Are the worst of COVID-19 business impacts over or are they yet to come?

Every now and then it is useful to reflect on where we have come from.  A year ago, we were entering into the great unknown of the impacts of the COVID-19 pandemic and while we were certainly worried about the health implications, it was also the business and job impacts that were front of mind too.

Through a range of Federal and State governments measures and pivoting by businesses, largely the business impacts have been kept to a minimum in most industry sectors, though varying.  Parts of the retail, hospitality and tourism sectors have struggled, but not all parts. The same even for my accounting industry.  Tax and some advisory parts have had increased workloads as they have helped clients navigate the various measures. Conversely, and maybe surprisingly, the insolvency sector is down around 55% on ‘normal’ years.  There has been a ‘kicking the can down the road’ impact due to various measures supporting businesses.

A year on from the start of the pandemic, there seems a feeling the worst is over, and the country is returning to some normality.  There seems to have been a reset of priorities, a realisation that everyone’s situation is different, but these differences can be accommodated within a business, and being flexible and adaptable is a valued attribute.  There is even a high level of consumer confidence. While people saved during 2020, they are starting to spend in 2021.  House prices increased in record amounts in February – 2.1% the highest monthly increase since 2003.  People are updating their houses with new appliances and try and get a tradie for a renovation at the moment.  So overall it would seem the worst of the COVID-19 business impacts are over.

But I am a little more cautionary that the worst is over.  Four industries I am particularly concerned about are: –

• construction,
• accommodation
• food services
• tourism

This was highlighted in the insolvency actions in Victoria in February. Also, the number of insolvency actions in Victoria doubled from January 2021 to February 2021.

Construction

In Victoria, there were around 60,000 new homes built annually pre-pandemic.  Around 75% were bought by immigrants.  With international borders not looking like opening this year this part of the market is non-existent. Added is that Australians cannot travel abroad, and monies saved for travel can be redirected into house purchases, and historically low interest rates.  What we are seeing at the moment is this gap being taken up by Australian resident first home buyers.  Both State and Federal governments have recognised the potential gap and have a program of incentives to encourage resident first home buyers. However, what this is going is doing is bringing forward new home builds and renovations for Australian residents. New dwelling approvals increased 38% from January 2020 to January 2021. I do not think this is sustainable and I expect in the next few months this could start to taper off, especially as it will have been at least 15 months of closed borders. Even when the borders reopen there will be a delayed restart of the immigrant house build market.  In fact, this has started with January seasonally adjusted approvals falling.

Interest rates being historically low have only one place to go – up.  Low interest rates fuel housing markets in Australia, but do not seem to aid business investment and wage growth. Housing affordability will decrease putting another squeeze on the housing market. ANZ economists recently commented that the regulators may apply macroprudential regulations later in 2021 such as debt to income ratios and loan to valuation ratios.

The is a supply chain issue for materials too that affects the smaller players the most as they either are delayed by lack of materials or have to finance holding costs of materials.

HIA concur and in their summer forecast said:

“The combination of the restrictions on migration, the post-HomeBuilder slump and changes in demographics are expected to lead to a decline in new home construction from 2022 and leaves a very pessimistic outlook for home building in 2023. An increase in interest rates is also possible from 2023 onwards and as was observed after the GFC, this will have an immediate adverse impact on housing.”

Construction is an industry that historically makes up about half of all voluntary administrations annually.  Companies that will survive will be the ones securing their balance sheets and start now planning for the impacts of a downturn.

Accommodation

The accommodation sector is also reliant on open borders – both domestic and international. Again, with the likelihood of international borders remaining closed for some time, the reluctance for domestic across State border travel, and the increase in videoconferencing and working from home, the accommodation sector is going to face headwinds for some time. Three other future impacts I see impacting the accommodation sector.

Firstly, there was a large number of new hotels that had commenced, or were scheduled to commence, building pre-pandemic.  This was based on forecasts need back in 2019, and these hotels are largely still going to be built.  This is going to put greater supply pressure into the market, that will result in downward price per room pressure, and also pressure on older accommodation that has not updated their premises.  I predict the result will be those hotels that cannot modernise will not survive, even when the borders open.

Second, hotel design and operations will change. Touchless ‘everything’ is heading our way, not only to reduce costs, but to enhance service delivery, and security for guests.  There will be a drive to eliminate touchpoints from room keys, do not disturb hangers, bathroom fixtures, payments etc.

Third, there will be a trend toward self-sufficiency.  There will be an emphasis on private amenities such as kitchenettes, private balconies, laundry, individual working pods in business centres, and in room exercise equipment.

I fear the accommodation businesses that do not look forward to what the post pandemic market expects will face further troubles when the borders reopen.

Food services

A few weeks ago, a café in Melbourne closed after the third Victorian lockdown.  Their sales for the day were $350 whereas pre-pandemic they were $10,000 a day.  Cafes and restaurants have been hanging on by their fingernails.  Victoria went into lockdown with just a couple of hours’ notice the Friday before Valentine’s Day and Chinese New Year – massive weekend for restaurants.  Food bought in anticipation was given away and the costs will never be recovered by these already struggling businesses.

Particularly impacted will be CBD cafes and restaurants that are likely to suffer the effects of the pandemic for many years to come.  It is unlikely that in the next few years the daily CBD population will return to pre-pandemic levels directly impacting sales turnover.  Some CBD workers will work from home some if not all the time. Others will move to the regions.

Costs are going to be higher in a sector that have high costs and low margins. Deferred rents need to be repaid. Cleaning and safety costs will increase.  Technology costs will increase as they move to online payments, bookings, and sales.  Working capital required will need to increase as a protection against further shutdowns.  Staff costs are going to be higher while the borders are closed, and the seasonal worker and backpackers stay away.  Supply costs may increase as a premium for security of supply is applied.

Tourism

Both inbound and outbound tourism has been decimated with border lockdowns – both international and domestic.  Even when borders reopen there is going to be a period where travellers will need to regain trust that the borders will not close, and they will be safe to travel.

With Jobkeeper and rent and loan repayment deferrals ending at the end of March further pressure will be placed on this sector. Tourist businesses and regions that rely predominately on overseas tourist will be impacted the most.

In Australia and New Zealand there has been a push to get domestic tourists to support these regions. This is a short-term measure and as soon as the border opens these people, with pent up demand, will travel oversees again.

The infrastructure carrying costs for the tourist businesses is high – think if the carrying costs for tour boats, animal feed at zoos, holding costs for theme parks etc.

Operators in Queenstown, New Zealand ‘managed’ through the summer with the New Zealand domestic tourists. Domestic tourists also spend less than overseas tourists so while the physical numbers improved the daily spend was still low.  Most businesses are now wondering what they will do for the next few months until the ski season begins and, (they are crossing their fingers) the travel bubble with Australia starts.

The fear is that by the time overseas tourists return they will not have the operators and attractions that there was pre-pandemic.

If I had one message for businesses in these four industry sectors it is to stop thinking about, and making decisions based on, today and tomorrow.  Make decisions and take action today, and do so on the medium – long-term outlook.

You would never (or never use to) turn up to an airport for a holiday without a plan, having done some research, saved and budgeted, and have a contingency arrangement. Start today and go through this process for your business and make decisions not based on today or tomorrow.