By Jeff Tryka, CFA, Senior Director
I thought about titling this piece “A Brave New World,” but I don’t think we are entering a nearly as frightening nor dystopian world that would require a nod to Aldous Huxley. Rather, I think we are approaching a “gale of creative destruction,” more akin to the ideas of Joseph Schumpeter. In this light, I expect we will see a number of businesses cease to function as they once did, facing either their conclusion or their entrance into something new. With this backdrop, we will focus on one industry, leisure and hospitality, which will likely face the initial challenges of this gale, as states and cities begin to reopen for business. Through our review of this industry, we intend to offer lessons that could also be useful to other industries facing similar dilemmas in the later phases of the cycle.
The Leisure and Hospitality Industry
One industry that has received a lot of coverage over the pandemic is the broad leisure and hospitality industry, which includes a range of businesses from restaurants, hotels, movie theaters, live entertainment venues, sporting events, cruise lines and recreational vehicles, as well as the tangential inclusion of travel services and airlines.
Some of these businesses, like restaurants, are facing significant near-term challenges. Many guidelines for reopening business at the state and local levels are stipulating that restaurants may reopen but only at 25-50% of pre-pandemic capacity to safely allow for social distancing. Coping with the potential loss of 50-75% of revenues may be an insurmountable challenge for smaller restaurants with fixed occupancy costs, but many creative businesses will rise to the occasion. There is a myriad of other considerations that might not even fly on the radar of these business owners. For example, within the Texas rules for reopening, reusable menus are prohibited as are condiments designed for more than one guest (no more ketchup bottle on the table; everything must now be single-serve packets).
Hotels will also be facing additional costs for cleaning between guests. In the past few years, many hotel operators have opted for less thorough cleanings of rooms between guests, choosing instead a weekly deep cleaning to reduce costs. These practices will likely be reversed as consumers and local health departments demand more stringent procedures. Other areas of the hotel business might also see significant changes beyond what was described for the aforementioned restaurants. Swimming pools and fitness centers may be a thing of the past at hotels, potentially along with bars and happy hours.
Entertainment venues will likely also see significant changes. It seems unlikely sporting venues built on packing in spectators will be able to function with six feet of space between fans (nor does it seem fans would much appreciate cheering and hearing their own echo). Movie theaters are facing challenges on two fronts—the first being the increased social distancing and related significant decrease in seating capacity that entails, while the second is more long-term. Theaters have seen significant competition from alternative entertainment, initially from home video and now through a vast array of streaming services that can entertain families from the comfort of their own homes. This recent pandemic is sure to create more competitive challenges across the traditional industry. The outlook is even more concerning for live theater, particularly community theaters (a note of bias here, as I have been a supporter of my local community theater for a number of years), which enhances the culture of communities large and small throughout the country. Small theaters may not be able to cope with the significant loss of seating capacity for ticket sales.
Of course, there will also be winners as we emerge from the pandemic. Some businesses may emerge as winners simply due to the fact that their business aligns with shifting consumer concerns and preferences coming out of the pandemic. The RV industry is one that may benefit greatly as consumers reconsider their vacation options, opting for the safety and comfort of bringing their own homes with them on vacation. A segment of consumers may want to control their own destinies and decide that sleeping in their own beds, with their own linens, is a safer alternative than boarding a plane and sleeping in a rented room.
Other businesses will win by adapting to the new normal we see emerge, just as our team at Lambert has adapted to remote workspaces, webinars and video conferences. These businesses will fully embrace the creative destruction concept and change the way they operate for long-term success. We may see some restaurants evolve into commissary kitchens to accommodate the increased demand for delivery options. Others may expand outdoor seating areas which might help with added social distancing. We may also see some businesses go retro with renewed emergence of drive-in restaurants and movie theaters. In my town, there is a drive-in root beer stand that has been doing tremendous business since the advent of COVID-19. Drive-in movies may be another potential alternative to traditional movie theaters—after all, if we can do drive-in worship services, we could certainly do movies as well.
Ultimately, humans are social creatures. As such, we will continue to eat together, play together and enjoy life together. We will adapt and find ways to dine out, enjoy our favorite sporting events and overall entertain ourselves, and the businesses that can find a way to do it safely and efficiently will no doubt emerge as the winners in the post-COVID world.