details about our methodology, see sidebar “Our stickiness test”). Focusing on the period 2020 to 2024, we determined whether each of our case study behaviors would stick in our sample of major economies.

We found that e-grocery shopping, virtual healthcare visits, and home nesting were likely to stick while remote learning, declining leisure air travel, and decreasing live entertainment would likely revert closer to pre-pandemic patterns (Exhibit 4).

What will stick and what will not differ by sector and geography; overall, we find e-grocery is the stickiest and remote education the least sticky.

Two consistent patterns stood out across our case studies. First, the COVID-19 pandemic accelerated digital adoption, especially in grocery shopping and healthcare, and this is expected to continue. Second, the pandemic and lockdowns reversed the long-standing trend of declining money and time spent at home, leading to “home nesting.” We expect this behavior to stick as some portion of high-income households will prefer to work from home to some degree after the pandemic and low-income households retain low-cost at-home alternatives such as digital entertainment. At the same time, we expect many other behaviors that the pandemic interrupted—leisure air travel, in-person education, and in-person dining—to resume with the recovery, although potentially with modifications from the experience of the pandemic.

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We found that an important precondition for stickiness is adequate infrastructure, typically defined as basic physical and organizational structures and facilities, such as buildings, roads, and power supplies, needed for the operation of an enterprise or society. How adequate infrastructure is can affect consumer, industry, and government response in determining the stickiness of behaviors.

In the case of consumers, reliable internet access played a role in determining whether consumers had a good or bad experience with remote learning and ultimately whether they are willing to try it again.
In the case of industry, it could apply to supply chains and the network of third party relationships. For example, in e-grocery, those companies with established delivery capabilities and relationships were able to respond to the new environment quickly and effectively, determining the choices consumers had.
In the case of government, infrastructure policy can enable and support consumption. For example, comprehensive digital infrastructure is key for access to virtual healthcare.

Consumption and sustainability in a postpandemic world

While sustainability has been a growing concern for many consumers, corporations, and governments, the COVID-19 pandemic has accelerated awareness around the topic.¹Climate risk and response: Physical hazards and socioeconomic impacts, McKinsey Global Institute, January 2020; for COVID’s implications for companies and next normal, see also The Next Normal: Doubling down on sustainability, McKinsey & Company, December 2020; for a review of the circular economy, see The circular economy: Moving from theory to practice, McKinsey & Company, October 2016. During the pandemic, many households had more time to consider their shopping choices and expressed increased desire to make ‘eco-friendly’ and sustainable choices in their purchases, especially in Europe. For example, in one survey, 17 percent more Europeans reported shaping buying decisions around sustainable/eco-friendly products compared to pre-COVID and in another survey of global consumers, one in three ranked sustainability as a top purchasing criteria.² Another indication of growing interest in sustainability is the rise of Environmental, Social, and Governance investment funds. Inflows into these ‘sustainable’ funds hit a record high during the fourth quarter, up 88 percent versus 2019 to $152.3 billion.

Yet even when consumers express greater appetite for making more sustainable choices, it is less clear how much of these stated preferences will be realized in changed behavior and different product and service choices. Many consumers who indicate a preference for sustainable products and services ultimately select cheaper or more easily accessible alternatives. This is known as the attitude-behavior gap. Research has highlighted this misalignment; in different surveys, about 30 percent to 50 percent of consumers indicate an intent to consume sustainable products but when it comes to making a purchase, these products often account for less than 5 percent market share of sales.³C. William Young et al., “Sustainable Consumption: Green Consumer Behaviour when Purchasing Products,” Sustainable Development 18, pp 20-31, 2010; Michael J. Carrington, Benjamin A. Neville, and Gregory J. Whitwell, “Why Ethical Consumers Don’t Walk Their Talk: Towards a Framework for Understanding the GAP between the Ethical Purchase Intentions and Actual Buying Behaviour of Ethical Minded Consumer,” Journal of Business Ethics 97, pp 139-158, May 2010.

Past evidence suggests that government and industry action will be key to meaningful change in the marketplace. Companies can impact the choices available to consumers through their product and service offerings, pricing, and labeling. For example, “FairTrade” logos on cotton products are credited for doubling the sales of fair trade items in Europe between 2007 and 2008.⁴ H&M used discounts to nudge consumers into recycling worn apparel and collected the equivalent of 145 million T-shirts in 2019. The retailer also set up a resale site where, for a commission, consumers can buy and sell pre-worn apparel (as have Patagonia, Levi’s and other apparel companies).⁵ Energy efficiency labeling schemes for home durables across the world have been shown to shift consumer choices to more environmentally-friendly products. One study showed that consumers are willing to pay 30 Euro or more for a better energy efficiency class, all else equal.

