COVID, let alone a war sparks business innovation

23 Mar 2022

Covid sparked record new business starts across Australia in the last two years, which reaffirmed for me just how resourceful we humans are when confronted with disaster. My hairdresser had used her COVID‐19 lockdowns to think and reinvent her life. As a result, she started her own business. Some did not have time to think, barely hanging on by a thread or succumbing. But many thousands of business owners used the pandemic to reimagine their businesses.

With all States opening again we have witnessed the economy emerge from hibernation. Hospitality, the arts, the fitness sector and many more industries are adapting and coming back to what they do best ‐ providing ‘in person’ services to their customers. However, as we emerge, we can reflect on some of the changes and what they mean for business.

Most people have a general understanding about the economic impacts of COVID. Some know it resulted in Australia’s largest ever stimulus and can recognise the efforts of Governments to pump enormous amounts of cash into the economy. ‘Rivers of gold’ have kept the economy strong, with Federal and State Governments providing cash stimulus of over AUD$300 billion since the beginning of the pandemic. This is unprecedented in Australia’s history. Staggering liquidity in the economy has set off takeover‐mania and a scramble for assets. Throughout, banks have worked determinedly to support businesses.

Many business owners we are talking to are exploring different approaches and adapting to navigate this new world and for many that will be crucial if they are to prosper going forward. Many have used the time to restructure their capital to give them a path to growth.

Let’s look at some of the impacts, opportunities and threats for businesses as we emerge from the pandemic and then predict the top trends to watch going forward. As always, there have been winners and losers.

• Tourism is the key area in which we have seen stress. More than 300,000 Australian businesses rely on tourism. Borders have been closed and international tourists have not come for almost two years. With all borders now open, some operators have managed to survive with limited numbers of domestic tourists. Most expect tourism to rebound strongly when borders reopen.
• Restaurants, particularly CBD restaurants have suffered painfully and dramatically, particularly in states where the lockdowns were prolonged. Many cleverly changed their business model to home deliveries and selling branded produce through retailers.
• Australia’s significant international education industry has been severely impacted, with virtually zero overseas students for almost two years and uncertainty about when they will return in pre‐COVID numbers. Almost AUD$20 billion of value has been wiped from the sector in 18 months. This will take years to restore.
• We know that the arts sector has been severely affected with many companies and venues fighting for survival. This also applies to the ‘event industry’ which has seen a stream of work cancelled, or severely hampered by COVID protocols. The fitness industry all but ground to a halt with the closure of most gyms.
• Elective surgeries were stopped to ensure health systems could cope with demand – forcing Australians to live with minor ailments and many medical businesses to cut their costs.
• Aged care has been impacted with many families delaying the move into aged care as a caution with concerns about the virus.

The seismic shifts businesses are now pondering include the re‐emergence of manufacturing in Australia, increases in real wages and energy prices, increasing inflation and interest rates, labour shortages and significant supply chain disruption.

Just the effect of increased shipping costs, combined with shortages of building materials, with people at home and time on their hands, building and home renovations costs have increased exponentially. The dramatic increase in global shipping costs by up to ten fold, coupled with critical supply issues out of China and other countries, sees predictions of a manufacturing resurgence in Australia. Many products now becoming competitive to manufacture here, and smart businesses are now relooking at this.

Other non‐COVID factors have emerged concurrently, such as the dramatic increase in energy prices. Increasing inflation will mean that business input costs have increased and if businesses cannot pass on those costs, profitability will be impacted.

Savvy companies, which had to starve during COVID, have re‐emerged with leaner costs and more efficient operating models – these are the ones likely to survive and prosper in the new environment.

If owners didn’t test their key assumptions during this crisis, then they probably never will. For those with long memories, the Piper Alpha oil rig explosion in 1988, led to the expression, a ‘burning platform’. Events such as a war and COVID force dramatic decisions and change. If ever there was a ‘burning platform’ for businesses, it is now. For many businesses, it’s now or never.

Ian Carson
Tanarra Restructuring Partners