Coronavirus – the industry winners & losers so far... (Part 1)

I want to begin by saying that although this week’s article is focused on the business impacts of Covid-19/coronavirus, nothing is more important than the human side of this current pandemic.

At time of writing, the disease has infected over 335,000 people and taken the lives of nearly 15,000 around the world. Unfortunately, a cure is still a number of months away and things are likely to get worse still before they get better. May that cure come quickly and arrive effectively.

I’m based in London and last week our UK government led by Prime Minister, Boris Johnson, announced a series of unprecedented economic stimulus packages worth around ￡350bn to support the British economy through this crisis. Measures include grants to businesses, interest-free business loans for 12 months, guaranteeing 80% of employee salaries (up to ￡2,500 per month) so companies don’t have to fire staff, providing business rates relief and other tax reliefs. More measures are expected in the coming weeks.

A number of other jurisdictions around the world have announced similar economic stimulus packages.

Will the packages be enough to see us through this pandemic? – only time will tell.

What’s clear is that a number of industry sectors have been hugely affected by the crisis in different ways. Global stock markets are down between 20-35% off their recent highs. There are winners and losers in this crisis (and some businesses where it’s still too early to tell) – this is Part 1 of 2 articles where I analyse the effects on industries so far.

The Losers…

Hotels, hospitality & travel

No surprise that hotels & hospitality businesses (e.g. travel agents, spas, gyms etc) have been absolutely decimated due to the virus. ‘Social distancing’ measures imposed by a number of jurisdictions around the world, including shutdowns of particular types of businesses, has caused revenues and forward-bookings to fall off a cliff. People have cancelled holidays and stayed away from places with large group gatherings.

I was on holiday in Thailand recently (and was very fortunate to make the trip out & make it back to the UK in time before the skies closed) staying in both Bangkok & Koh Samui. Both hotels I stayed in had no more than 30% occupancy versus a typical 70-80% for this time of year, with no prospect of that increasing over the next 6 months at the least.

Hotel businesses are known for operating with high fixed costs (e.g. rent/mortgage payments, staff costs, property costs & taxes) so it’s imperative occupancy levels are high enough to cover these. Lower occupancy levels are derived from lower activity levels in the travel industry – travel agents have seen a sharp reduction in bookings and a number of the larger players in the industry carrying debt from historic expansion drives are no doubt concerned about how they’ll weather the storm with little revenues to service loans.

My local gym emailed my wife & I last Friday stating that they were freezing all membership payments until further notice. Similar to hotels, gyms operate with high fixed costs.

The hotel & leisure industry is going to take some time to ride through this crisis. Customers won’t return immediately as fears over infections persist, so expect the recovery to be slow, gradual and painful.

Airlines & Aviation

Imposed travel restrictions have hit airlines particularly hard as revenues have dried up.

Airlines companies biggest costs are leasing (they often lease their fleets from airline manufacturers rather than buy outright), staff and fuel costs. An industry notorious for price competition and low returns on capital, Sir Richard Branson of Virgin was once famous for saying after he’d run Virgin Atlantic for a number of years ‘if you’re a billionaire and want to become a millionaire, then own an airline!’

A number of larger, well-known players have already imposed staff & executive pay cuts to bring running costs down. Airline fuel costs tend to be hedged through use of forward contracts, the benefit being that airlines will not see fuel cost volatility from oil price movements, but unfortunately the downside being that they will not benefit from oil prices falling (as they are doing currently).

Rumours are persisting that a number of national governments will be looking to take ownership stakes in several of their larger airlines, or provide substantial state aid/loans and subsidies in order to provide liquidity so they can ride out the current storm and protect jobs.

Retail (Non Grocery)

A number of governments around the world have imposed forced closures on retail businesses deemed ‘non-essential’ (i.e. are not food or pharmacies).

In the UK, last Friday the government has forced closure of bars, restaurants and cafes. People are being asked to practice ‘social distancing’ and stay away from establishments that enable people to form in larger groups in order to curb the spread of the virus.

Pubs and bars in the UK have been struggling in recent years more generally (some exceptions to this) as supermarkets have been selling lower priced alcohol and a general move toward healthier living. The current situation is putting these ‘bricks and mortar’ types of businesses under enormous pressure and its possible that even wages guarantees by governments and tax reliefs wont be enough to save a number of ‘watering holes’.

Shopping malls, clothing retailers and other retailers deemed ‘non-essential’ are also suffering as many close down sites temporarily. Footfall and customers keeping tills ringing are vital to continuing operations. But bills like staff costs, rents and property taxes will still need paying (even if some government relief will help). Unless you have in place an established & slick online operation prepared to offset your bricks & mortar offering, you’re going to struggle.

Sports, Events & Entertainment

Never in my lifetime have I known such a wide scale and simultaneous closure of sporting & entertainment events across the globe. In the US, the suspension of national sports such as basketball, football and other large scale sporting events has hit ticket sales, advertisers and the food and entertainment industries that depend on these events.

In Europe, the suspension of the major soccer leagues and postponement of the UEFA European Championship until 2021 as well as the London Marathon and major music festivals and events will again cause widespread disruption and economic damage.

Japan is under increasing pressure to delay the 2020 Summer Olympic games. I’m expecting the event organisers to announce the inevitable this week.

