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by EOS Intelligence EOS Intelligence No Comments

Can Tourism Be the Ticket to Turkey’s Economic Recovery?

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Tourism is one of the most dynamic and fastest growing sectors in Turkey. The country is highly reliant on tourism for foreign exchange earnings. However, the COVID-19 outbreak and Russia-Ukraine war have affected the country’s tourism industry and resulted in decline in tourist visits. While spike in energy and commodity costs due to war has widened the current account deficit gap, it has also made tourism cheaper in the country due to a significant decline in currency value. This has resulted in an unprecedented influx of tourists once the pandemic subsided. Furthermore, various initiatives have been taken by the government to boost tourism in hopes to reduce current account deficit and bring down inflation rates and support economic growth.

Turkey is known for vast historical sites in major cities of Istanbul and Antalya, as well as the Aegean and Mediterranean Sea coasts. Tourism sector employs about 2.6 million people in the country. The sector also contributes significantly to new tourism-related business sources and foreign exchange earnings, and thus, plays a crucial role in the economic development of the country, especially in the post-COVID era. In 2021, it is estimated that Turkey generated about US$25 billion revenue from the tourism sector.

The country’s dependence on tourism has increased significantly over the past few years. Turkey’s travel and tourism sector contribution to GDP increased to 11% in 2019 as compared with 4.7% in 2014. As per the United Nations World Tourism Organization (UNWTO), Turkey was the sixth-most visited country in the world in 2019. While the country’s rank came down to 15th in 2020 due to the COVID-19 outbreak, it jumped to fourth in 2021 in the post COVID-19 recovery phase.

In addition to this, as per 2022 Economic Impact Report (EIR) by the World Travel and Tourism Council, Turkey’s Travel and Tourism GDP is expected to increase by about 5.5% on an annual basis over the next decade (2022-2032) and create over 716,000 new jobs in the country. The projected growth rate in the country’s travel and tourism sector is more than double the projected growth rate of the overall economy, which is expected to be 2.5% during the same time period.

Challenges faced by tourism sector over the years

While the tourism sector remains one of the best performing sectors in Turkey, it has faced its own set of challenges over the past several years. Inflation is rapidly rising in the country since 2016 due to factors such as low interest rates, energy crisis, increase in commodity prices, and declining currency value. This has significantly affected domestic travelers and business owners in the tourism sector. Several terrorist attacks particularly in the south-east part of the country and Istanbul and Ankara by the Kurdistan Workers’ Party (PKK) and ISIS also severely affected tourist visits and economic growth in 2016.

Owing to the 2020 COVID-19 outbreak, spending on tourism by international visitors in Turkey declined by about US$20 billion, a 70% decline in comparison with 2019. This led to decline in demand and to unemployment in related sub-sectors including airlines, travel agencies, hotels, and car rental companies, among others.

Stringent measures and trade restrictions resulted in significant decline in air traffic and affected the aviation industry. For instance, the National carrier, Turkish Airlines, reported net loss of about US$761 million in 2020.

Hospitality industry was also hit due to fall in tourism in the country. Most hotels faced significant revenue loss during lockdown months. According to the Turkish Hotel Association (TUROB), the hotel occupancy rate in the first nine months of 2020 was just 35.4%, a decline of 47.8% from the same time period in the previous year. Moreover, revenue per available room declined by 52.5% to US$24.7 during the same period.

Can Tourism Be the Ticket to Turkey’s Economic Recovery? by EOS Intelligence

The 2022 war between Ukraine and Russia further affected the tourism sector growth in Turkey. Tourist visits from Russia and Ukraine used to account for a significant share of the total number of tourists visiting the country for holidays from Europe. Over 4.7 million Russians and 2 million Ukrainians visited Turkey for vacation in 2021. While 2.2 million Russians visited Turkey during January-July 2022, it is expected that the total number of tourists from Russia in 2022 will fall short of the 2021 figures due to prolonged war and imposition of western sanctions and flight suspension. The number of tourists from Ukraine declined to 374,000 in the first seven months of 2022 in comparison with 1.1 million during the same period in 2021.The war also spiked Turkey’s inflation rate, which touched about 80% in August 2022.

While the Turkish government is trying to attract tourists from Russia by collaborating with the Turkish aircrafts to transport foreign guests amid war, it is not likely to recover tourist visits to pre-war levels.

Depreciating currency value boosts tourism in the country

The increase in current account deficit due to rising energy and commodity costs in the backdrop of war in Ukraine has led to massive currency value plunge for the Turkish Lira in 2022. Turkey is a net importer of oil and gas and spike in energy costs amid Ukraine-Russia war has widened the current account deficit gap. As per the Turkish Central Bank data, the current account deficit increased to about US$32.4 billion in the first half of 2022. As of September 2022, the Turkish Lira declined to about TRY18.3 per US$1 compared with an average of TRY 8.9 per US$1 in September 2021 and is likely to decline further in 2023 with rising inflation rates due to interest rate cut.

A significant plunge in the currency value has made Turkey a more affordable destination for holidays in comparison with other European tourist destinations. The cost of stay, food, and travel has become significantly lower for foreigners. Adding to this, there has been a decline in COVID-19 cases across the globe, which has also provided the tourism sector a strong boost.

The number of foreign tourists visiting Turkey increased by 94% in 2021 (compared with 2020) reaching 24.7 million. It further witnessed a y-o-y increase of about 128% for the period of January-July 2022 to reach to 23.3 million tourists during the period. The country’s revenue from tourism also witnessed a y-o-y increase of 190% in Q2 2022 to reach US$8.72 billion. In 2022, Germany accounted for the largest share of visitors reaching 2.9 million from January to August. The number of tourists from Middle Eastern and European countries has also increased significantly in 2022. This has also resulted in an increase in share prices of Turkish Airlines. For instance, the share value of Turk Hava Yollari AO, also known as Turkish Airways, increased by about 147% between January and May 2022.

Since Turkey is highly reliant on tourism for its foreign exchange earnings, the significant boost in tourism is likely to help lower the widening current account deficit in the country. Low current account deficit is likely to increase the value of Lira and thus, bring down the inflation rate and support economic growth. However, further decline in interest rates by the Central Bank is resulting in an increase in inflation rate, which reached 80.2% in September 2022. Therefore, while tourism can help soften the blow on the economy by reeling in foreign currency and earnings, it is unlikely that it will single-handedly help the economy recover from the ongoing crisis. That being said, the government is undertaking several efforts to capitalize on the growth in the tourism sector and provide a much needed cushion to the economy as a whole.

Initiatives aimed at boosting tourism in the country

The Turkish government realizes the role tourism can play in uplifting the economy and has been undertaking several initiatives to boost the sector. For instance, in 2021, the government adopted a new promotion strategy, ‘Go Turkey’, to boost tourism. The ‘Go Turkey’ website encompasses the use of advanced technologies such as artificial intelligence and communication models. It follows over 100 media and social media outlets which cover news about the country. Additionally, it also analyses positive or negative content on Turkey and determines promotion priority based on this analysis. The aim is to focus on advanced public relations by integrating all the 81 provinces under the system and promote tourism together as a single voice.

A few other initiatives taken up to boost tourism in the country include additional domestic flight routes, medical tourism support, transportation infrastructure development, and several hotel investments. In August 2022, Turkish Airlines signed a deal with the Services Exporters’ Association (HİB) to help increase medical tourism in Turkey to meet medical tourism industry’s export service revenue target aimed at US$5 billion in 2023.

About US$172 billion have also been invested in communication and transportation infrastructure during 2003-2021, and the government is planning to invest an additional US$198 billion by the end of 2053. Some of the key ongoing projects include The MBB – Gari – Mezitli Metro, The IBB – Kazlicesme – Sogutlucesme Metro Line and the IMM – Ucyol-Buca Koop Light Rail among others aimed at boosting transportation network in the country. Additionally, according to the Hotel Association of Turkey (TÜROB), new investments were planned in about 30 provinces in the first half of 2022. The new investment incentive includes applications for 11 five-star hotels, 18 four-star hotel, and 26 three-star hotels.

As of March 2022, TUI Group, a leading German travel and tourism company, together with its partners in Turkey, planned on expanding its holiday program and developing a winter program across destinations to attract more tourists as compared with pre-pandemic levels.

Additionally, in July 2022, Cengiz Construction, a leading construction company, started construction of villas and hotels in Bodrum’s Cennet Bay together with Bulgari, a luxury hospitality company, with significant increase in international visitors in the country.

Furthermore, travel companies and agencies are focusing on adoption of digital platforms to promote tourism in the country as people are becoming more technology savvy and prefer online booking. It also helps attract travelers from different countries across the globe. Hotel booking through digital platforms increased to 81% in 2019 up from 73% in 2014 and is expected to increase further with rising penetration of smart phones and easy internet access. Turkey’s Tourism Development Agency (TGA) is likely to spend about US$100 million to promote tourism in over 120 countries through internet platforms and media in 2022.

EOS Perspective

Tourism contributes a significant amount to the Turkish GDP and is likely to help limit the consequences of increasing commodity and energy prices by reducing the widening current account deficit gap and ease the pressure on the economy. That being said, it is unlikely to help the country recover completely from its economic woes. Although the depreciating Lira has made Turkey a very affordable destination for holidays, people operating in tourism businesses are significantly affected by the high inflation levels as well. Hotels and resorts are facing high costs of employee wages, food supplies, and car rents among others, which hurt their profits. Interest rates cut by the Central Bank are further increasing the inflation rate. In addition to this, the key tourist season, which is summer season for Turkey, last for just a few months, and the sector’s revenue and profitability falls in the winter season. This makes it evident that Turkish economy must base its recovery on a balanced mix of support across several sectors.

by EOS Intelligence EOS Intelligence No Comments

Diagnostics Gain Spotlight amid Coronavirus Outbreak

It took 60 days for global COVID-19 infections to reach 100,000, but this figure doubled in the following 12-14 days, and the addition of next 100,000 cases took only 3 more days. Because of highly contagious nature of the novel coronavirus, testing became essential to keep the epidemic under control. As a result, there was a spike in global demand for coronavirus testing kits. As per McKinsey’s estimates, in May 2020, global demand for coronavirus testing was 14 million to 16 million per week, but less than 10 million tests were being conducted.

Industry was quick to respond to the rise in demand

The widespread outbreak of coronavirus required the manufacturers to develop and launch new testing kits in large volumes in a short duration of time. Diagnostics kit suppliers responded promptly to this spike in demand by developing new coronavirus testing kits. Roche Diagnostics, for instance, developed coronavirus test in about six weeks – such diagnostic tests generally take 18 months or more to reach regulatory review stage. In 2020, Roche developed a total of 15 solutions for coronavirus diagnosis.