Regulatory changes can shift consumption toward more ‘green’ choices by shaping both consumer options and company actions. Incentives to encourage energy efficient cars are one example. France’s bonus/malus system of tax credits for fuel efficient vehicles contributed to a 26 percentage point increase in the market share of fuel-efficient models among new vehicle registrations between 2007 and 2009.⁶ Early tax incentives in Norway and California have similarly helped accelerate electric vehicle sales.⁷ London’s congestion charge for car usage and Australia’s water use targets are other examples of financial incentives leading to meaningful change in consumer behavior. Industry regulation can also shape consumer choices by shaping company actions. For examples, the Montreal Protocol helped dramatically reduce chlorofluorocarbon-emitting devices from the marketplace, and fuel-efficiency standards led to more efficient fleets of combustion engine vehicles.

We are likely to see more incentives for sustainable consumption. The European Union’s Circular Economy Action plan is an example that sets goals for Europe to reduce single use products, improve recycling, and expand reclaimed materials reuse. Recent fiscal policy initiatives, such as ‘green stimulus’ packages in the EU where 30 percent of economic recovery funds target climate-related projects, similarly encourage sustainable solutions.⁸ Our sector case studies included examples of this. For example, the French government made its $8 billion bailout of Air France conditional on reducing domestic emissions by 50 percent by 2024 and has scrapped an $11 billion planned expansion of Charles De Gaulle Airport over environmental concerns.⁹ Also in France, the government provided financial assistance tied to sustainability and financial incentives for green home renovations that encouraged consumer spending on home nesting.¹⁰

There are other behavioral changes that we did not cover in our case studies: sustainability is one; an increased focus on health is another. (See sidebar “Sustainability” for more on this topic.) We think tracking the stickiness factors—consumer behavior as well as company offerings and government role—could help predict the nature of long-term behavioral changes we should expect. On both accounts, however, the likelihood of consumers actually supporting these choices will critically depend on the product choices and pricing that companies offer, as well as the regulatory incentives for both companies and individuals to shift toward more sustainable or healthy goods, services, and behaviors.

Company and government actions matter at least as much in determining what consumer behavior will stick

From innovative new consumer products and services like restaurant in a box to virtual fitness and gym glasses, companies have shaped consumer behavior during the pandemic and will continue to do so.

For example, China, the United Kingdom, the United States, and, to a degree, France, had grocery players with an established, albeit low-penetration, online presence that were relatively well prepared for the explosion of e-grocery. These countries also had higher e-commerce penetration and had strong delivery networks. Together, this enabled grocers to rapidly offer a variety of options, be it BOPIS (buy online, pick up in store) versus delivery or third party versus grocer-hosted, at the same time integrating with payment platforms that provided more reliable, timely, and tailored services.

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The pandemic upended the competitive landscape across many industries. In particular, changing consumption patterns have led to shifts in market share and opened the possibility of new entrants. Many companies have been forced to accelerate investment in e-commerce and expand their capabilities such as in regards to customer delivery. The ramifications of these shifts will be felt for some time and continue to shape consumer choices long after the pandemic is over.

In other examples, wider adoption of work from home has reduced demand for business air travel, with some estimates indicating a 20 percent or more drop could be permanent, 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, we expect a lasting drop in demand for movie theaters, due to the high likelihood of permanent theater closures and the shift to digital channels by movie studios.

As in past crises, government regulations can have a significant impact on the strength and shape of the consumer demand recovery. For example, in the near term, both individual fears about the coronavirus and government travel policies, such as vaccine passports or mandatory quarantines, will determine how fast the demand for air travel will recover.

Government incentives and funding also help shape consumer behaviors. For example, in France, the government introduced a program in 2020 known as “MaPrimeRenov’,” which offered up to €20,000 per household for essential renovations, encouraging home nesting.

Companies and governments will face challenges from an uneven consumer demand recovery and lasting effects of the pandemic

Accounting for the unequal economic impact and the full range of “stickiness” factors can lead to quite different outcomes between markets and product categories, and companies and governments that can anticipate the challenges and opportunities may well be able to shape the recovery path rather than simply waiting to see the outcome.

To prepare, companies could determine how a segmented rate of recovery, varying degrees of stickiness of consumer behaviors introduced during COVID-19, and emerging innovations, changes in business models, and a reshaped competitive landscape will affect their product and service offerings.

Governments will face many challenges—in particular, finding the right balance of macroeconomic policies to support the consumer demand recovery, adjusting regulations in consumer markets to keep up with ongoing changes, and addressing lasting marks from the pandemic, especially on inequality.

At the local government level in both the United States and Western Europe, pandemic shifts to increased time spent at home and increased reliance on e-commerce, among others, will have implications for cities, states, and regions, especially around the viability of commercial districts, the provision of public services like public transportation, and rising poverty and homelessness.

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