- The coronavirus pandemic has forced many U.S. companies to reverse expansion plans they had at the start of the year.
- Job losses have piled up, sending the U.S. unemployment rate to nearly 15%.
- Some executives expect a recovery to take years.
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 around the country had never been busier. Airline employment continued to climb to the highest levels in more than 16 years. Retail sales in December were up for a third straight month. And consumer spending reached an annual record of $13.28 trillion in 2019.
Then coronavirus hit.
The blow has been swift and vast.
The country’s unemployment rate, at a roughly 50-year low in February, is now at levels not seen since the Great Depression. The U.S. lost a record 20.5 million jobs in April — and many 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. Instead of 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 likely to trigger an economic hangover that could last for years. It’s also prompted soul-searching as businesses plot out how they can bounce back. And it could cast a long shadow, permanently changing how companies spend money, sell goods and run their businesses, as new requirements spring up that could add to their costs.
Kenneth Rogoff, an economics professor at Harvard University and former chief economist at the International Monetary Fund, said the pandemic is a stark reminder that “out-of-the-box shocks happen.”
“You have to avoid drinking the Kool-Aid,” he said. “You can find lots of articles from the investment banks, from economists about how we’re in this remarkable period of low volatility. ‘Isn’t it wonderful?’ without any kind of sense of perspective that just because the market isn’t predicting a shock doesn’t mean that it’s not going to happen.”
A business plan called pandemic
Automakers saved billions in cash in preparation for an economic downturn — but even companies in the cyclical industry hadn’t predicted the extent of financial 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 outbreak in China, it wasn’t immediately clear how disruptive the coronavirus would become around the world.
Boeing’s CFO Greg Smith, on an earnings call on Jan. 29, called the impact of Covid-19 on air traffic in 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 of us know just how quickly everybody will be getting back to work.” Both companies have announced job cuts in the last few weeks as airline customers for new planes post losses.
Before the disease spread globally, the impact of the pandemic began to show up in the form of supply chain constraints that made it harder to import goods or parts from China because of factories that were shut down there. Apple, for example, said it expected to have 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 such as computer monitors and video game systems. But the big-box retailer’s CEO Corie Barry said the company’s merchants knew how to deal with the inventory challenges because they dealt with the uncertainty of tariffs.
As the coronavirus began to spread in the U.S., shutting offices and schools, Best Buy tried to keep its doors open. It saw a burst of demand as thousands of people began to set up home offices, buy supplies to help their kids with remote learning and upgrade kitchen appliances. But by mid-April, it was hard to keep its customers and employees safe as the numbers of people with Covid-19 ticked higher. Best Buy announced plans to close 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 New York and Detroit. The pandemic brought global auto production to a standstill and shut down U.S. facilities, most of which remain closed. Consumers focused on the bare essentials, stocking up on groceries, prescriptions, cleaning supplies and other household items like toilet paper.
The abrupt change cost automakers billions. Ford tallied $2 billion in losses in the first quarter, and it expects the pandemic-related losses will be even larger in the second quarter. It forecast an adjusted pretax loss of more than $5 billion. Fiat Chrysler burned through about $5.5 billion in the first quarter. 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 related to Covid-19.
U.S. airlines in the quarter ended March 31 swung to their first losses in years. U.S. business and leisure travel came to a near standstill. Many people were hunkered down at their homes, venturing out to the grocery store or the pharmacy, but little else. Spending patterns changed, as they contemplated an uncertain future.
The pandemic and measures to stop it from spreading upended daily life and sent companies scrambling to cut costs and reduce headcounts, the opposite of what many of them were planning at the start of the year.
Airlines that were gearing up for strong business and leisure travel this year did an about-face. Air travel demand fell to the lowest levels since the 1950s, before the jet age, according to Airlines for America, which represents the largest U.S. carriers, including Delta, American, Southwest and United.