Governments across the world eased up regulatory procedures for manufacturers in order to allow rapid development and commercialization of the coronavirus testing kits. This paved way for many companies to quickly launch new products to the market. For instance, a Korean firm, Seegene, developed coronavirus testing kit in two weeks and got approval from Korea Centers for Disease Control and Prevention (KCDC) in another two weeks’ time. Such approvals generally take more than six months in Korea.

Furthermore, standard regulatory process for approval of diagnostic kits in the USA typically take several months, but considering the public health emergency in the event of pandemic, the FDA issued emergency use authorizations to expedite the process of bringing coronavirus test kits to the market. Emergency use authorizations are like interim approvals provided on the basis of sufficient evidence to suggest a diagnostics test is effective and the benefits outweighs potential risks.

By the end of 2020, the FDA granted emergency use authorization to 225 diagnostic tests for coronavirus detection, including test kits developed by Abbott Laboratories, Roche, Cepheid, Clinomics, Princeton BioMeditech, UPenn, Inno Diagnostics, Ipsum Diagnostics, Co-Diagnostics, QIAGEN, DiaSorin, BioMérieux, and Humanigen.

Leading companies with adequate resources quickly ramped up their production capacity by multifold in line with the rising demand. For instance, a US-based firm, Thermo Fisher Scientific, increased the global production of coronavirus test kits from 50,000 per week in January 2020 to 10 million per week by June 2020. In 2020, Roche spent CHF 137 million (~US$149 million) to ramp up production capacity and supply chain for all COVID-19-related testing products.

Some companies also received government grants and private investment to scale up their production capacity. For instance, in July 2020, BD (Becton, Dickinson and Company) received a US$24 million investment from the US government to scale up production of coronavirus test kits by 50%, thereby, enabling the company to produce 12 million test kits per month by the end of February 2021.

The pandemic encouraged the shift towards decentralizing diagnostics

While the test kit manufacturers were trying to achieve round the clock production to meet the demand, they struggled with global supply chain disruptions which were also induced by the pandemic.

Coronavirus testing requires several components including specialized chemicals and laboratory testing equipment. Roche, for example, manufactures coronavirus tests in the USA but procures components of the test kit from different countries. One of the important components of test kits is reagent, a specialized liquid used for the identification of coronavirus. Roche produces these reagents mainly in Germany and few other production sites located across the world.

Further, the test kits are often compatible only with company’s own testing equipment and systems. For instance, the Roche cobas SARS-CoV-2 test kit runs on the cobas 6800 or 8800 systems. The cobas 8800 system includes approximately 23,000 components which are procured from different parts of the world. In addition to this, the production involves 101 sub-assemblies and accumulated assembly time of about 450 hours each. Final production of these instruments from Roche takes place in Switzerland.

Manufacturing of a coronavirus testing kit involves complex supply chain. Spread of coronavirus forced countries to implement extreme measures including lockdowns and trade restrictions which impacted the supply chain of test kit manufacturers. Producing all the testing components and equipment at one place is near to impossible. For instance, the production of reagents involves highly sophisticated and sensitive processes, and thus, setting up a new production site to manufacture reagents on a large scale would take several months. Setting up a new production site and streamlining the procurement for such testing equipment and systems would take several years. Hence, the diagnostics firms upped their R&D activities in an effort to develop tests that could be conducted without sophisticated laboratory systems and equipment.

Moreover, the high demand for testing compelled the diagnostics practices to evolve far beyond the traditional laboratory-based business model. The need for community testing during the pandemic that challenged the operational capabilities of hospitals and diagnostics labs dictated the importance of decentralizing diagnostics for improved patient care. This gave rise to increased demand for point-of-care testing.

The two most widely used diagnostic tests for coronavirus detection are Reverse Transcription Polymerase Chain Reaction (RT-PCR) and Antigen tests. RT-PCR test detect viral RNA in samples from the upper and lower respiratory tract, while antigen test is used to detect viral proteins in samples.

RT-PCR test is considered gold standard for coronavirus detection since the accuracy and reliability is high compared to Antigen test. However, RT-PCR test needs to be processed in a laboratory-setting and had turnaround time of several hours. Hence, there was a need for development of RT-PCR tests that could give faster results without the support of laboratory equipment.

On March 18, 2020, Abbott announced the launch of their first coronavirus test kit that was compatible with their system ‘m2000 RealTime’ which processed 470 tests in 24 hours and another ‘Alinity m’ system with capacity to run 1,080 tests in a 24-hour period. Since there was demand for more portable and fast testing solution, on March 30, 2020, Abbott launched a RT-PCR point-of-care test that ran on ID NOW system, which is the size of a small toaster. The test delivers results in 13 minutes or less. The test price is in the range of ~US$100.

Further, despite the limitations of accuracy and reliability, in some cases antigen test is preferred because there is no requirement of a lab specialist to conduct this test, thus making it less expensive, and the result is available in a few minutes. The industry saw an opportunity here and quickly developed rapid antigen tests that can be conducted at home without any assistance. For instance, in December 2020, the US FDA granted emergency use authorization to an Australia-based firm Ellume’s antigen test (priced at ~US$30) as first over-the-counter at-home diagnostic test for coronavirus detection. Soon after, Abbott also received emergency use authorization from FDA for its at-home rapid antigen test (priced at US$25) giving results in 15 minutes.

Other countries around the world also followed the suit by extending official authorization to the home-based tests for coronavirus detection. For instance, in February 2021, Germany’s Federal Institute for Drugs and Medical Devices (BfArM) granted special approval for the first time to antigen home-test kits developed by US-based Healgen Scientific as well as China-based firms Xiamen Boson Biotech and Hangzhou Laihe Biotech.

Diagnostics Gain Spotlight amidst Coronavirus Outbreak by EOS Intelligence

Coronavirus crisis accelerated innovation in the field of diagnostics

In a united fight against the pandemic, governments, private sector, as well as NGOs and philanthropists across the world stepped forward to raise funds to bolster R&D efforts in coronavirus diagnostics. As per data compiled by Policy Cures Research (an Australian firm engaged in global health R&D data collection and analysis), from January 2020 to September 2020, funds worth over US$800 million were committed for coronavirus diagnostics R&D. The firm also indicated that 450+ coronavirus diagnostics products were in R&D pipeline since January 2020 to December 2020.

With firms looking to capitalize on exponentially rising demand for coronavirus testing, the development of new diagnostics technologies beyond conventionally used tests (i.e., RT-PCR and antigen tests) picked up significantly.

For instance, in May 2020, the FDA granted an emergency use authorization to first ever CRISPR-based rapid test kit developed by Sherlock Biosciences. CRISPR, an acronym for Clustered Regularly Interspaced Short Palindromic Repeats, is a gene editing technology which allows to alter the DNA. Sherlock’s rapid test is a paper-strip test (like a pregnancy test) which can be conducted at point-of-care and does not require any additional equipment for processing of the test. The test works by programming a CRISPR enzyme to release a detectable signal in presence of genetic signature for coronavirus.

In March 2020, US-based Surgisphere launched a smartphone app using Artificial Intelligence algorithms to detect coronavirus infection. This app confirms diagnosis by integrating the findings of chest CT scan and laboratory tests with clinical symptoms and exposure history. Preliminary studies found that the tool can detect coronavirus infection with 95.5% accuracy.

Further, application of nanotechnology for diagnosis of coronavirus infection is also underway. Canada-based Sona Nanotech developed a rapid antigen test using gold nanoparticles. This is a strip test that can be conducted at point-of-care and gives result in 15 minutes. Research is in progress to develop wearable sensors using nanoparticles for detection of coronavirus. In January 2021, University of California San Diego received US$1.3 million from the National Institutes of Health to develop a test strip containing nanoparticle that change color in presence of coronavirus. This test strip can be attached on a mask and used to detect coronavirus in a user’s breath or saliva.

Innovation wave was not limited to development of different types of tests but also expanded to consumables. For instance, in March 2020, HP (a company manufacturing 3D printers) teamed up with Beth Israel Deaconess Medical Center (a teaching hospital of Harvard Medical School) to develop 3D printed nasopharyngeal swab (typically used to collect sample for coronavirus testing) and within 35 days the clinically validated swab was ready for use. By May 2020, these swabs were commercially available for the US market following the FDA approval. In June 2020, a Belgium-based 3D printing service provider, ZiggZagg, began to plan large-scale production of swabs on their fleet of HP 3D printers. By October 2020, the company had 3D-printed over 700,000 swabs for the Belgian market.

EOS Perspective

A market research firm, The Business Research Company, estimated that the global COVID-19 rapid test kits market was expected to reach a value of US$14.94 billion in 2020. Due to worldwide vaccination drive, the market is expected to decline at a rate of -54.9%, to reach US$1.37 billion in 2023.

Though the demand for coronavirus tests is expected to diminish eventually, it has supported rapid development of diagnostics infrastructure which will remain. In India, for example, only one laboratory was performing molecular assays for COVID-19 in January 2020. The COVID-19 pandemic has shifted that balance. By May 2020, some 600 Indian RT-PCR laboratories had been set up in an effort to help manage the pandemic, thousand-fold increasing testing capacity. The additional capacity will likely remain in place as the pandemic subsides, leaving the RT-PCR assay as the dominant method for diagnosing most viral infections in India in the future.

Furthermore, with surge in demand for the coronavirus testing, the provision of diagnostic services expanded beyond the purview of hospitals and laboratories. Mobile testing facilities and drive-through testing sites propped up with development of point-of-care diagnostics. For instance, Walgreens, one of the largest pharmacy chains in the USA, offer coronavirus drive-thru testing at 6,000+ locations across the country. Further, there is high-demand for home-based testing.

Diagnostics firms riding high on the COVID-19 gains have been actively scouting opportunities to strengthen their positioning in the market and prepare for the post-pandemic world. High demand for COVID-19 test kits boosted the revenues of diagnostic companies, with Roche, Thermo Fisher, PerkinElmer, Hologic, and DiaSorin among the companies benefiting. With strong balance sheet, these companies went on with M&A flurry to advance their diagnostic portfolio and other core business verticals.

As the virus originated in China, the country was better prepared and first to develop relevant detection mechanisms. By the time the virus spread to the other parts of the world, Chinese companies were ready to export detection kits globally. Coronavirus outbreak helped China to penetrate major markets such as EU and the USA in which the indigenous diagnostics companies traditionally had a stronger hold. China was a net importer of diagnostic reagents and test kits in 2019. But in 2020, after the outbreak of coronavirus, China ramped up its production capacity of diagnostic reagents and test kits, and as a result its export growth increased by more than 500% and the country became a net exporter of diagnostic reagents and test kits by the end of 2020.

