The U.S. economy was slowing last year, but many companies entered 2020 with reasons to be optimistic and expansion plans to match.
Hotel construction round the country had never been busier. Airline employment continued to climb to the very best levels in additional than 16 years. Retail sales in December were up for a 3rd straight month. And consumer spending reached an annual record of $13.28 trillion in 2019.
Then coronavirus hit.
Reeling from the whiplash, the CEOs of companies from Macy’s to Ford, from McDonald’s to American Airlines have all used an equivalent word to explain the fallout: Unprecedented.
The blow has been swift and vast.
The country’s percentage , at a roughly 50-year low in February, is now at levels not seen since the good Depression. The U.S. lost a record 20.5 million jobs in April — and lots of economists have warned the jobless rate of nearly 15% doesn’t fully reflect the pandemic’s toll on the workforce.
The Covid-19 pandemic has been beyond the worst case scenarios that executives at many of the country’s largest companies had prepared for. rather than a gradual slowdown, the coronavirus — and efforts to contain it — ground much of the economy to a halt. The crisis has forced companies to shutter stores for weeks, lay off employees, shrink budgets and shift to other business models — quickly.
The virus is probably going to trigger an economic hangover that would last for years. It’s also prompted soul-searching as businesses plot out how they will recover . And it could cast an extended shadow, permanently changing how companies spend money, sell goods and run their businesses, as new requirements originate that would increase their costs.
Kenneth Rogoff, an economics professor at Harvard University and former chief economist at the International fund , said the pandemic may be a stark reminder that “out-of-the-box shocks happen.”
“You need to avoid drinking the Kool-Aid,” he said. “You can find many articles from the investment banks, from economists about how we’re during this remarkable period of low volatility. ‘Isn’t it wonderful?’ with none quite sense of perspective that simply because the market isn’t predicting a shock doesn’t mean that it’s not getting to happen.”
A business plan called pandemic
Automakers saved billions in take advantage preparation for an economic downturn — but even companies within the cyclical industry hadn’t predicted the extent of monetary disruption brought by the pandemic.
“I never had a business plan that was called pandemic,” Ford CEO Jim Hackett said in an earnings call. He added: “we just never imagined the economy turning off.”
When it began as an epidemic in China, it wasn’t immediately clear how disruptive the coronavirus would become round the world.
Boeing’s CFO Greg Smith, on an earnings turn Jan. 29, called the impact of Covid-19 on traffic within the near term “clearly a watch item this year.” General Electric’s CEO Larry Culp, when asked at a Feb. 19 industry conference about coronavirus impacts, said that “it’s just too early to call given none folks know just how quickly everybody are going to be getting back to figure .” Both companies have announced job cuts within the previous couple of weeks as airline customers for brand spanking new planes post losses.
Before the disease spread globally, the impact of the pandemic began to point out up within the sort of supply chain constraints that made it harder to import goods or parts from China due to factories that were pack up there. Apple, for instance , said it expected to possess a shortage of iPhones.
In late February, Best Buy said the coronavirus outbreak in China was making it harder to stock stores with goods from the country like computer monitors and computer game systems. But the big-box retailer’s CEO Corie Barry said the company’s merchants knew the way to affect the inventory challenges because they addressed the uncertainty of tariffs.
As the coronavirus began to spread within the U.S., shutting offices and schools, Best Buy tried to stay its doors open. It saw a burst of demand as thousands of individuals began to line up home offices, buy supplies to assist their kids with remote learning and upgrade kitchen appliances. But by mid-April, it had been hard to stay its customers and employees safe because the numbers of individuals with Covid-19 ticked higher. Best Buy announced plans to shut its stores to customers, switch to curbside pickup only and furlough about 51,000 employees.
The number of cases was rising rapidly in cities like ny and Detroit. The pandemic brought global auto production to a standstill and pack up U.S. facilities, most of which remain closed. Consumers focused on the bare essentials, stocking abreast of groceries, prescriptions, cleaning supplies and other home items like toilet tissue .
Having a business model which is flexible and adaptable was already vital during a world which is very globalized and competitive with constant technological change. it’s 10 times as important immediately .
