Annual review 2020

Trends

Three years in three weeks

Temporary changes or permanent shifts?

The year 2020 was one of constant and rapid change. Some shifts affected individual industries, others affected every aspect of society. Many changes are temporary – based on restrictions we do not want to follow for a minute longer than we have to. Other shifts are likely to be more permanent.

In two areas immediately relevant to our business, we are convinced we are seeing lasting behavioral changes. The first is the acceleration of e-commerce. The second is about shifts based on changes we see in how – and where – we work, move about and consume. Even if only parts of the new behaviors linger, they will create countless reverberations, affecting both communities and markets.

Record growth in e-commerce

In 2020, the movement characterizing trade over the last 15 years accelerated tremendously: the shift from physical to digital. During a few early spring weeks, the shift sped up – corresponding to three years of development going forward. We are convinced that the leap that e-commerce has taken is permanent.

From having increased the year before by 13 percent, Swedish e-commerce grew in 2020 by as much as 40 percent. The increase was particularly strong for grocery stores and pharmacies. Online food purchases doubled, albeit from modest levels. Pharmacies are especially well-suited for e-commerce, with small, manageable products and customers who for natural reasons tend to be concerned about infection. The 250 percent growth of Apohem, co-owned by Axfood and Novax, illustrates the power of that change.

Annual e-commerce growth 2016–2020

Axfood’s e-commerce sales more than doubled during the second quarter. When the spread of infection during the summer and early fall later fell, one would have expected e-commerce to be at more normal levels, but the development held instead, lifting even further towards the end of the year. For the full year, Axfood’s e-commerce growth landed at 112 percent, faster than the market as a whole, which grew 95 percent.

The proportion who e-shop regularly is generally higher among younger people and in high income groups. But the most telling news during the pandemic has been increased online purchases from older customers – in Sweden as well as in other markets. Among Swedes over the age of 75, 1 percent bought food online every month, a figure that increased to just under a quarter in the spring of 2021. This was also reflected in our operations: The proportion of Willys’ e-commerce orders that came from people who were 70 years or older grew from 4 to 25 percent.

Swedes over the age of 75 who shop online at least once in month

The fact that e-commerce is growing over time has emerged almost as a natural law, driven by general digitalization, increasing digital maturity among consumers and improved digital offers. But what says the 40 percent leap taken in 2020 will not be followed by a reduction when infections slow down? Will e-commerce end up at its previous growth curve again, growing again at a slower pace?

We believe this is unlikely, for three reasons:

First of all – once an online customer, always an online customer. Customers who have crossed that threshold simply see the benefits of e-commerce. This does not necessarily mean that you mainly e-shop, but that you are happy to supplement physical store visits with online purchases, depending on the context and product category. Research as well as data from our businesses confirms this.

Secondly – the digital knowledge boost. That completely new groups have acquired new online behavior means the potential market has increased drastically. The pandemic has resulted in the biggest digital public education improvement in modern times: Grandparents who learned to use Zoom to see their grandchildren have a lower threshold for other digital services than they had a year ago.

Thirdly – investments in improved supply. The acceleration we saw in 2020 creates an investment wave in the supply going forward. As expectations for continued e-commerce growth are high, we also see huge investments, from both existing retail companies that invest in meeting customers digitally and financial investors who are looking for growth opportunities in e-commerce. It enables more and improved offers, faster deliveries and other benefits achieved through larger volumes. 

The influx of money also leads to subsidization financed either by risk capital that is fighting for market share or by a profitable physical business. An example is home-delivered grocery bags, where stocking and delivery are priced below their actual cost.

We know the same person can exhibit widely differing consumer behaviors in a physical versus a digital environment. Two primary issues characterize us as digital consumers: We are less loyal and more price-conscious, which are connected of course. 

This means price pressures are likely to increase. To continue to foster loyalty and be able to compete with something other than price, a physical store – in addition to the value lying in the location, convenience and immediacy of a physical purchase – must be able to offer something unique that builds loyalty and a relationship. This can be exclusive products or own brands at KICKS. Or it can be services, such as Skincity’s digital consulting. It can be an omni-offer where value is created by connecting the physical and digital consumption environment.

Another challenge is sustainability. Consumer expectations for immediate home delivery at low cost create friction with the ambition of sustainable deliveries, both in terms of climate impact and local urban environments. 

A new geography?

In spring 2020, working from home became the norm for much of the world. At the same time, many activities that make the city alive became impossible. Restaurants in Sweden’s larger cities occasionally lost 80 percent of their guests, department stores and shops were nearly empty and theaterstages, museums and cinemas closed.