U.S. airlines slashed flights, idled about half of their planes, froze hiring and asked their employees, which numbered more than 750,000 in March, according to federal data, to volunteer for unpaid or partially paid leave. Thousands signed up and executives encouraged more to follow suit. Carriers also rushed to raise new debt. They started receiving portions of $25 billion in federal payroll grants and loans last month that require them not to 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 able to receive part of another $25 billion in federal low-interest loans.
For companies that were still seeing demand, it was not business as usual. Modifications had to be made to protect workers and customers. Supermarkets, pharmacies and other stores selling essentials reduced hours to allow employees extra time to clean and stock shelves that were quickly stripped by stockpiling customers.
Walmart, which is already the largest private sector employer in the country, had to hire 200,000 additional employees in its stores, distribution and fulfillment centers to keep up with demand and fill in workforce gaps as some employees got sick or took off from work because of the additional risk or lack of childcare.
And Target halted the start 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 New York City. It delayed its addition of fresh food 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 stay 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 example, 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 strategy 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 attract cash-strapped customers with full pantries comes at a cost. Chipotle has offered free delivery since mid-March, which will weigh on profits. Delivery orders also squeeze restaurant margins because of extra packaging to safeguard food and drinks and 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 right now, 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 dearth 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 have 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 very important in a world which is highly globalized and competitive with constant technological change,” he said. “It is 10 times as important right now.”
A long shadow
As stay-at-home orders lift in parts of the U.S. and the economy begins to reopen, companies are previewing how they’ll adapt to and operate in a changed world.
Millions of Americans have tighter budgets after layoffs or pay cuts. Some have new aversions, such as fear of going to restaurants or grocery stores. And many have heightened expectations for safety.
“I don’t think we’re all going to stand 6 feet apart forever, but I think there are going to be new norms about not going to work if you’re not feeling well and expectations for retail stores, entertainment venues and hotels to ensure high-quality standards for cleanliness,” said Steve Barr, a consumer markets leader for PwC.
Companies are already adopting new policies to prevent spread and put customers’ at ease.
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 will require drivers and passengers to wear face masks . At Hilton hotels, housekeepers will put a seal on doors to indicate to guests that the room has been vacant since its cleaning.
At airports, airlines will distribute masks and require both passengers and employees to wear them. United this month plans to test touchless kiosks at airports. Frontier Airlines will check travelers’ temperatures to detect fevers, a common 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 may sell every other reserved seat in theaters or restrict sales to 50% per theater to allow for families to sit together while social distancing.
Home-sharing giant Airbnb has fallen out of favor as travel demand plunged after shelter-in-place orders were implemented around the world and airlines cancelled much of their international service. The company had planned to go public in 2020. Now, it’s processing refunds and last week announced it would 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 end of April 2020.
On the other hand, Peloton shares have surged. Investors that once ridiculed the company as a “bubble stock,” have seen new relevance in its pricey exercise equipment and virtual workout classes as trips to the gym and 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 decline 22% this year to under 70 million units, led by a 26.6% fall in 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 can be done by machines instead of 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 have to spend money on restructuring. For example, he said, they may move their offices outside of cities hard-hit by the coronavirus to areas where they can have larger campuses where people spread out or invest in technology that accelerates the fulfillment of online orders, as people’s shopping behaviors shift.
Stores of the future may look different, too, Barr of PwC said. Just as airports added room for security after 9/11, he said grocery stores and other retailers may be built to allow customers’ more personal space and provide greater flexibility or safety in 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.
He said companies could miss opportunities if they are too cautious.
“I don’t see the strategic imperative in cancelling growth,” he said. “If you follow everything the lawyers tell you to do, everything would freeze.”
Rogoff said the economic downturn triggered by the pandemic will likely cast a long shadow. He said he expects to see a shift away from globalization as travel becomes more complex and less appealing and as companies tighten control over their supply chain.
“2008 brought radical changes,” he said. “This is worse than 2008.”