COVID winners and losers

Not all businesses are created equal, especially in light of the challenges thrown up by COVID. We can group most businesses into #COVID winners & losers.?

COVID winners are experiencing 30+% revenue growth, rising margins, captive markets, and relatively inelastic demand. The sectors that spring to mind include logistics, building services, essential services, food production, supermarkets, marketing and professional services.

The COVID winners are experiencing boom times, with demand and profits even surpassing pre-covid times. As a result, many business owners have been increasing prices and have been surprised with the market’s ability to absorb price increases. This has also given business owners sufficient profits to pay staff more, to compensate them for lacklustre wage growth over recent years as well as to retain them. We are hearing from business owners that staff are routinely being offered salaries in excess of 20% above current salaries. Australia is also becoming more attractive for experienced skilled staff. The brain drain will only accelerate as New Zealand relax border restrictions for Kiwis but at the same time not open up for skilled migrants.

Overall, despite people challenges,?COVID winners have performed spectacularly well, and we are seeing businesses sell at good multiples. Despite recent interest rate movements, cost of funds is still relatively low. Banks are also keen to lend against cashflow positive businesses, with significantly better interest cover than your typical rental property.

On the other hand, we are also encountering businesses deeply impacted by COVID through no fault of their own. These businesses find it difficult to trade during lockdowns, or are impacted by border closures. We class these businesses as COVID losers, victims of circumstance.

These businesses are characterised by falling revenues/margins, inability to pass on rising costs to customers, and pressure from funders. Although much is said about the need to pivot in the face of COVID, for many such businesses there’s only so much pivoting one can do. For example, if you’re a tourist attraction selling cultural shows or other high-priced experiences, it would be difficult to thrive on the domestic market alone. The sectors facing the biggest challenges include tourism, international education, retail and hospitality. We are now seeing some light at the end of the tunnel, due to the impending border reopening and the government ruling out further lockdowns. We have also seen some businesses adapt quickly. For instance, in hospitality, the survivors have quickly moved to a lower cost takeaway model, increasing online and social media activity. Some good operators continue to generate good margins and we have great respect for these operators who have continued to thrive despite the challenges confronting their sector.

For the students of Warren Buffett looking for buy-low, sell-high opportunities, don’t overlook the Covid losers. Particularly if your long term outlook is that tourists will return and that COVID will be behind us soon enough, the valuations for these businesses are compelling and if you can generate a profit during such times, then potentially it could be far more rosy once demand returns.

Opportunities abound and we are happy to help you with your business acquisition or your business sale journey. Our wider team is skilled at not just executing a business sale, but also in assisting you prepare for sale, and to match you with suitable buyers. If you’re keen to buy or sell a business this year, do get in touch. We would love to hear from you.

Check out kauribusiness.co.nz or email us at?[email protected]