In 2020, traffic in and around major cities throughout the western world decreased. In Sweden’s two largest cities, the number of public transport passengers declined by more than 50 percent, and commuting into the city in Gothenburg and Stockholm decreased by significantly more than that.  

The reduced mobility has been proportional to the size of the cities. Enköping with 20,000 inhabitants saw a lower fall in mobility and a faster recovery than the seven times larger Norrköping, which in turn had a lower fall than the seven times larger Stockholm. Mobility in the larger city centers decreased the most. Through a combination of reduced job commuting into the city and growing e-commerce, consumer-oriented businesses in city centers lost significant numbers of visitors and sales. 

In Axel Johnson’s businesses, we could see with almost block-by-block precision precision how much deeper the crisis hit sales in central city locations, compared with residential areas just a few kilometers away or in suburban areas. Restaurants in central locations were also hit harder, while a lunch place in a residential area outside the city instead gained a larger possible lunchtime customer base.

In determining the degree of permanence in these changes, the single most important factor is working from home. Working from home has been widespread among white-collar employees, but those who worked from home are a minority in Sweden. About 60 percent of working Swedes have not worked from home to any significant extent. Nevertheless, the effects at the local level are large, as working from home is more widespread in large cities, in groups with higher education, higher income and strong purchasing power. 

Looking ahead, most point to the fact that the experience of working from home will have a permanent impact, in the form of more permissive approaches. Surveys in a number of countries give roughly the same answer: Most people who have the opportunity also want to continue working from home two-three days a week. When the question is asked from the other side, that is, what employers see as desirable, the answers land at preferring a slightly higher physical presence, but in the same general region.

Assuming that white-collar workers who have the opportunity will work from home at least one-two days a week – a prudent and realistic assumption – already will have very big consequences.

Population mobility 2020

More people work than live in central parts of big cities, and a very large proportion of large proportion of white-collar jobs. Take Norrmalm in Stockholm as an example. There are just over 180,000 jobs there, largely in business services and communication, jobs that are well-positioned to be done remotely. Some 80,000 people live in the same district. 

If half of those who hold the 180,000 jobs choose to be at home one-two days a week, this means the daily movement of people who eat lunch, do errands and shop on the way to or from work will decrease. The other side of the coin is that home-based suburban residents will strengthen the customer base for restaurants and shops in residential areas.

Such a shift will in turn reasonably dampen the demand for retail and restaurant premises in the inner city, especially at street level. Swedish store rents have long been high in international comparisons. Those rents are now under pressure from the combination of growing e-commerce and pandemic effects, and we see how store rents in Stockholm went down during the second half of 2020.

Office rents can also be affected as many employers with a lower office presence will see the opportunity to save by reducing their space, or at least not increase it. We are already seeing how vacancies during the fall have increased in Stockholm, as in almost all other European capitals, albeit from low levels.  

Since the pandemic outbreak, the housing market has developed very strongly in Swedish cities. A driving force has probably been that living space has simply become more highly valued when many have spent a larger part of their hours at home. However, housing prices outside cities have grown even faster. The price increase in the inner city is driven by a desire to live larger, not by more people moving to the city.

Both Gothenburg and Stockholm municipalities have had negative net migration for several years. In 2020, a significant net emigration from Stockholm County was also noted for the first time, totalling 5,560 people.

A related trend is the rise of satellite cities. If we look at cities such as Strängnäs, Nyköping, Enköping and Trosa, which are less than an hour’s train or car journey from Stockholm, we see a strong net influx. It is easy to believe that the combination of the city’s weakened attractiveness, combined with the fact that it is no longer as necessary to live where you work, creates a strong driving force for such moves.

The city is under duress. It will lead to change and challenges at least in the short term. In a static perspective, we see that of those who work in Gothenburg or Stockholm today, slightly fewer will make the journey to and from work every day. But cities and business are not static. On the contrary, both the city and the business community are characterized by an ability to adapt. If companies that currently have offices in the inner city reduce their office space, this may, for example, mean that companies currently with offices in the suburbs for cost reasons choose to relocate to more central locations.

For employers, there is the challenge of ensuring efficiency, corporate culture and commitment when employees increasingly do their jobs from other places. There are also possible benefits in that employees can save time on reduced commuting, and in geographical distances becoming a less decisive factor. An employee and an employer who were previously considered to be too far apart geographically can now be within reach of each other. 

This new flexibility can lead to both increased productivity for companies and increased freedom for people. Less mandatory urbanization and fewer hours spent commuting during rush hour create opportunities for society, companies and people.

 

Sources: Caspeco, Datscha, Gothenburg University, KTH, McKinsey, Postnord, PWC, SL, Savills Office Outlook 2020, Svensk Handel, SCB, Stockholm City and the U.S. Census Bureau.

Net mobility