Battling the pandemic speeds up business changes

The closures and restricted working brought on by governments combating the pandemic are accelerating a number of business trends.

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  1. Charles Stanley

Before the pandemic struck, high streets were already under pressure, the digital revolution was gathering pace and green change dominated the agendas of European governments. Global trade was under attack and a new Cold War was brewing between China and the US.

On the high streets many shops and retail chains were struggling. High rents, staffing costs and stock requirements made it increasingly difficult for the shop to compete with online business showing goods through an internet catalogue and holding concentrated stocks in a limited number of warehouses.

Customers on the web do much of the work to purchase goods that a shop assistant usually does in the physical store. As a result, established retail businesses were setting up their own online competitor to themselves, adding the costs of an online provider to the costs of the traditional business.

Rents were starting to fall. Retail chains were mapping out plans to reduce the number of stores in their chain and to switch more of their activity to online. Argos joined J Sainsbury to eliminate many stores and use Sainsbury's stores with large car parks to deliver click and collect. Marks and Spencer decided it had to cut the number of outlets. Some such as Toys “R” Us and Debenhams found their way into administration.

Non-food retail in crisis

The lockdown has damaged cashflows badly for non-food retailers. It makes it much likelier that weak chains will go bankrupt, and more chains will decide on a substantial slimming down of their shop estate. They will be looking for lower rents for the stores that remain. This, in turn, places big pressures on property companies.

Shop properties are still expensive compared to warehouses or offices. Property companies will be reluctant to let their tenants go, but many tenancies will be terminated by companies going into voluntary liquidation if landlords do not respond positively to demands for both lower rents and fewer shops by major retailers. Meanwhile, relatively cheap warehouse property will continue to do well, eroding the large gap between traditional shop rents and warehouse rents for online retail execution. Three months of no revenues followed by impaired revenues will force a much faster slimming of the high street, with the need to convert space to other uses.

The fate of the office is less clear, but the direction of travel is towards more flexible and home-based working. There are advantages in this for employers. If people can prove they are as productive or even more productive working from home leaving behind the dead time of commuting, more sceptical employers will be persuaded to have more staff working in these flexible ways. The most talented may insist on it.

Once it becomes established that it can be a good way to establish a superior brand as an employer, capable of recruiting the best, there is more of a case to adopt it. Existing teams may also express stronger views as companies think through the end of lockdown, seeking a more flexible approach to where and when they do their work, as long as they do it and do it well.

An incentive for talent

If employers become convinced that they can supervise and motivate people who do not come into the office every day, then they can think about less office space. Hot desking will return as the virus recedes. Offices could become centres for a limited group of core personnel, and a fluctuating group of homeworkers who day-to-day are working from their homes or cars using remote technology as they visit clients and customers, or suppliers or whoever they have to deal with. This will mean less office space and lower rents.

Some firms may also appreciate the advantages of having a main office away from the centres of expensive large cities, where commuting and office costs are highest. If more people work from home, we should expect more to want to live outside big cities, in larger properties with gardens, with implications for relative residential property values and construction priorities. Some companies will realise substantial cost savings, throwing the cost of workspace onto the employee who pays for their own home.

Cashless society?

The banks will use the virus to give a further push to online and cashless models of banking. For some years they have sought to avoid having to meet their customers, and more recently have tried to reduce the number they need to talk to on the phone. Social distancing gives a further big push to automating the contact and getting most customers to be unpaid employees doing the banking work on the banks systems with little or no staff engagement. This will lead to more branch closures and a further retreat from the High Street, increasing the dislike of banks by some of the public.

The big oil companies have been damaged by the temporary collapse of demand and large loss of revenue. It is likely to accelerate their plans to cut their dependence on oil products in the name of a green vision, as they seek favour with investors and governments preoccupied by reducing carbon dioxide emissions. We see BP writing off part of its assets based on the belief that the future oil price will be materially lower as they think part of the lost demand for oil products will not be regained.

The winners of the recent events will be the technology companies, and the companies that have been best at applying remote technologies to their business models. The new world will see quicker adoption of online retail, services and entertainment. Allied to robotics, automation will intensify at home as well as in the factory. It will be apps for everything as electronic personal organisers and helpers guide people through an online world. Investment needs to reflect these patterns. High multiples go to companies who are thought to be the future.

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