This indicates that the outbreak of the pandemic has shifted the market dynamics on many fronts. As the pandemic slowly subsides, some of these shifts might partially revert, however, the way testing is performed is likely to remain.

by EOS Intelligence EOS Intelligence No Comments

Cloud Kitchens on the Surge as Consumers Choose to Order-in

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For food delivery, e-commerce was an option before Covid-19 but as the pandemic unfolded, it became the preferred way to take the customers’ orders. Restaurants were shut down for indoor dining, so customers turned towards cloud kitchens to order and enjoy restaurant-like food without having to step out. The ease of having high-quality food delivered right at the footstep, has instigated people, now more than ever, to order-in. The pandemic has accelerated the cloud kitchen business causing a paradigm change. Customer- and technology-driven cloud kitchens reflect a business model that will be adopted, sooner than later, unanimously by players in the food and restaurant service space.

The global cloud kitchen market was valued at close to US$ 52 billion in 2020, with the APAC region accounting for more than 60% of the global market share. Rising disposable income and increased use of smart phones have been driving the increase in online food delivery services (on which cloud kitchens depend), but it was not until the pandemic entered the scene that cloud kitchens really gained traction as restaurants and other eateries closed down.

COVID-19 accelerated the ascent of cloud kitchens as people used food delivery services much more frequently than before the pandemic. The growth was further favored by the trivial need for dine-in space due to social restrictions.

Everyone wants a piece of cloud kitchen on their menu

While China, India, and Japan are the key markets driving growth of the cloud kitchen market in the region, the market in other countries is also witnessing significant growth rates. For instance, JustKitchen, a Taiwan-based cloud kitchen operator established in March 2020, has 14 “Spokes” (smaller kitchens for final meal preparation and packaging) and one “Hub” (larger commercial kitchen where earlier stage food preparation takes place) across the country. The company further plans to expand both domestically (by having 35 Spokes and two Hubs in Taiwan by the end of 2021) and internationally – it opened its first overseas kitchen in Hong Kong in June 2021 and plans to expand further in Singapore, the Philippines, and the USA. Another player, GrabKitchen, owned by Singapore-based Online to Offline (O2O) mobile platform Grab, which opened its first cloud kitchen in Indonesia (in 2018), now has operations in Thailand, Vietnam, Singapore, Myanmar, and the Philippines.

Restaurant chains are the primary adopters of the cloud kitchen concept. The pandemic has made India-based QSR chain, Bercos, realize that it is important to include deliveries as part of the business plan because of which it is planning to launch three new cloud kitchen brands in the western and southern parts of India. Another Indian multi-brand cloud kitchen player, TTSF Cloud One, looks at opening 150 cloud kitchens by 2022. They aim at investing between US$ 3.3 million to US$ 4 million in the project through a combination of owned cloud kitchens, retail stores as well as franchised stores, and franchised cloud kitchens.

Owing to corporate strategy and global restructuring, the Philippines-based fast-food restaurant chain Jollibee Foods announced (in May 2020) that it would spend US$ 139.4 million on building its cloud kitchen network.

Global food chains are also partnering with local players to increase their outreach in the cloud kitchen ecosystem – in 2020, Wendy’s, a US-based fast food restaurant chain, entered into a joint venture with Rebel Foods, an Indian online restaurant company, to open up 250 cloud kitchens across India. This is a strategic move for Wendy’s as the company will get immediate access to scale rapidly across the country because of Rebel Foods’ existing network of cloud kitchens. Furthermore, Rebel Foods recently announced that the company plans to add another 250-300 locations to its repertoire across Southeast Asia, West Asia, and the UK via partnerships.

With the cloud kitchen concept growing at an astronomical rate, players, especially in nascent markets, are also looking to scale up rapidly. CloudEats, a Philippine-based cloud kitchen, plans to expand its reach further within the country (it currently has five cloud kitchens domestically) and other countries with the highest online food delivery penetration across Southeast Asia. Bangladesh-based cloud kitchen and digital food court player, Kludio, launched Kitchen-as-a-service to help restaurateurs, home cooks, and virtual brands to expand with no upfront investment, and FoodPanda Bangladesh, in July 2020, announced that it would be launching 30 new cloud kitchens (in a period of 6 months) across the country.

Cloud Kitchens on the Surge as Consumers Choose to Order-in by EOS Intelligence

Cherry-picked business model served on a silver platter (well, almost)

Cloud kitchens present a sea of prospects for both food and restaurant industry players as well as other adjoining sectors. They represent a potential of a tech-enabled business model for the restaurant and food delivery industry where operational jobs in the kitchen will be handled by robots and deliveries made by drones. Another opportunity is for restaurants that would like to expand their geographical reach but are incapable of opening another dine-in place. With a cloud kitchen in place, they can access new markets via delivery only. Restauranteurs can further use it to their advantage by experimenting with new food items with relatively no investment and low risk. Last but not the least, the mid and large-sized restaurant chains, which thrived on the dine-in concept (before the pandemic), will be quick to jump and adapt (some players have already ventured into this space) the cloud kitchen model to capitalize on the growing food delivery business. Furthermore, new players entering the restaurant and food business can take this as an opportunity to pan their premises layout in a way that space is efficiently optimized to adjust both the restaurant layout as well as the delivery service.

But it is not all smooth sailing. With a large number of cloud kitchens sprouting, the competition will be fierce in the coming years. Furthermore, with only so many food delivery platforms to support the already crowded cloud kitchen market, they are easily exploited by food aggregators. Not only do aggregators charge a high commission (ranging between 25% and 40%), the ratings for cloud kitchens on these portals (for a cloud kitchen) play a massive role in influencing other customers and affect the brand value.

EOS Perspective

Unlike restaurants, a cloud kitchen offers no dine-in facility and relies solely on online orders. The delivery-only model has its limitations, especially when it comes to customer experience. And a slowdown in dine-in style is indicative that restaurants are moving forward and looking to enter this space. Therefore, a hybrid model where cloud kitchen and dine-in concepts integrate is most likely to rise in the future.

The restaurant industry is recovering from the coronavirus crisis and adjusting to the fact that a pandemic could shake the entire foundation of the sector which was once based on dining in. But now with more and more people ordering in, the burgeoning cloud kitchen space represents a sprouting new business model. In the near future, smaller brands are most likely to embrace a cloud kitchen network model whereas the hybrid business model (combining physical stores and cloud kitchens) will work best for the larger and established brands. For instance, in July 2020, Thailand’s fast-food restaurant chain, Central Restaurants Group (CRG), which currently operates 1,100 fast food outlets nationally, announced that it will open 100 cloud kitchens across the country in the next five years to strengthen its food delivery business. Moreover, as social distancing becomes the norm (wherein restaurants are forced to maintain sizable distances between tables) and preference for eating out reduces, the dine-in spaces across restaurants are also likely to shrink.

In the long term, the concept of cloud kitchen seems practical and a plausible winner, however, its success hinges entirely on the growth of food delivery market. Before the pandemic, in 2017, APAC lead the global online food delivery market with a share of 52.1% and market revenue of US$ 34.31 (the region was anticipated to contribute a revenue of US$ 91.0 billion and a share of 56.2% by 2023). Post pandemic, these figures have multiplied and present a space that exudes growth potential. For instance, in Southeast Asia, the food delivery market grew 183% from 2019 to 2020 (in terms of gross merchandize value) owing to changing consumer behavior (towards how they consume food) and the ease of ordering in due to digitalization. Moreover, the growth in the food delivery sector is expected to continue.

Food aggregators have been active in the cloud kitchen space even before the pandemic hit. Their value proposition of acting both as a supplier (wherein it allows independent cloud kitchen players to use its platform while charging them on a revenue-sharing model) and operator of the platform puts them in an interesting position, where they have control, to a certain extent, of business functions of other players. Food aggregators may likely dominate this space in the long run.

The metrics of the food and restaurant service industry have changed as businesses evolve continuously. With concepts such as cloud kitchen, the sector has become consolidated wherein multiple establishments work under a single roof.  In a nutshell, the cloud kitchens are here to stay as they display substantial growth potential provided players revisit their business strategies and rethink the right hybrid business model (such as merging with a large brand, to expand into cloud kitchen space, among others) in order to thrive.

by EOS Intelligence EOS Intelligence No Comments

Indian Pharma Needs to Reinforce Supply Chain Capabilities

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COVID-19 has emphasized the importance of strong healthcare and pharmaceutical ecosystem for India. Constant demand for drugs and the expectation to deliver them in time put a lot of pressure on pharma supply chains, highlighting several challenges and shortcomings. At the same time, the Indian pharma sector seems to have benefited from the situation as well, as the pandemic unlocked new avenues of growth. To seize new opportunities, the Indian pharma sector should now focus on increasing manufacturing capacity, invest in R&D capabilities, develop world-class infrastructure, and strengthen its supply chain network.

Challenging times for the Indian pharma sector

With coronavirus wreaking havoc, the Indian pharmaceutical sector was shaken and the pandemic inflicted several challenges on the industry.

The key challenge faced by pharmaceutical companies has been the shortage of key raw materials for manufacturing drugs. India imports 60% of APIs (Active Pharmaceutical Ingredients) and DIs (Drug Intermediates) and nearly 70% of this demand is met by Chinese companies (as of July 2020). This reliance to import cheaper raw materials from countries such as China is a result of lack of tax incentives, high cost of utilities, and low import duties in India.

India’s dependence on China has affected the supply of essential APIs. The recent pandemic has magnified this problem, and in order to meet the increasing demand, Indian pharma manufacturers need to strengthen their supply chain strategies by working with multiple API suppliers, both domestic as well as international.

Another concern has been the increased raw materials and logistics cost. Between January and June 2020, the production costs at the Chinese suppliers increased due to the implementation of safety and hygiene measures thus increasing the overall cost of APIs and other materials imported by India by an average of 25%. Logistics prices also went up during the same period, with the cost of shipping a container from China to India increasing to an average of US$ 1,250 up from US$ 750. Additionally, air freight charges also went up from US$ 2/kg to US$ 5-6/kg.

Furthermore, restrictions on movement of products and other goods also posed a problem for pharma supply chain. Even though the sector was exempted from these restrictions, delays in the delivery of drugs were registered. These delays have been largely contributed to by the complexity of various processes and their elements (from raw material procurement to procuring casing and other packaging material – all of which come from different locations to the final assembly point, and their delivery can be exposed to delays at each stage). While logistics companies tried to make product deliveries on time, they were restrained by limited workforce and movement restrictions (that required clearance at every step).

Moreover, due to panic buying, scarcity of OTC and generic drugs was also observed.

Government’s push to make India self-reliant

The government has undertaken steps to strengthen the pharma sector and announced several schemes and policies to boost domestic pharma manufacturing.

To reduce import dependence in APIs and boost domestic manufacturing, the government approved a US$ 971.6 million (INR 69.4 billion) Production Linked Incentive (PLI) Scheme in March 2020 to promote domestic manufacturing of APIs and KSMs (Key Starting Materials)/DIs. Under the scheme, financial incentives ranging from 5% to 20% of incremental sales will be given to selected manufacturers of 41 critical bulk drugs (of the identified 53 APIs for which the country is heavily dependent on imports). This includes aid for fermentation-based products from FY2023–2024 to FY2028–2029 and for chemical-synthesis-based products from FY2022–2023 to FY2027–2028. It is expected that the scheme will result in incremental sales of US$ 649.6 million (INR 464 billion) and generate a large number of employment opportunities.