Kenneth Rogoff
Professor of economics, Harvard University
The abrupt change cost automakers billions. Ford tallied $2 billion in losses within the half-moon , and it expects the pandemic-related losses are going to be even larger within the second quarter. It forecast an adjusted pretax loss of quite $5 billion. Fiat Chrysler burned through about $5.5 billion within the half-moon . General Motors managed to report a $294 million profit and a cash burn of only $903 million for the quarter, $600 million of which was associated with Covid-19.
U.S. airlines within the quarter ended March 31 swung to their first losses in years. U.S. business and leisure travel came to a near standstill. many of us were crouched at their homes, venturing bent the grocery or the pharmacy, but little else. Spending patterns changed, as they contemplated an uncertain future.
Urgent action
The pandemic and measures to prevent it from spreading upended lifestyle and sent companies scrambling to chop costs and reduce headcounts, the other of what many of them were planning at the beginning of the year.
Airlines that were gearing up for strong business and leisure travel this year did an about-face. aviation demand fell to rock bottom levels since the 1950s, before the jet age, consistent with Airlines for America, which represents the most important U.S. carriers, including Delta, American, Southwest and United.
U.S. airlines slashed flights, idled about half their planes, froze hiring and asked their employees, which numbered quite 750,000 in March, consistent with federal data, to volunteer for unpaid or partially paid leave. Thousands signed up and executives encouraged more to imitate . Carriers also rushed to boost new debt. They started receiving portions of $25 billion in federal payroll grants and loans last month that need them to not lay off or cut the pay rates of workers through Sept. 30, but warned they expect to emerge smaller airlines. They also expect to be ready to receive a part of another $25 billion in federal low-interest loans.
For companies that were still seeing demand, it had been not business as was common . Modifications had to be made to guard workers and customers. Supermarkets, pharmacies and other stores selling essentials reduced hours to permit employees overtime to wash and stock shelves that were quickly stripped by stockpiling customers.
Walmart, which is already the most important private sector employer within the country, had to rent 200,000 additional employees in its stores, distribution and fulfillment centers to stay up with demand and fill in workforce gaps as some employees got sick or took faraway from work due to the extra risk or lack of childcare.
And Target halted the beginning of all new store renovations, saying they’d be too disruptive. It scrapped plans for a record expansion of small-format stores, designed for dense urban neighborhoods like in San Francisco or ny City. It delayed its addition of fresh foods and alcohol to its pickup and drive-up services.
Target wasn’t alone in scaling back growth plans. Many companies also took drastic measures to remain afloat during the pandemic. Stock buybacks were halted. Dividends were suspended. Executive pay was cut. Employees were furloughed. Credit lines were drawn down. Financial outlooks were pulled.
Some made sharp pivots to new business models. Panera Bread, for instance , began selling yogurt, fresh produce and other groceries as demand for typical restaurant fare like soups and sandwiches plummeted.
Chipotle Mexican Grill and Starbucks said they saw a surge in loyalty program members as consumers downloaded their apps to order takeout or delivery. Both companies have heavily invested in technology in recent years, a technique that’s helped them reach customers even at locations that lack drive-thru lanes.
While digital orders haven’t insulated either company from sharp sales declines, the two have outpaced the broader industry. But trying to draw in cash-strapped customers with full pantries comes at a price . Chipotle has offered free delivery since mid-March, which can weigh down profits. Delivery orders also squeeze restaurant margins due to extra packaging to safeguard food and drinks and therefore the hefty commission fees paid to third-party delivery providers on every order, as Starbucks told investors last month.
For Yum Brands’ Pizza Hut, the pandemic is finally helping the struggling company shed its reputation as a dine-in pizza chain. Pizza Hut has tried to grow its digital and delivery sales as fewer customers want to eat their pizzas inside its restaurants.
“This three-month period we’re in immediately , basically, we’re gonna have three years worth of changes in our business, and it’s accelerating our plan for Pizza Hut,” Yum CEO David Gibbs told analysts last month.
Airlines facing a scarcity of passengers started scheduling flights that were carrying only cargo. For American Airlines, they were its first cargo-only flights since 1984. And General Motors began making ventilators.
Rogoff, the economist and Harvard professor, said companies will need to be nimble to weather what’s likely to be a years-long economic downturn.
“Having a business model which is flexible and adaptable was already vital during a world which is very globalized and competitive with constant technological change,” he said. “It is 10 times as important immediately .”