All of the above, plus more, are huge money spinners for franchise owners, brands/advertisers, participants, retailers and distributors. All are and will continue to feel the pain over the coming months.

The Winners

Whilst there are a number of clear losers, some winners are emerging also.

Retail – Food

Crisis or not, people will still need to eat, buy everyday essentials and loo roll!

Those retailers deemed ‘essential’ include food & grocery retailers. Queues outside before stores are open make it seem like the days of rationing. Tills have been ringing all day long. Food stockpiling continues despite governments and retailers advising customers not to. Demand is very strong so expect these businesses to prosper during these strange times.

Online-dominant retailers (e.g. Amazon & Ocado in the UK) have seen a surge in business and Amazon is hiring 100,000 additional workers to cope with demand and Walmart up to 150,000 in the US alone.

The challenge will be the strength and dependency of supply chains. Can they cope with increasing demand?

Online & Ecommerce

With more and more people opting (or being forced) to stay at home and practice social distancing, online & ecommerce businesses will continue to benefit.

Social media giants such as Facebook is seeing increased engagement as people begin to increase their isolation from others. Human beings are social creatures, and the need to stay up to date with current developments as well as connect with others will mean players like Facebook and their 8 million registered businesses will strengthen its hold on online advertising income. The anti-trust authorities which have called for a break-up of large tech giants will not be pleased.

I’ve been hearing of general online ecommerce activity increasing by as much as 500% compared to earlier in year, with online ecommerce retailers benefiting from the surge in demand as countries like Italy and Spain force lockdowns and people stay at home and shop.

Pharmaceuticals

First and foremost, this is a health crisis.

The impact has resulted in a surge in pharmaceutical sales and people opt to stock up & buy remedies such as cold & flu medicines, thermometers, cough syrups and other ailments to help fight the symptoms of coronavirus.

Other items such as hand sanitizers, anti-bacterial wipes and other similar germ-fighting goods have been flying off the proverbial store shelves. Pharmaceuticals are ‘defensive industries’ much like food retailers, no matter the state of the economy people will still need medicine and food.

Again, like food retailers, the challenge has been to get stocks in to meet demand. Supply chain pressure is evident and this key dependency will probably continue to pose a challenge to pharma players.

Other players this arena that will benefit include drug & medicine R&D. There is currently no known cure for Covid-19 and a number of companies globally are working on producing a mass-produced vaccine. That will attract investment and funding with those that have large scale distribution networks also winning. Once a vaccine is found, it’ll need to be produced and distributed at mass scale.

The Jury’s still out on these….

Real Estate/Property

Real estate and property investment businesses are seen to be relatively safe bets over the long-term (I’m talking about those players which buy and hold property assets for rental income & capital appreciation as opposed to property development & sales).

A number of large property/real estate stocks are down between 20-40% on the markets, reflecting overall stock market sentiment.

In the short-term, the pressure is on jobs (for residential property owners) and on business earnings (for commercial property owners) to meet rental payments. Record-low interest rates will help those players that use debt to fund property purchases and government backstops to support wages & salaries and protect jobs (and therefore tenants).

Those in property sales and lettings will be hurting. Viewings are down as people stay away from close contact with others, but smart-operators are upping their ‘virtual tours’ of properties via zoom, skype etc to keep potential buyers interested.

Re/Insurance

The insurance & re/insurance industry is a good barometer of general market dynamics. Those of us in the industry often say that we need to know a lot about other industries to be able to price and insure their risks.

Insurance prices over last 12 months have seen big increases on most product lines after years of falling prices due to excess capital in the industry. We could now see more muted price rises for the rest of the year and beyond as insurance buyers ability to pay higher prices for insurance reduces.

I’m expecting to see a big claims surge in exposed product lines e.g. contingency (event cancellation cover), trade credit insurance and directors & officers insurance (D&O). Those insurers with heavy exposures in these product lines will be hit hard. The industry is still grappling with the effects of US social inflation and let’s hope the windstorm season to come is a quiet one and the wind doesn’t blow too hard!

On the plus side, most global large insurance companies are well-diversified. The pain in exposed product lines plus the asset side of the balance sheet (insurers are big institutional investors in stocks & bonds) will at least be partially offset by demand in other lines of business as insurance proves its worth to customers more generally.

Banking

A key player in any economy, the banking industry will see some upside and downside during this pandemic.

On the downside, loans exposed to industries hit hardest (e.g. aviation, hotels, entertainment etc) will likely see an increase in defaults. Central banks lowering interest rates will also hit net interest income of banking groups that need to reduce their own rates on loans to stay competitive.

On the plus side, demand will be high for loans and credit to continue to support businesses through the crisis, and governmental guarantees to banks to provide those loans will help mitigate risks with lending during the current climate.

Another plus is that the financial crisis of 2008-9 and the aftermath has resulted in regulatory authorities forcing banks to hold a lot more capital to withstand shocks. Banks are generally much stronger than they were before the last crisis and I expect the major clearing banks to weather the storm well.

So there you have it. A lot of downsides but certainly upsides also. Next week I look at another dozen or so industries and analyse how they’re being affected by the coronavirus pandemic.

Until next week, stay safe.