Moreover, in November 2020, a new PLI Scheme (referred to as PLI 2.0) for the promotion of domestic manufacturing of pharmaceutical products was announced, wherein US$ 210 million (INR 150 billion) were allotted for pharma goods manufacturers based on their Global Manufacturing Revenue (GMR). Financial incentives ranging from 3% to 10% of incremental sales will be given to manufacturers (classified under Group A – having GMR of pharmaceutical goods of at least US$ 700 million (INR 50 billion), Group B – having GMR between US$ 70 million (INR 5 billion) and US$ 700 million (INR 50 billion), and Group C – having GMR less than US$ 70 million (INR 5 billion). The objective of the scheme is to promote production of high-value products, increase the value addition in exports, and improve the availability of a wider range of affordable medicines for local consumers. The initiative is likely to create 100,000 (20,000 direct and 80,000 indirect) jobs while generating total incremental sales of US$ 41,160 million (INR 2,940 billion) and total incremental exports of US$ 27,440 million (INR 1,960 billion) during six years from FY2022-2023 to FY2027-2028.

Another scheme named Promotion of Bulk Drug Parks was announced by the government in March 2020 to attain self-reliance. Under the plan, funds worth US$ 420 million (INR 30 billion) were allotted for setting up three bulk drug parks between 2020 and 2025. This initiative aims at reducing the manufacturing cost as well as the dependency on importing bulk drugs from other countries. Financial assistance will be given to selected bulk drug parks to the extent of 70% of the project cost of common infrastructure facilities (for north-eastern regions and states in the mountainous areas, the assistance will be 90%). The aid per bulk Drug Park will be limited to US$ 140 million (INR 10 billion).

Furthermore, to end reliance on China, Indian pharma companies are also taking steps to strengthen their operations and manufacturing capabilities with regard to pharmaceutical ingredients. For instance, Cipla Ltd. (Mumbai-based pharmaceutical company) launched the “API re-imagination” program in 2020 to expand its manufacturing capacity by using the government incentive schemes.

The announcement of the above schemes is a show of intent by the government towards building a self-sufficient pharma sector in India. It will be interesting to see how much pharma players stand to gain from these potentially game-changing initiatives. However, only time will tell if these policies are good enough for the industry stakeholders or will these schemes not be plentiful enough to truly help the manufacturers.

Indian Pharma Needs to Reinforce Supply Chain Capabilities by EOS Intelligence

Investment in API and intermediaries’ sub-sectors on the rise

Since the outbreak of COVID-19, Indian pharmaceutical companies (that deal particularly with manufacturing of APIs, vaccine-related products, and bulk pharma chemicals) have been attracting huge investment from private equity firms. This is happening mainly because of two reasons. Firstly, the occurrence of the second wave of COVID-19 in India has increased the demand for medicines (including demand for self-care, nutritional, and preventive pharma products to boost immunity), and secondly, pharma companies across North America and Europe are shifting their manufacturing sites from China to India (to reduce dependency on a single source). Indian companies received an investment worth US$ 1.5 billion from private equity firms during the FY2020-2021 (since the coronavirus outbreak) and the investment is expected to reach US$ 3-4 billion in the FY2021-2022.

Some of the major deals that happened in this space included Carlyle Group (US-based private equity firm) buying 20% stake in Piramal Pharma (Mumbai-based pharma company) for US$ 490 million in June 2020 and 74% stake in SeQuent Scientific (India-based pharmaceutical company) for US$ 210 million in May 2020. Further, KKR & Co. (US-based global investment company) purchased a 54% controlling stake in J.B. Chemicals & Pharmaceuticals Ltd. (Mumbai-based pharmaceutical company) for nearly US$ 410 million in July 2020. Another example is Advent International (US-based private equity firm) acquiring stakes in RA Chem Pharma (Hyderabad-based pharmaceutical company) for US$ 128 million in July 2020.

From a capital perspective, COVID-19 acted as an investment accelerant that will keep the market open for opportunistic deals for many years to come. In the current scenario, investment firms are re-evaluating the pharma landscape and looking to invest in innovative ideas and products that help them grow. It is highly likely that in the coming months, if the right opportunity strikes, the investment firms will not deter from going ahead with novel deal structures. This could include arrangements such as both parties sharing equal risk and rewards, a for-profit partnership wherein the investor specifically focuses on enhancing the digital-marketing capabilities of the pharma company (rather than sticking to just acquiring a certain share or merge with an existing company) and being open to taking more risk, if needed.

Partnerships expected to increase

The pandemic has led pharma companies to rethink their operational and business strategies. For long-term sustainability, players are analyzing their market position and partnering with other industry stakeholders for better market penetration and value creation for their customers.

In November 2020, Indian Immunologicals Ltd. (Hyderabad-based vaccine company) announced that the company would invest US$ 10.5 million (INR 0.75 billion) in a new viral antigen manufacturing plant based in Telangana that would cater to the need for vaccines for diseases such as dengue, zika, varicella, and COVID-19 (in April 2021, the company announced a research collaboration agreement with the Griffith University, Australia to develop a vaccine for the coronavirus).

Furthermore, Jubilant Life Sciences Ltd. (Noida-based pharma company) entered into a non-exclusive licensing agreement with Gilead Sciences (US-based biopharmaceutical company) granting it the right to register, manufacture, and sell Remdesivir (Gilead Sciences’ drug currently used as a potential therapy for Covid-19) in India (along with other 126 countries).

In February 2021, to scale up the biopharma ecosystem, the state government of Telangana partnered with Cytiva (earlier GE Healthcare Life Sciences) to open a new Fast Trak lab in Hyderabad. This facility will enable the biopharma companies in the region to improve and increase production efficiency, reduce operational costs, and make products available in the market quicker.

Future ripe for new opportunities

The pandemic has opened a stream of opportunities for India’s pharma sector which are expected to drive the growth of the sector in the long term.

China’s supply disruption and increased raw material costs have forced global pharma companies to reduce dependence on China. As an alternative, the companies either set up new API manufacturing plants (which is time-consuming) or turn to existing European or US drug manufacturers to help them meet their requirements. However, both options are capitally draining and there is a need for finding a cost-efficient solution. This presents a huge opportunity for the Indian API sector which is also a key earnings growth driver for pharma manufacturers.

India is among the leading global producers of cost-effective generic medicines. Now there is a need to diversify the product offerings by focusing on complex generics and biosimilars. With the guidance of the United States Food & Drug Administration (USFDA) in identifying the most appropriate methodology for developing complex generic drugs, Indian pharma companies such as Dr. Reddy’s, Zydus, Glenmark, Aurobindo, Torrent, Lupin, Cipla, Sun, and Cadila are working on their product pipeline of complex generics. Currently, the space has limited competition and offers higher margins (in comparison to generic drugs) thus presenting a lucrative opportunity for Indian players to explore and grow.

Similarly, biosimilars (referred to as similar biologics in India) is another area where Indian companies have not been faring too well in international markets mainly due to the non-alignment of Indian regulatory guidelines with the guidelines in other markets (mainly in Europe and USA). The government had already revised the guidelines of similar biologics (done in 2016, which provided an efficient regulatory pathway for manufacturing processes assuring safety and efficacy with quality as per cGMP (Current Good Manufacturing Practice regulations enforced by the FDA)) and introduced industry-institute initiatives (such as ‘National Bio-Pharma Mission’, launched in 2017 to accelerate biopharmaceutical development, including biosimilars, among others) to improve the situation. But now with the intensified need for improved healthcare system and more effective medicines, COVID has presented Indian companies with an opportunity to shape their biosimilar landscape.

India holds a strong position as a key destination for outsourcing research activities. While it has been a preferred location for global pharma companies to set R&D plants for a number of years now, becoming an outsourcing hub for pharma research is another growth area that is yet to be explored to its full potential.

EOS Perspective

Currently, the Indian pharma industry is at an interesting crossroad wherein the industry responded to the unprecedented situation with agility and persistence. The pandemic presented several opportunities and challenges for the industry and unsurprisingly, had a positive impact on the sector. The pandemic acted as a catalyst for change and investment for the pharma sector, which also responded to the challenges by adjusting to the new normal that furthered new opportunities.

In the past few months, COVID-19 has led the government to reassess the country’s pharmaceutical manufacturing capabilities and led them to take steps to make India self-sufficient. As an immediate measure, the country has been reviewing its business policies (for the ease of doing business and to attract more investment) and pharma companies recalibrating their business models, and some success has been achieved. The government should also be mindful that, in the long run, success will only be achieved when industry stakeholders are presented with a business environment (in the form of incentives, tax-subsidies, low rate of interest on bank loans, utilities such as electricity and water at discounted rates, and transparent business policies, etc.) that is conducive for growth.

Moving forward, the Indian pharma companies need to be adaptive and flexible. While the sector has been resilient to the effects of the coronavirus pandemic, companies need to focus on risk management as well. Moreover, with continuous capital flowing into the sector, there is an opportunity for firms to not just broaden their scope of innovation but also to invest in critical therapeutic areas.

To emerge as a winner post pandemic, the Indian pharma industry needs to focus on its strengths and propel full steam in the direction of opportunities presented by COVID-19.

*All currency conversions as on 20th May, 2021, 1 INR = 0.014 US$

Industry Game for Diversifying Monetization Pathways
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Industry Game for Diversifying Monetization Pathways

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Currently, gaming industry is believed to be bigger than any other popular entertainment mediums such as films and music. IDC estimated that global gaming revenue reached US$180 billion in 2020. Another research firm, Newzoo, indicated that global gaming industry generated US$159.3 billion in revenue in 2020. On the other hand, the global film industry surpassed US$100 billion in revenue for the first time in 2019 according to the Motion Picture Association. And, as per MIDiA Research (a firm specializing in digital content research), global recorded music industry generated US$23 billion in 2020.

Gaming industry has been on a continuous growth trajectory

Gaming industry has enjoyed a steady growth in the past few years with increasing its reach by each year. As per Newzoo’s analysis, the number of gamers increased from 2 billion in 2015 to 2.7 billion in 2020, indicating annual growth rate of over 6%.

Industry Game for Diversifying Monetization Pathways by EOS Intelligence

Games are generally played through mobile devices, personal computers, or gaming consoles. In 2020, 2.5 billion were playing games on mobile devices (including games played via smartphones and tablets), 1.3 billion on personal computers, and 0.8 billion using consoles. Mobile gaming was the largest revenue segment in 2020, accounting for nearly half of the total gaming industry revenue, followed by gaming on consoles and PC which represented 28% and 23% of the market share, respectively. These estimates are from Newzoo Global Games Market Report 2020 which was based on a survey of 62,500 people from 30 countries (representing more than 90% of the global games industry revenue) conducted between February and March 2020.

