As S&P 500 lifespans continue to decline, fast-shaping “hybrid industries” create new risks and opportunities.
Creative destruction continues apace – and at a high level. After a plunge in activity due to the COVID pandemic, major rebounds in private equity, M&A, and IPOs are leading indicators of a continued future rise in the value of the S&P 500. Our tracking of corporate longevity of S&P 500 firms shows a steady churn rate of companies dropping off the index as new entrants join the list and corporate lifespans continue their downward trajectory.
The full impacts of this global pandemic are not yet known and will play out over the next few years. But signs point to ongoing changes in consumer and market behavior that were previously underway and which the pandemic sharply accelerated.
As a long-term trend, the digital revolution has already reshaped the S&P 500. In 1969, industrial companies represented a third of the index. A half-century later, 68 firms are industrials. Over the same span, info-tech companies went from 16 to 68, tied for the top spot.1
Innovation has flourished during the pandemic, as new solutions have displaced the way we’ve done things before. As all this creative destruction2 makes its way through the economy, disruptive forces are especially concentrated in several sectors, where entire industries are blurring together into fast-growing “hybrid industries” – notably digital healthcare, retail-tainment, and e-mobility.
Hybrid industries manifest in different ways. In the case of retail-tainment, it is a convergence of two sectors that previously operated separately. E-mobility, on the other hand, is more multi-faceted, as it re-makes a long-standing coupling of fuel and transportation to include entirely new players in a new sector. Finally, digital health harnesses the increasing consumerization of a wide range of traditional healthcare services, as accelerated by the COVID crisis.
Across these and other industries, three factors hold: companies that are thriving are digital, sustainable, and play to their core strengths that catch broader tailwinds and market forces that can lift growth.
And there are signs of more turbulence ahead. The surge of pre-IPO decacorn companies is rising along with a decline of candidates among existing public companies available to fill what historically remains a high plateau of spots opening on the S&P 500 list.
Tailwinds matter. If your products and services are seeing a lift from the demand changes, you should look at the coming years as a period of acceleration. And if demand is flagging, the time to catch up is running out.
Corporate Longevity and the Rise of Hybrid Industries
Corporate longevity remains in long-term decline, according to Innosight’s biennial corporate longevity reports. Our latest analysis shows the 30- to 35-year average tenure of S&P 500 companies in the late 1970s is forecast to shrink to 15-20 years this decade (Chart 1).
Every year, a number of companies drop off the S&P 500 list due to a decrease in market value or acquisition by larger companies. They are replaced by other firms that enter the index due to growth in market value, or arrive via an IPO or spinoff. In 2020, 18 companies were added or dropped from the index, versus a turnover of 20 in both 2019 and 2018. To further analyze select companies entering and exiting, see chart 2.
As the chart highlights, the companies dropping off the S&P 500 or getting acquired were concentrated in industries converging into three broad sectors. In turn, they’ve been replaced largely by companies blazing growth trends in place before COVID that have since accelerated.
These three hybrid industries help explain the turbulence while also serving to highlight the risks and opportunities in the future.
The Rise of Retail-tainment
Retail and media have been intertwined for decades. And even before the pandemic, digital commerce had already reshaped retail, leading to the bankruptcy of dozens of store chains every year for the past several years, from Toys R Us to Sears to Brookstone. Dropping off the S&P 500 during the pandemic were an array of venerable retailers, such as Nordstrom, Macy’s, Kohl’s, and Tiffany & Co.
The disruptive trend toward retail-tainment has accelerated during the COVID pandemic. For consumers, their entertainment and retail experiences are increasingly one in the same (at home, on screen) — and often provided by the same companies.
Amazon Prime members have for years been receiving both free shipping and unlimited content streaming from one place. As the number of Amazon Prime households in the U.S. has increased from 60 million in 2018 to nearly 75 million today, these households now represent a supermajority of the population.
This convergence has led to the growth of new types of retail experiences. One of the S&P 500’s recent entrants, online crafts seller Etsy, typifies this phenomenon. Founded in 2005, the Brooklyn-based website grew up as a way for makers of hand-made crafts to reach a global audience.