A long shadow
As stay-at-home orders lift in parts of the U.S. and therefore the economy begins to reopen, companies are previewing how they’ll adapt to and operate during a changed world.
Millions of Americans have tighter budgets after layoffs or pay cuts. Some have new aversions, like fear of getting to restaurants or grocery stores. and lots of have heightened expectations for safety.
“I don’t think we’re all getting to stand 6 feet apart forever, but i feel there are getting to be new norms about not getting to work if you’re not feeling well and expectations for retail stores, entertainment venues and hotels to make sure high-quality standards for cleanliness,” said Steve Barr, a consumer markets leader for PwC.
Companies are already adopting new policies to stop spread and put customers’ comfortable .
Some grocers, including Costco, now require all customers to wear masks. And Best Buy has reopened many its stores to customers — but only by appointment.
U.S. auto dealers, many of which are small businesses, have moved to online sales during stay-at-home orders, something many dealers have resisted for years over fears about it hurting their traditional showrooms. They’ve also increased vehicle delivery options and established touchless delivery protocols.
Ride-hailing companies Uber and Lyft would require drivers and passengers to wear face masks . At Hilton hotels, housekeepers will put a seal on doors to point to guests that the space has been vacant since its cleaning.
At airports, airlines will distribute masks and need both passengers and employees to wear them. United this month plans to check touchless kiosks at airports. Frontier Airlines will check travelers’ temperatures to detect fevers, a standard symptom for Covid-19, the disease caused by the coronavirus.
When movie theaters reopen, AMC Entertainment may check customers’ temperatures, the company’s CEO Adam Aron told CNBC. Another movie chain, Cinemark, said it’s going to sell every other reserved seat in theaters or restrict sales to 50% per theater to permit for families to take a seat together while social distancing.
I don’t see the strategic imperative in cancelling growth. If you follow everything the lawyers tell you to try to to , everything would freeze.
Richard A. D’Aveni
Professor of business strategy, Dartmouth College’s Tuck School of Business
The pandemic has turned some winners into losers.
Home-sharing giant Airbnb has fallen out of favor as travel demand plunged after shelter-in-place orders were implemented round the world and airlines cancelled much of their international service. the corporate had planned to travel public in 2020. Now, it’s processing refunds and last week announced it might lay off nearly 1,900 employees, or 25% of its workforce. Its valuation has plummeted from $31 billion in March 2017 to $18 billion by the top of April 2020.
On the opposite hand, Peloton shares have surged. Investors that when ridiculed the corporate as a “bubble stock,” have seen new relevance in its pricey exercise equipment and virtual workout classes as trips to the gym and therefore the spinning studio seem less appealing.
For some companies, the crisis will tighten capital spending. For others, it’ll force spending in new areas.
In the auto industry, research firm IHS Markit expects worldwide vehicle sales to say no 22% this year to under 70 million units, led by a 26.6% fall within the U.S. to 12.5 million units, compared with a year ago.
Scarred by the crisis, companies may speed up investments in automation so work are often done by machines rather than people.
“Coronavirus can’t kill machines,” said Richard D’Aveni, a professor of business strategy at Dartmouth College’s Tuck School of Business.
Rogoff said businesses may need to spend money on restructuring. for instance , he said, they’ll move their offices outside of cities hard-hit by the coronavirus to areas where they will have larger campuses where people opened up or invest in technology that accelerates the fulfillment of online orders, as people’s shopping behaviors shift.
Stores of the longer term may look different, too, Barr of PwC said. even as airports added room for security after 9/11, he said grocery stores and other retailers could also be built to permit customers’ more personal space and supply greater flexibility or safety during a similar crisis.
Even after the pandemic fades, executives may have a more conservative approach to expansion and the spending required. But if they’re too cautious, it could hurt them, said D’Aveni.
Even after the pandemic fades, executives may have a more conservative approach to expansion and therefore the spending required. But if they’re too cautious, it could hurt them, said D’Aveni.
He said companies could miss opportunities if they’re too cautious.
“I don’t see the strategic imperative in cancelling growth,” he said. “If you follow everything the lawyers tell you to try to to , everything would freeze.”
Rogoff said the economic downturn triggered by the pandemic will likely cast an extended shadow. He said he expects to ascertain a shift faraway from globalization as travel becomes more complex and fewer appealing and as companies tighten control over their supply chain.