Gaming on smartphones generated US$63.6 billion in annual revenue in 2020, recording 13.3% growth over previous year. Increasing number of smartphone users and improving internet connectivity are driving growth in this category. Gaming on tablets generated US$13.7 billion, indicating a moderate growth of 2.7% over previous year.

Mobile gaming has seen unprecedented growth due to coronavirus outbreak. According to Sensor Tower, a research firm providing insights on mobile app ecosystem, global downloads of mobile games from Google Play and iOS App Store totaled 28.5 billion in the first half of 2020, an increase by 42.5% as compared with the same period in 2019.

Newzoo’s analysis concluded that console gaming generated US$45.2 billion in 2020, representing 6.8% growth compared with 2019. While there was an increased demand for gaming consoles amidst coronavirus outbreak as more people turned to games due to stay-at-home restrictions, the manufacturing and distribution of gaming console providers were affected because of global supply chain disruptions, and as a result, the increase in demand for gaming consoles could not be met. For instance, Sony sold 118,085 PlayStation 5 consoles within four days of its launch in November 2020, but this figure was approximately one-third of the volume of PlayStation 4 sold over its launch weekend in November 2013. PlayStation 5 consoles were in high demand and were sold out within minutes after being made available in retail outlets. In October 2020, Sony’s Chief Financial Officer indicated that the company was not in capacity to fulfil pre-orders for PlayStation 5 consoles because of supply chain bottlenecks created by coronavirus outbreak.

PC games, including browser-based as well as downloaded versions, clocked US$36.9 billion in annual revenues in 2020, representing 4.8% year-on-year growth. Though PC games market is not declining, it shows the smallest growth compared with other categories, mainly because there is more deflection towards mobile gaming which is comparatively more convenient and less expensive.

Further, the number of gamers worldwide is expected to cross over 3 billion mark in 2023 contributing nearly US$200 billion in annual revenue for the global gaming industry.

Gaming Market Breakdown by Region
Asia Pacific North America Other Regions

Asia Pacific represents the largest gaming market with a total of US$84.3 billion in annual revenues in 2020.

China, Japan, and Korea are among the top five revenue generating countries worldwide. In 2020, China’s gaming industry raked in about US$41 million in annual revenues, while gaming industry in Japan and Korea recorded annual revenue of US$18.7 million and US$6.6 million, respectively.

North America represents the second largest gaming market which generated about US$45 million in annual revenue in 2020.

The USA, the second largest gaming market worldwide by revenue, accounted for majority of the share of the North America gaming market, with about US$37 million in annual revenues in 2020.

Europe was the third largest gaming market with revenue of US$32.9 billion for 2020, followed by Latin America in the fourth place, with revenue of US$6.8 billion.

MENA represented the smallest region in terms of revenue with US$6.2 billion.

With rising popularity and wider reach, gaming industry looks to unravel multiple monetization strategies

Historically, gaming used to be an entertainment medium for a niche segment, mainly gaming enthusiasts and children or teenagers. At the time, ‘game-as-a-product’ was a go-to monetization strategy for most game developers, where gamers paid one time to purchase the physical or digital copy of the game.

Today, however, gaming attracts a much wider audience, enticing people from every age group. Business strategy has also evolved from upfront-based revenue model to ongoing-based revenue model where game developers seek monetization avenues from various transactions during the lifetime of a game. For instance, retail sales of Ubisoft (a French gaming company) were 98% of total sales revenues in 2010, and in 2019, this was less than one-third of the total revenue. Gaming companies today are increasingly looking to diversify their monetization avenues beyond upfront retail sales.

The most widely used monetization strategies nowadays include:

In-game purchases

In-game purchases refer to virtual items such as new features, functionality, upgrades, aesthetic elements, or content that gamers can buy to enhance their gaming experience. Newzoo estimated that in-game purchases accounted for nearly three-fourth of the global gaming revenue in 2020.

While in-game purchase seems to be a good monetization strategy, it also involves high cost to acquire paying users. Based on analysis of 992 apps between September 2018 and August 2019, Liftoff (a mobile app marketing firm) found that game developers spend an average of US$86.61 to acquire a user who will make in-app purchase. Moreover, the median average revenue per paying user for free-to-play games was estimated at US$6. However, there was high variance in the amount spent by the gamers and a small set of gamers, who were grossly engaged in games, expectedly spent US$35 to US$70 per day, thus creating high returns for the game developers.

In-game ads

In-game ads is a widely used monetization strategy, especially for free-to-play games. According to a report released in June 2020 by Omdia (a UK-based technology research firm), worldwide game developers earned revenue of US$42.3 billion in 2019 through in-game ads. Based on analysis of top 1,000 games by downloads by App Annie (app analytics company), 89% of them used in-game ads as one of the revenue streams.

As per a 2019 survey of 284 game developers conducted by deltaDNA (a consultancy firm for gaming industry), 94% of the free-to-play mobile games carried in-game ads. Rewarded ads are most popular: 82% of game developers in the deltaDNA survey indicated that they deployed rewarded video ads, compared to interstitial video ads (57%) and banners (34%).

As per the same survey, 30% of game developers showed more than five ads per gaming session. While in-game ads seem like a lucrative monetization opportunity, there is also a risk of affecting gaming experience and thus loosing gamers’ interest. deltaDNA survey suggested that display of too many ads might result in gamer churn (30%), affect gamers’ playing experience (27%), and scare off potential gamers that might be willing to spend on in-game purchases (16%). Hence, game developers need to strike a balance and control the frequency of ads.

Subscription

Witnessing the success of subscription streaming service such as Netflix and Hulu, many game developers have started exploring subscription-based model generating regular revenue stream.

Console gaming companies have been diving into the subscription model for a few years now, for instance, Sony’s PlayStation Now offers on-demand streaming of PlayStation games for a monthly subscription of US$9.99 in the USA. Some of the leading mobile and PC game developers also offer subscription service, for example, Uplay Plus by Ubisoft and EA Play by Electronic Art (creators of world-renowned FIFA game). Subscription-based model is more suitable for large gaming companies who have multiple games under their umbrella, thus offering a wide selection range to the gamers.

Based on a survey of 13,000 people in 17 countries between May 2020 and June 2020, Simon-Kucher (a global consultancy firm) suggested that over one in three gamers opted for at least one gaming subscription. Moreover, hardcore gamers who typically dedicated more than 20 hours per week on gaming would spend US$19 to US$40 per month on gaming subscription service, and casual gamers who played fewer than five hours per week were willing to shell out US$10 to US$30 for monthly subscription.

Gaming industry ecosystem is expanding with advent of new services

As gaming is more and more perceived as mainstream entertainment, there is an increased effort to capitalize on the industry’s wider reach, thus giving birth to eSports and games streaming services. Moreover, with increased demand from gamers to reduce reliance on hardware and access their favorite games anytime anywhere, advancement of cloud gaming service is encouraged.

eSports

eSports includes games played in highly organized competitive environment. As per estimates of Valuates Reports, an India-based research firm, the global eSports market was valued at US$692 million in 2019 and it is expected to reach US$1.9 billion by 2026.

eSports demand cross-industry collaboration including key players such as eSports organizations, tournament operators, digital broadcasters, etc. eSports offer monetization opportunities through advertising and sponsorships, media rights, ticket sales, merchandise sales, as well as in-game purchases.

Game streaming services

Game streaming services allow live broadcasting of gaming sessions by players. Game streaming services have been welcomed by the community of gamers as a medium to learn, connect, and get entertained.

Gaming video content was valued at US$9.3 billion with a viewership of 1.2 billion in 2020. The content may include pre-recorded or live gaming sessions by individuals as well as live broadcasting of eSports events. Game streaming service segment has particularly seen high involvement from Tech giants. Amazon’s Twitch and Google’s YouTube Gaming are the top two players in this space with annual revenue of US$1.54 billion and US$1.46 billion, respectively, in 2019.

Cloud gaming services

Newzoo projects cloud gaming to grow from US$585 million in 2020 to US$4.8 billion in 2023. Cloud gaming ecosystem typically includes game developers, cloud gaming platforms, as well as content service providers. Google launched its cloud gaming platform ‘Stadia’ in November 2019. For a monthly subscription fee of US$10, Stadia offers access to 152 games. Microsoft launched cloud gaming platform xCloud for its Xbox user base in September 2020. China-based gaming giants Tencent and Netease started beta testing of their cloud gaming platforms in 2019.

A Deloitte survey of over 2,000 US customers conducted between December 2019 and May 2020 indicated that 23% of gaming respondents were multiplatform players, playing games via all three mediums, i.e. mobile, console, and PC. Cloud gaming services could offer good value proposition for these gamers which look for seamless play between platforms.

EOS Perspective

As mobile gaming started to gain more traction, there is an increasing demand for casual games which target mass audience. As per analysis of top 1,000 games by downloads in 2019, casual games accounted for 82% of all game downloads, and remainder were hardcore games. Casual games are for on-the-go fun, which requires less time and low skillset, while hardcore games demand high commitment from the gamers who willfully spend comparatively more time and money on gaming.

Usually, casual game developers prefer ad-supported business model. Since these games require low skills, attracting masses, they are likely to generate more revenue through in-game ads than in-game purchases. As the level of skill set required goes up, a hybrid monetization model is preferred. Beyond that, the main monetization method is in-game purchases, especially for role-playing and strategy games which demand gamer’s higher engagement.

The role of gaming is evolving from a medium of entertainment to a social engagement platform. Games such as PUBG enables social interaction and networking as it allows to connect with different players and chat with people in the game. As per Sensor Tower, PUBG was the highest-grossing mobile game globally in 2020, earning US$2.6 billion in annual revenues. Rising popularity of such games shows how the gaming culture is transforming and pushing game developers to design games allowing players to socialize within the virtual environment.

‘Cross-play’ is another interesting trend which is likely to be the way forward for gaming industry. In September 2018, Fortnite became the first game to allow cross-play between mobile, PC, and all major consoles (Microsoft XBOX, Nintendo Switch, and Sony PlayStation). Between March 2020 and June 2020 more than 60% of Fortnite players paired up with a player from another platform to cross-play. The average monthly revenue-per-user who cross-played Fortnite was 365% higher than non-cross-players.

Multiplayer gaming is becoming a cultural phenomenon, and thus, the industry needs to focus on offering easy on-demand access and development of platform agnostic games.

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COVID-19 Outbreak Boosts the Use of Telehealth Services

Telehealth is one of the few sectors that have benefited from the coronavirus outbreak. Telehealth services have been around since 1950s, however, they were perceived as a nice-to-have alternative to conventional delivery of healthcare services and thus largely underutilized. COVID-19 pandemic has proved to be a game changer for the industry. Since social distancing became a necessary measure to curb the risk of COVID-19 transmission, telehealth emerged as a viable option to offer uninterrupted healthcare without physical contact. Towards the end of 2020, Deloitte predicted that virtual consultations would account for 5% of total visits to doctor in the world in 2021, up from 1% in 2019. To put this into perspective, in 2019, doctor’s visits in OECD-36 countries totaled 8.5 billion, worth approximately US$500 billion. 5% of this would result in about 400 million teleconsultations and over US$25 billion in value (if doctors earn the same for teleconsultations as for in-person visits).

