It took 12 months for France’s top 40 listed companies to generate a combined €82bn in net profits last year. And only six months for those profits to evaporate in the heat of the pandemic. An analysis by accounting firm EY shows France’s CAC40 companies produced a combined net zero profit in the first half of this year. This is just one startling statistic in a long list highlighting the devastation wrought by Covid-19 on the global economy and the businesses that keep it going.
By April — just four months after the first recorded case of Covid-19 outside of China — 90 per cent of the world’s passenger aircraft had been grounded. Global manufacturing output fell by 20 per cent in the same month, according to the World Bank. And between April and June the equivalent of 400m full-time jobs had been lost. The OECD predicts the world economy will contract by 4.5 per cent this year, before returning to growth in 2021.
But when that growth returns, will it be driven by the same forces or has the virus fundamentally changed consumer spending patterns? Which sectors will be the winners and which the losers from this unprecedented upset to the global economy?
At first glance, the winners seem obvious. They are the tech companies — such as Facebook, Amazon, Microsoft and Google — which have kept many people connected, shopping and in work even as they have been confined to their homes; the media streaming companies, whose catalogues of films have entertained millions unable to dine out, travel or go to the cinema; and the pharmaceutical companies racing to develop vaccines or treatments.
According to another World Bank study, countries that had suffered from Covid-19 (defined as having recorded at least 10 cases) saw a 46 to 77 per cent rise in information and communication services. Online purchases in the US are forecast to jump 18 per cent to $710bn, according to research group eMarketer, boosting other sectors such as logistics.
The losers without doubt have been the aviation, travel and leisure industries. The same World Bank study found a 67 to 79 per cent drop in demand for hotel and restaurant services in countries with at least 10 confirmed Covid-19 cases. It is harder to transfer a night at a hotel or a weekend in Paris to an online experience than it is to swap a night at the cinema for an evening of Netflix.
Yet the statistics on Covid-19 do not show the whole picture, argues Bahige El-Rayes, partner at management consultancy, Kearney. Not only will soaring unemployment affect consumer spending but the end of Covid-19 does not necessarily mean the end of uncertainty.
“We have a series of crises piling up on each other. We have uncertainty because of Brexit, recession and climate change,” he says. Consumers will be more discriminating about how they spend their money in any sector, even on technology. Jordan Strauss, a managing director at the business intelligence and investigations practice of consultancy Kroll, agrees. At the beginning of the pandemic Mr Strauss helped to set up the Covid-19 “heat map” — a dashboard showing the pandemic’s social and economic impact across 61 regions and dozens of sectors. Tracking public and regulatory reports, the heat map attempts to highlight the shifting trends of consumer and business behaviour in the wake of Covid-19.
The key takeaway, says Mr Strauss, is that anyone producing “deferrable” products “will get shellacked”. “Look a little below the surface and there is a lot of pain. There will be some really big winners, but everyone else will suffer the same fallout from a catastrophic economy.”
That applies to all sectors from tech and pharma, to hotels and travel, he says. Drug companies producing discretionary products — for example Viagra — could find consumers no longer have the desire to splash out on costly non-essentials. Smart watches may no longer be deemed as necessary as smartphones — now a vital tool of everyday life.
The value-conscious trend will be particularly painful in the travel industry, where higher-paying business customers account for a disproportionate share of profits. In the airline industry, for example, business travellers “drive between 55 and 75 per cent of the profit for top airlines but account for as little as 10 per cent of passengers”, says Rock Khanna, a senior partner at McKinsey.
But many have now discovered the benefits of stay-at-home video conferencing. A survey by McKinsey across 14 countries found 70-80 per cent of decision makers plan to increase the emphasis on digital and remote selling, rather than face-to-face interaction.
Any sector relying on corporate business “will have to figure out a business model that reflects a totally different demand profile”, says Mr Khanna. For hotels that could mean marketing rooms as temporary workspaces. In the aviation sector, the low-cost airlines have an advantage over the legacy carriers who struggle with costly, established working practices, say analysts.
Scott Davis, chief executive of Melius Research, a boutique equity research house, says many of the forces that are expected to influence consumers — such as the desire for sustainable products, the use of video conferencing or online retailing — were already under way before the pandemic. “This just forced it to happen faster,” he says.
The good news for those caught in the turbulence is that he sees some glimmers of recovery in the industrial world, which has had to reconfigure factories to ensure continued production even during the worst of the pandemic.
“The macro recovery is on pace and tracking ahead of expectations. Inventories have come way down and order books are pretty good,” he says. And when large swaths of the economy begin to recover, he adds, “it pulls everyone up with it . . . I am pretty encouraged”.
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