Morningstar - Q4 2020 - 52

Spotlight: World After COVID-19

EXHIBIT 1

Means of Impact How each of our key COVID-19 themes is affected by habits, fear,
and sunk costs.
Key Themes

Habits

Fear

Sunk Costs

Working From Home

-

-

Employers and employees
have invested in the
working-from-home experiment during COVID-19.

Industries Severely
Affected by Social
Distancing (Travel,
Restaurants, Events)

Consumers will
get accustomed
to dining out less,
traveling less.

Fear of next pandemic
-
will reduce desire
to travel and spend time
in public places.

E-Commerce and Other
Digital Services

Consumers will
get accustomed to
online shopping.

-

Firms have boosted
e-commerce investments.
Consumer experimentation.

Source: Morningstar.

EXHIBIT 2

Five Case Studies We found that habits, fear, and sunk costs had a range of
impacts on long-term economic behavior after major shocks.
Historical Episodes

Habits

Fear

Sunk Costs

Overall

World War II and Rationing

No Impact

No Impact

No Impact

No Impact

World War II and Female
Labor Force Participation

Small Impact

No Impact

Small Impact

Small Impact

Oil Price Shock of 1970s

Small Impact

No Impact

Large Impact

Moderate Impact

9/11 and Air Travel

No Impact

No Impact

Small Impact

Small Impact

Pandemics in Recent History

Small Impact

No Impact

Small Impact

Small Impact

Source: Morningstar.

shop online out of convenience long after
the pandemic.
How Do Extreme Shocks Affect People Over Time?
Habits, fear, and sunk costs are important
factors to understanding the world after COVID-19.
To gauge how these factors might affect the
postpandemic future, we considered five
analogous major episodes that occurred in the
past. To varying degrees, each was a shock
to the economy that had significant short-term
consequences. We wanted to see if society's
habits, fears, and sunk costs led to fundamental
long-term changes in economic behavior
or if they were temporary and dissipated. E X H I BI T 2
assesses each episode.

52

Morningstar Q4 2020

Altogether, we see, at best, modest support
for the idea that COVID-19 will affect
long-term consumer habits based on these
historical episodes. Each of these shocks had
some impact on short-term consumer
behavior. By and large, however, behavior after
the shock subsided to more closely resemble
behavior before the shock, rather than being
influenced by any new habits formed during the
episode. Likewise, the idea that lingering
fear will have a large and enduring impact on
consumer behavior is not well supported
by our historical episodes.
The importance of sunk cost, however, is
supported by our historical episodes. The oil

price shock of the 1970s, for example,
prompted a permanent jump in automotive fuel
efficiency, which permanently depressed
oil demand.
Episode 1: WWII and Rationing
Rationing during WWII provides a clear
example of people being deprived of goods for
several years for reasons outside their control. We
investigated this temporary (but lengthy)
period of deprivation to see if it changed people's
habits and thereby had a lasting impact on
consumer behavior.

The United Kingdom is one of the purest
examples of rationing during WWII. As
an island nation that by the 1930s was importing
70% of its food, it was massively
exposed to supply-chain disruption as
a result of the war.
Rationing in the U.K. was introduced in a
piecemeal fashion in 1939, first on petrol, meat,
and fish, then extended to cheese and
numerous other products. It lasted to some
degree until 1954 in order to redistribute
food and resources to countries under British
control that were devastated during the
war. This extended period of rationing makes
the U.K. an even more interesting test case
when assessing whether purchasing habits
persist after times of disruption.
In EXHIB IT 3 , we can see that rationing
had a sharp negative impact on the demand
for key food items. In 1941 (when the
U.K. was struggling to defend its oceanic
shipping from attack by German submarines),
per capita meat consumption was down
25% from prewar levels. Fat consumption (butter,
margarine, and others) was down 12%.
Sugar was down 35%, and eggs were down
64%. For some items, the nadir came after the war:
Fat was down 21% in 1947 and meat down
32% in 1949.
Despite consumption levels being reduced for
over a decade, Britons clearly didn't get
accustomed to austere eating habits. Food
consumption rebounded in the early 1950s as
rationing was relaxed. By the mid-1950s,
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