Telehealth services uptake during the pandemic varied by region

While the adoption of telehealth services has increased across the globe, the growth rate varied by region depending upon factors such as technology and infrastructure, consumer awareness and willingness, government regulations, insurance policies, etc.

In the USA, world’s largest telehealth market which accounted for 40% of the global share in 2019, the growth over the years was steady but incremental mainly because of regulatory constraints and stringent insurance policies.

In response to the pandemic, the US government health insurance plans (Medicare, Medicaid, etc.) as well as private insurers expanded their coverage for telehealth services. As a result, telehealth accounted for 43.5% of all US Medicare primary care visits in April 2020, compared with just 0.1% before the pandemic. US Centers for Disease Control and Prevention indicated that the number of telehealth visits increased by 154% during the last week of March 2020, compared with the same period in 2019, primarily due to policy changes and public health guidance on telehealth during the pandemic. Considering unprecedented rise in demand for telehealth services during the times of pandemic, in April 2020, Forrester (a research and consulting firm) revised their estimation for virtual general medical care visits in the USA from 36 million to 200 million for the year 2020.

UK and France have been the dominating countries in the European telehealth market. Telehealth services’ growth momentum due to COVID-19 pandemic in these countries is likely to continue because of conducive environmental factors such as established ecosystem, favorable regulatory framework, reimbursement policies, and consumer readiness. UK’s National Health Service revealed that 48% of GP consultations in May 2020 were carried out remotely over the telephone, compared with 14% in February of the same year. Teleconsultations in France increased from 40,000 in February 2020 to 611,000 in March 2020.

Growth of telehealth market in Switzerland, Germany, and Austria has been comparatively slow as these countries have more decentralized healthcare systems in contrast to UK or France. For instance, McKinsey’s survey of over 1,000 consumers from Germany, conducted in November 2020, showed that only 2% respondents started or increased usage of telehealth services since COVID-19 outbreak.

In countries such as Greece and Czech Republic, telehealth platforms were launched for the first time during the pandemic. Ireland had telehealth platforms before COVID-19, but the adoption of the telehealth services even after pandemic remains moderate because of lack of favorable regulatory framework.

COVID-19 Outbreak Boosts the Use of Telehealth Services

China and India are among the fastest growing telehealth markets in Asia. The number of telehealth providers in China increased from less than 150 to nearly 600 between late 2019 and early 2020. Telehealth platforms in India are witnessing increased interest from both patients as well as doctors. India’s leading health-tech firm, Practo, reported that 50 million people opted for teleconsultations through its platform between March 2020 and May 2020, representing 500% growth in teleconsultations during this time. 1mg Technologies, another telehealth service provider in India, indicated that between March 2020 and July 2020 nearly 10,000 doctors showed interest in signing up with the platform to offer teleconsultations. The company had only 150 doctors onboard until March 2020.

Japan, which is one of the largest healthcare markets, lagged in remote healthcare services because of stringent legislative policies. Remote consultations were allowed only for recurring patients and for limited number of ailments. Following the spike in COVID-19 cases, Japan temporarily eased restrictions on telehealth by allowing doctors to conduct first-time consultation online. Japan health ministry indicated that about 15% or 16,100 Japanese medical institutions (excluding dentists), offered telehealth services by July 2020. This shows phenomenal growth as in July 2018 only 970 of such Japanese healthcare institutions offered telehealth services.

In South Korea, telehealth was banned before COVID-19. This ban was lifted temporarily during the pandemic, but the long-term growth of telehealth in South Korea will depend on how the regulatory framework is shaped in the post-COVID era.

Vietnam also joined the telehealth upsurge as the country’s first telehealth app (developed by the Vietnamese multinational telecommunications company, Viettel) was launched amidst corona virus outbreak in April 2020.

Industry stakeholders seek to capitalize on telehealth boom

Healthcare providers have turned to telehealth to compensate for cancelled in-person consultations due to COVID-19 outbreak. This has encouraged providers to scale up their telehealth capabilities. For instance, over 56,000 doctors in France started teleconsultations by July 2020, as compared with only a few thousands at the beginning of the year.

Healthcare providers are not the only players looking to capitalize on the increase in demand for telehealth services. Other industry participants such as insurers and pharmacies are also exploring this segment.

In the USA, leading insurers such as Cigna, United Health, Aetna, Anthem, and Humana are partnering with telehealth providers to capitalize on the spurt in virtual healthcare demand. For instance, in February 2021, Cigna announced plans to acquire MDLive, Florida-based telehealth firm serving 60 million people across the USA, with a view to bring telehealth services in-house and reduce the patient-provider accessibility gap. Pharmacy giants Walgreens and CVS also extended access to telehealth services during COVID-19 crisis. In March 2021, a US-based digital retail pharmacy NowRx expanded into telehealth to provide care for HIV patients in California.

Since telehealth primarily encompasses delivery of healthcare services through digital and telecommunications platforms, telecoms and cable operators are uniquely positioned to organically expand in to telehealth space. Telecoms have the opportunity to expand in healthcare space by delivering telehealth as a value-added service. In October 2020, CommScope, an infrastructure solutions provider for communications networks, estimated that telehealth has the potential to create US$50 billion per year revenue opportunity for internet and telecom service providers in the USA.

Moreover, leading technology firms including Amazon, Microsoft, Salesforce, Tencent, Alibaba, and Alphabet are also investing in or considering to invest in telehealth. For instance, in January 2020, Alibaba launched an online coronavirus clinic, to offer remote assistance to patients across China.

Telehealth startups are mushrooming across the world and raking in millions in investment. Mercom Capital Group indicated that, in 2020, telehealth attracted nearly US$4.3 billion in venture funding. This represents 139% year-on-year increase compared to US$1.8 billion in 2019 implying that COVID-19 outbreak was the key driver behind the increased investment in telehealth.

Since everyone is trying to grab a piece of the growing telehealth market cake, this has led to flurry of M&A deals. Mercom Capital Group recorded 23 M&A transactions in telehealth space in 2020, up from 14 transactions in 2019.

EOS Perspective

COVID-19 outbreak worked as a catalyst resulting in dramatic increase in telehealth services utilization; whether this growth will continue in the long term, remains a question. This growth of telehealth market is primarily demand-driven. Thus, to sustain the growth momentum it would be imperative to overcome the challenges faced by the industry before the pandemic.

Ambiguous and often changing regulatory framework remains one of the biggest hindrances to telehealth. In order to tackle the spread of coronavirus, many countries temporarily relaxed their regulations for telehealth. However, it remains unknown whether countries will pull back the relaxations once the pandemic is over. Moreover, telehealth opens up doors for cross-border provision of healthcare services. This calls for development for a universal law for telehealth which is acceptable worldwide.

Further, the market will also largely depend on how the reimbursement policies evolve in the future. Historically, in many countries, reimbursement for teleconsultations has been lower than for in-person consultations. During the pandemic, the reimbursement amount was leveled in order to encourage adoption of telehealth. This proved to be a strong incentive driving the surge in telehealth. Post the pandemic, if the policies are changed again offering lower reimbursement for teleconsultations as compared with in-person visits, this could impact the growth momentum.

Data security and privacy concerns have long been debated as some of the biggest barriers for telehealth worldwide. Development of more secure platforms using technologies such as blockchain, AI, and Secure Access Service Edge (SASE) networks could potentially address these issues in future. Further applications of blockchain are being explored to improve operational transparency, increase protection of health records, and detect fraud related to patients’ insurance claims as well as physician credentials.

It is believed that the risk of misdiagnosis increases with telehealth as compared to in-person visits. This risk can be significantly reduced by integration of remote patient monitoring technologies with teleconsultations. IoT-enabled remote care monitoring technologies have been evolving by leaps and bounds. Teleconsultations carried out in conjunction with data collated from smart wearable devices can potentially help to cut down misdiagnoses.

Telehealth has become the new normal amidst coronavirus outbreak. While the telehealth market growth in the next 2-3 years could be attributed to pandemic crisis, the future will depend on how the regulatory framework will shape up and whether the industry will be able to tackle the challenges related to the technology implementation.

by EOS Intelligence EOS Intelligence No Comments

COVID-19 Unmasks Global Supply Chains’ Reliance on China. Is There a Way Out?

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Dubbed as the factory to the world, China is an integral part of the supply chain of a host of products and brands. From manufacturers of simple products such as toys to complex good such as automobiles, all are dependent on China for either end products or components. However, China’s ongoing trade war with the USA and the COVID pandemic have made several brands question their supply chain dependence on this country, especially in some industries such as pharmaceuticals. Moreover, aggressive investment incentives offered by countries such as India and Japan have further cajoled companies to reassess their global supply chains and reconsider their dependence on China. However, with years of investment in the supply chain ecosystem, a shift such as this seems easier said than done.

China emerged as the manufacturing hub of the world in the 1990’s and hasn’t looked back since. Owing to vast availability of land and labor, technological advancements, and overall low cost of production, China became synonymous to manufacturing. Over the past decade, increasing labor and utility costs, and growing competition from neighboring low-cost countries such as India, Vietnam, Thailand, etc., have resulted in some companies shifting out from China. However, so far this has been limited to a few low-skilled labor intensive industries such as apparel.

The year 2020 has changed this drastically. The COVID pandemic along with the ongoing trade war between the USA and China made companies realize and question their dependency on China. In the beginning of last year, COVD-19 brought China to a halt, which in turn impacted the supply chain for all companies producing in China. Moreover, several pharmaceutical companies also realized that they are highly dependent on China for few basic medicines and medical supplies and equipment, which were in a considerable shortage throughout 2020. This pushed several companies across sectors such as pharmaceuticals, automobiles, and electronic goods, to reconsider their global supply chains to ensure reduced dependence on any one region, especially China.

Currently, several companies such as Apple, Google, and Microsoft are looking to shift their production from China to other South Asian countries, such as Vietnam and Thailand.

Some of the companies looking to reduce dependence on China:

Apple

In November 2020, Apple, along with its supplier Foxconn, expressed plans to shift assembly of some iPad and MacBook to Vietnam from China. The facility is expected to come online in the first half of 2021. Moreover, Apple is also considering shifting production of some of its Air Pods to Vietnam as well. In addition, it has invested US$1 billion in setting up a plant in Tamil Nadu, India to assemble iPhones that are to be sold in India. Apple and Foxconn are consciously trying to reduce their reliance on China due to the ongoing USA-China trade war.

Samsung

In July 2020, Samsung announced plans to shift most of its computer monitor manufacturing plants from China to Vietnam. The move is its response to hedge the supply chain disruptions it faced due to factories being shut in China during the early phase of the pandemic. In addition, in December 2020, the company shared its plans to shift its mobile and IT display plants from China to India. Samsung plans to invest about US$660 million (INR 48 billion) to set up the new facility in Uttar Pradesh (India).

Hasbro

Hasbro has been moving its production out of China into Mexico, India and Vietnam over the past year. It aimed to have only 50% of its products to be coming out of China by the end of 2020 and only 33% of its production to remain in China by the end of 2023. In 2019, about 66% of its toys were produced in China, while in 2012, 90% of its toys were manufactured in the country. The key reason behind the consistent switch is the souring trade relations between the USA and China.

Hyundai

During the past year, Hyundai Motors has been looking at developing India into its global sourcing hub instead of China in order to reduce its over-reliance on the latter. It has been encouraging its vendors, such as Continental, Aptiv, and Bosch, to ramp up production in India so as to move their supply chain away from China. It plans to source its auto parts from India (instead of China) for its existing factories in India, South America, Eastern Europe as well as planned facility in Indonesia.

Google

Google is looking to manufacture its new low-cost smartphone, Pixel4A, and its flagship smartphone, Pixel5A in Vietnam instead of China. In addition, in 2020, it also planned to shift production of its smart home products to Thailand. This move has been a part of an ongoing effort to reduce reliance on China, which in fact gained momentum post supply chain disruptions faced due to the coronavirus outbreak.

Microsoft

In early 2020, Microsoft expressed plans to shift the production base of its Surface range of notebooks and desktops into Vietnam. While the initial volume being produced in Vietnam is expected to be low, the company intends to ramp it up steadily to shift volumes away from China.

Steve Madden

In 2019, Steve Madden expressed plans to shift parts of its production out of China in 2020, given growing trade-based tensions between the USA and China. However, due to the COVID pandemic, it could not make planned changes to its supply chain. In October 2020, it again expressed plans to start shifting part of its production away from China by spring 2021. It plans to procure raw materials from Mexico, Cambodia, Brazil, and Vietnam to reduce reliance on China.

Iris Ohyama

The Japanese consumer goods player expressed plans to open a factory in northeastern Japan to diversify its manufacturing base, which is based primarily in China. The company made this move on the back of increasing labor cost in China, rising import tariffs to the USA, along with the supply disruptions it faced for procuring masks for the Japanese market. In 2020, it also set up a mask factory in the USA. In addition, the company plans to open additional plants in the USA and France for plastic containers and small electrical goods to cater to the local demand in these markets.

Nations using this opportunity to promote domestic production

In August 2020, about 24 electronic goods companies, including Samsung and Apple, have shown interest in moving out of China and into India. These companies together have pledged to invest about US$1.5 billion to setup mobile phone factories in the country in order to diversify their supply chains. This move is a result of the Indian government offering incentives to companies looking to shift their production facilities to India.

In April 2020, the Indian government announced a production linked incentive (PLI) scheme to attract companies looking to move out of China and set up large scale manufacturing units in the electronics space. Under the scheme, the government is offering an incentive of 4-6% on incremental sales (over base year FY 2019-20) of goods manufactured in India. The scheme, which is applicable for five years, plans to give an incentive worth US$6 billion (INR 409.51 billion) over the time frame of the scheme.

In November 2020, the Indian government subsequently expanded the scheme to other sectors such as pharma, auto, textiles, and food processing. In addition, it is expected to provide a production-linked incentive of US$950 million (INR 70 billion) to domestic drug manufacturers in order to push domestic manufacturing and reduce dependence on Chinese imports. Apart from incentives, India is developing a land pool of about 461,589 hectares to offer to companies looking to move out of China. The identified land, which is spread across Gujarat, Maharashtra, Tamil Nadu, and Andhra Pradesh, makes it easy for companies looking to set shop in India, as acquiring land has been one of the biggest challenges when it came to setting up production units in India.

On similar lines, the Japanese government is providing incentives to companies to shift their production lines out of China and to Japan. In May 2020, Japan announced an initiative to set up a US$2.2 billion stimulus package to encourage Japanese companies to shift production out of China. About JNY 220 billion (~US$2 billion) of the stimulus will be directed towards companies shifting production back to Japan, while JNY 23.5 billion (~US$200 million) will be given to companies seeking to move production to Vietnam, Myanmar, Thailand, and other Southeast Asian countries.

In the first round of subsidies, the Japanese government announced a list of 57 companies in July 2020, which will receive a total of US$535 million to open factories in Japan, while another 30 companies will be given subsidies to expand production in other countries such as Vietnam and Thailand. The move is a combination of Japan looking to shift manufacturing of high value-added products back to the country and the initial disruptions caused to the supply chain of Japanese automobiles and durable goods manufacturers.

Similarly, the USA, which has been at odds with China regarding trade for a couple of years now, is also encouraging its companies to limit their exposure in China and shift their production back home. In May 2020, the government proposed a US$25 billion ‘reshoring fund’ to enable manufacturers to move their production bases and complete supply chain from China preferably back to the USA and in turn reduce their reliance of China-made goods. The bill included primarily tax incentives and reshoring subsidies. However, the bill has not been passed in Congress yet and now with the leadership change in the USA, it is expected that president Biden may follow a more diplomatic strategic route with regards to China in comparison to his predecessor.

In addition to individual country efforts, in September 2020, Japan, India, and Australia together launched an initiative to achieve supply chain resilience in the Indo-Pacific region and reduce their trade dependence on China. The partnership aims at achieving regional cooperation to build a stable supply chain from the raw material to finished goods stage in 10 key sectors, namely petroleum and petrochemicals, automobiles, steel, pharmaceuticals, textiles and garments, marine products, financial services, IT services, tourism and travel services, and skill development.

Similarly, the USA is pushing to create an alliance called the ‘Economic Prosperity Network’, wherein it aims to work with Australia, India, Japan, New Zealand, Vietnam, and South Korea to restructure global supply chains to reduce dependence on China.

COVID-19 Unmasks Global Supply Chains’ Reliance on China by EOS Intelligence

Is it feasible?

While these efforts are sure to help companies move part(s) of their supply chain out of China, the extent to which it is feasible is yet to be assessed. Although the coronavirus outbreak has highlighted and exposed several supply chain vulnerabilities for companies across sectors and countries, despite government support and incentives, it will be very difficult for them to wean off their dependence on China.

Companies have spent decades building their manufacturing ecosystems, which in many cases, are highly reliant on China. These companies not only have their end products assembled or manufactured in the country, but also engage Chinese suppliers for their raw materials, who in turn use further Chinese suppliers for their inputs. Therefore, moving out of China is not a simple process and will take tremendous amount of time as well as financial resources.

While companies such as Google or Microsoft are looking to shift their assembling plants out of China, they are still dependent on China for parts. This is all the more relevant in case of high-technology products, such as automobiles and telecommunication infrastructure, where companies have made significant investments in China for their supply chain and are dependent on the nation’s manufacturing capabilities for small, intricate, but technologically advanced parts and components.

Moreover, despite significant efforts and reforms from countries such as India, Vietnam, and Thailand, they still cannot match China in terms of availability of skilled labor, infrastructure, and scale, which is required by many companies especially with regards to technologically advanced products. That being said, more companies are looking at a strategy where they are maintaining their presence in China, while also developing relatively smaller operations outside the country to have a fallback and to reduce total dependency on China. This is also dubbed as the China + 1 strategy.

Another reason going in China’s favor has been its capability to bounce back from the pandemic and resume production in a short span of time. While production had been halted in January to March 2020, it ramped up April onwards and was back to normal standards within no time. This reinforced the faith of many companies on Chinese capabilities. Therefore, as some companies are already cash-strapped due to the pandemic, they are not interested in investing in modifying their supply chains when in most cases normalcy resumed in a relatively short span of time.

EOS Perspective

Companies have been looking to diversify their supply chains and reduce dependence on China for a couple of years now, however, the trend has gained momentum post the coronavirus pandemic and growing US-China trade tensions. The onset of the COVID-19 outbreak exposed several vulnerabilities in the supply chain of global manufacturers, who realized the extent of their dependence on China. Moreover, several countries realized that they relied on China for key medicines and medical supplies, which cost them heavily during the pandemic.

Given this situation, several nations such as Japan, India, and the USA – together and individually, have started giving incentives to companies to shift production from China into their own borders. While this has resulted in several companies, such as Apple, Microsoft, Sanofi, Samsung, etc., to expand their manufacturing operations out of China, it does not necessarily mean that they are moving out of China. This is primarily due to heavy investments (in terms of both time and money) that they have already made into developing their intricate supply chains as well as the inherent benefits that China provides – technologically skilled labor, sophisticated production facilities, and quick revamping of production after a calamity.

That being said, it has come into the conscience of companies to reduce their over-reliance on China and while it may not impact the scale and extent of operations in the country in the short run, it is quite likely that companies will phase out their presence (at least part of it) in China over the coming decade.

A lot depends on the level of incentives and facilities provided by other nations. While countries such as India, Vietnam, and Thailand can offer low cost production with regards to labor and utilities, they currently do not have the technological sophistication possessed and developed by China. Alternatively, while Japan and the USA are technologically advanced, without recurring incentives and tax breaks, cost of production would be much higher than that in China. Thus, until there is a worthy alternative, most companies will follow the China +1 strategy. However, with growing trade tensions between China and other nations, and ongoing efforts by other nations to encourage and support domestic production, China may risk losing its positioning as the ‘factory of the world’ in the long run.

Crippled by COVID-19, Tourism Gears Up to Rebound
by EOS Intelligence EOS Intelligence No Comments

Crippled by COVID-19, Tourism Gears Up to Rebound

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COVID-19 has disturbed practically every business vertical across the globe, and travel and tourism sectors were one of the first ones to fall prey to the devastating effects of the pandemic. Complete lockdowns made taking a leisure trip or planning a vacation impossible for a long time to come. Not only were people unable to travel, but also multiple businesses serving in the tourism sector closed down temporarily, with some shutting their doors for good. Recently, leisure travel started to resume, but at a snail’s pace. In many countries, businesses, local authorities, and government agencies are developing a coordinated approach to aid economic recovery of the sector. The actions and approaches taken in these uncertain times will lay the foundation for the future of the tourism sector.

The travel & tourism industry contributed US$ 8.9 trillion to the global economy in 2019. Leisure travel made up the majority of total travel & tourism revenue standing at 78.6%. The trend was expected to follow in 2020 but the coronavirus outbreak crippled the entire leisure tourism sector as travels were canceled globally for at least three months (mainly from April to June, though in many locations those cancellations have continued at least till autumn, and again at the end of the year).

Read more on the pandemic impact on business travel in our previous Perspective: Business Travel: On the Mend but Long Recovery Ahead

Travelers evolving preferences

Demand for domestic leisure travel is expected to rise as people are likely to be less inclined to travel to international destinations due to safety, hygiene, and uncertainty concerns. Unwillingness to spend on international travel in the immediate future also suggests that people are less inclined to make trips to international destinations. Self-driving trips to nearby destinations and weekend getaways are likely to increase in popularity.

In terms of traveler type, the group travel segment (irrespective of the size of the group) has always generated higher revenue for the global leisure travel market, in comparison to the solo traveler segment (in 2018, group travel segment contributed nearly 73% of revenue to the global leisure travel market). Travelers were always able to take advantage of group discounts offered by hotels, resorts, airlines, and vehicle rental companies.

It is anticipated that group travel will continue to be a common practice among travelers (both during the pandemic and post-pandemic). However, to avoid crowded places, it is highly likely in the future, travelers would need (and perhaps also desire) to travel in smaller groups. This trend is expected to continue in the distant future mainly due to the growing acceptance of social distancing norms as the new normal for sanitation and hygiene purposes globally. However, whether or not this type of travel arrangement will be monetarily favorable to various market stakeholders (in terms of discounts and margins when compared to larger group travels) and what discounted rates would consumers receive is yet to be seen.

It is highly likely in the future, travelers would need (and perhaps also desire) to travel in smaller groups. This trend is expected to continue in the distant future mainly due to the growing acceptance of social distancing norms as the new normal for sanitation and hygiene purposes globally.

Demand for private charter flights is also rising among leisure travelers. Wary of flying with regular flights, people are turning to charter planes for taking a vacation trip to safe destinations (for both short and long-distance locations). However, this trend is expected to be short-lived mainly because only upper-class travelers will be able to afford such travel and most of the demand for charter flights come from business travelers (which is also limited to need-only basis, for now at least).

Moreover, interest in trips to off the beaten path locations and niche tourism (such as adventure tourism, wellness tourism, and heritage tourism) is also expected to grow as these locations are likely to be considered safer to travel to in comparison to famous tourist locations, at least for some time in the foreseeable future.

Crippled by COVID-19, Tourism Gears Up to Rebound by EOS Intelligence

Governments to the rescue

Travel and tourism businesses have been hit hard as they had to temporarily close business operations (many small and medium-sized business players are permanently out of business) and suffered heavy revenue losses. To mitigate the impact of coronavirus (on both the travel and tourism sector and economies), many governments have offered aid packages to help the sector.

Governments globally have taken a range of measures to revive the sector in order to shield the economy and to protect employment. For instance, Italy, one of the most popular tourist destinations and also one of the worst-hit economies by the first wave of pandemic, announced a relief package to revive businesses in the travel sector. The package includes a US$ 645.7 million fund for the aviation sector, a US$ 129.1 million fund to support regions that generated lower revenue owing to lower number of people paying tourism taxes, US$ 19.3 million for tourism promotion, and subsidies worth US$ 129.1 million for museums and other cultural sites to recover lost ticket revenue for 2020, among others.

Similarly, under the Hong Kong government’s Anti-Epidemic Fund, licensed travel agents will receive a subsidy ranging from US$ 2,580 to US$ 25,803, travel agents’ staff and freelance tourist guides and tour escorts will receive a monthly subsidy of US$ 645 for six months, licensed hotels will receive a subsidy of US$ 38,705 or US$ 51,607 (depending on the size), and tour coach drivers a one-time subsidy of US$ 1,290. Additional US$ 90.3 million has been allotted to the Hong Kong tourism board for tourism promotion.

New Zealand announced that for the losses borne by travel agents for canceled travel plans by their consumers, the government will pay 7.5% of value for cash refunds or 5% of credit value to be capped at US$ 31.4 million.

In another example, the Australian government allotted a package of US$ 177.2 million for regional tourism which will include US$ 35.4 million to support businesses in regions heavily reliant on international tourism and remaining US$ 141.8 million to boost local infrastructure in regional communities, of which US$ 70.8 million will be used for tourism-related infrastructure. For regional tourism rebound, the Western Australian government has allotted US$ 10.2 million in the form of two funds – US$ 7.3 million as one-off cash grants of US$ 4,608 to up to 1600 individual small businesses and US$ 2.8 million as grants of US$ 17,723 to US$ 70,894 for tourism operators.

To revitalize tourism, some countries are assigning special reserves for campaigns as well. The UK initiated a US$ 12.9 million ‘Kick Start Tourism Package’ for the recovery and renewal of the tourism sector wherein businesses can access government grants of up to US$ 6,462 to restart operations. Similarly, Norway allocated US$ 19.9 million for rebounding the country’s internal tourism businesses while Denmark assigned US$ 7.8 million for international tourism campaigns.

Various employee training programs and digital technology management processes are also being implemented to support the sector. One such example is the Singaporean government’s move to fund up to 90% of the training course and trainers’ fee for employee upgrading and talent development through its Training Industry Professionals in Tourism fund.

With minimal to no action happening in the travel and tourism segment, all these efforts are likely to not only protect jobs but also give the necessary push to restart the businesses, albeit from ground zero, in some cases.

Tourism-dependent least developed economies in deep waters

Considering that out of the 47 least developed countries identified by United Nations, 45 consider travel and tourism of significant relevance to their economies in terms of job creation, growth prospects, and overall development, COVID-19 has a real potential to adversely affect these vulnerable countries.

In January 2020, through the ‘Visit Nepal Year 2020’ campaign, Nepal expected to attract two million visitors and generate US$ 2 billion in revenues in 2020. It should be noted that in normal circumstances, travel and tourism contributes nearly 6.7% to Nepal’s GDP. However, with the onset of the pandemic, not only was the campaign suspended but also the tourist arrivals declined drastically – 177,975 tourists visited Nepal up until August 2020, only 24% of what had arrived during the same period in 2019 (739,000 tourists arrived between January and August). Also, nearly 20,000 tour and mountaineering guides risked losing jobs due to the cancellation of all mountaineering expeditions.

In Cambodia, where travel and tourism contribute nearly 26% to the nation’s GDP, the effects of the virus have also been damaging. The country may lose up to US$ 3 billion in revenues as the inflow of international travelers was down by 52% to 1.16 million in between January and April 2020 (2.41 million visitors in 2019 during the same period). Up until May 2020, more than 45,000 jobs had been affected due to the pandemic.

Likewise, for countries such as Kiribati, Gambia, Sao Tome and Principe, Madagascar, Tanzania, Solomon Islands, Rwanda, and Comoros, travel and tourism sector forms a key contributor to their economies by contributing 18%, 17.7%, 16.2%, 11.8%, 10.7%, 10.5% 10.2%, and 10.1%, respectively, to the countries’ GDPs.

In normal scenario, majority of the travel and tourism revenue in these countries is generated by leisure travel (for most of these countries leisure segment generates >50% of the revenue) as against business travelling. The sudden onset of the pandemic prohibited the entry of travelers (for vacationing purposes) within these countries stopping cash inflow thus hampering revenue generation.

Governments in most of these countries, through relief funds and aid packages, attempt to cushion the negative impact of the virus on the sector and the livelihoods of people involved. However, they are far from being able to fully offset the devastating repercussions, considering that these economies had already been at a disadvantageous position with limited growth and development even prior to the pandemic.

EOS Perspective

Covid-19 has altered most travelers’ perspective on vacationing, a fact that is unlikely to change in the short term. It is now upon the various stakeholders operating the leisure tourism sector to ensure that travelers will have an easy and reassuring path back to the sector’s services.

In the current scenario, regions where governments have been able to contain the spread of the virus, even if to a small extent, leisure traveling is slowly resuming. However, reduction in disposable income (due to unemployment), safety concerns, and overall economic slump are causing people to plan affordable regional trips rather than international vacations.

Globally, the impact of the pandemic on leisure tourism has been detrimental to the latter’s growth, to say the least. In some regions, people are slowly keener on booking vacation trips again but the volumes are low. They are likely to remain so, at least in the near future, especially with the returning spikes in number of infections and increased travel restrictions that follow.

Safety is not the only factor holding people back from traveling. Equally important is the financial crunch, fueled by the job losses and uncertainty about the future. Travel and tourism industry stakeholders are observing this trend and trying to alter their strategies and business models, in collaboration with government agencies, to survive in these changing, challenging, and uncertain times.

Safety is not the only factor holding people back from traveling. Equally important is the financial crunch, fueled by the job losses and uncertainty about the future.

More so, partnerships among tourism industry stakeholders’, regional communities, government authorities, and private sector enterprises would also contribute to the sector’s recovery. For instance, in October 2020, Nigeria Tourism Development Corporation (NTDC) partnered with Google to launch Goggle’s Arts & Culture collection called ‘Tour Nigeria’ which is an online exhibition that includes videos, photographs, and commentaries highlighting the country’s scenic beauty and cultural festivals. This collaboration aims at providing online training programs to small businesses and impart digital skills training to individuals in order to support the local tourism sector. As part of the initiative, a video series named ‘Explore Nigeria’ was also launched wherein social media influencers are roped in to publicize ‘best of Nigeria’ in order to reach large number of viewers via influencers’ social media followers.

Post the lockdown, stakeholders in the travel and tourism landscape restarted their operations by evolving their product offerings (hotel stay packages with increased flexibility or airlines not flying to full capacity thus practicing social distancing), experience services (such as tours and excursions or offering upgrades at no or minimal fee), and overall business approach. However, in some regions, this re-opening was short-lived, and was paused by the second wave of pandemic (with the third one on the horizon for spring 2021).

In the foreseeable future, it would not come as a surprise if the customers can book a service provider for a leisure trip based on hygiene and sanitation rating associated with it. Businesses are therefore being promoted on the basis of adopting upgraded cleaning procedures. It is highly likely that the pandemic may push tourism councils and governing bodies to come up with a hygiene assurance standard, either on a global or national level, that all players in the travel industry might need to abide by – this could be a bit of a stretch but such an initiative, if taken, is very likely to be embraced by many travelers.

Automation, though already at the forefront of travel and tourism, is likely to pick up pace. Travelers can expect to witness increased contactless interactions such as contactless check-in or check-out and usage of mobile apps as hotel room keys, virtual reality for sight-seeing, and chatbots and robots for concierge services. Usage of contact tracking apps to monitor traveler’s health and automatic disinfectors will also increase.

Adoption of digital identity and biometric tools will drive the travel industry in the future. Consolidated technology solutions offering transparent and seamless flow of information ensuring travelers’ safety are essential. One such digital identity tool is the Known Traveler Digital Identity (KTDI) that holds the potential to offer a secure and seamless travel experience. An initiative by the World Economic Forum, KTDI not only aims at optimizing passenger processing experience but also manages risks in real-time by monitoring a traveler’s health records.

Nevertheless, while it is optimistic to think that once the vaccine is widely available, the virus will be eradicated and travel will resume as before, one thing that the pandemic has brought to the forefront is that adaptability and adjustment is the key for travel and tourism sector players to keep their businesses running.

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