Coronavirus is shaking up business and consumer behaviour on a massive scale.
Both the public and private sectors are scrambling to slow the spread of the illness and contain COVID-19 infections. While the full economic consequences of this black swan event are still unclear, we know that the effects that the virus—and the drastic measures being taken to contain it—are already precipitating change across industries. Here are the top three ways Business Insider Intelligence and eMarketer analysts think the pandemic is set to impact telecoms and technology, digital media, payments and commerce, fintech, banking, and healthcare.
The outbreak of the coronavirus is posing a challenge to many businesses in mainland China and in Hong Kong, not least in terms of the impact on their ongoing and future commercial contracts. In order to aid businesses during these turbulent times, we have developed a pack to discuss some of the standard contractual issues that are facing businesses right now.
We hope that this pack provides helpful support.
The entire communication is prepared by law firms in Hong Kong and Shanghai, which are part of the KPMG Global Legal Services network. A week ago, Mark Canlis's restaurant in Seattle was offering a $135 tasting menu to a bustling dining room every night. Eileen Hornor's inn on the Maine coast was booking rooms for the busy spring graduation season. And Kalena Masching, a real estate agent in California, was fielding multiple offers on a $1.2 million home.
Then the coronavirus outbreak changed everything.
Today, Mr Canlis's restaurant is preparing to become a drive-through operation serving burgers. Ms Hornor is bleeding cash as she refunds deposits for scores of cancelled reservations. And Ms Masching is scrambling to save her sale after one offer after another fell through.
"Last week, I would have told you nothing had changed," she said. "This week, it has all gone to hell." For weeks, forecasters have warned of the coronavirus's potential to disrupt the American economy. But there was little hard evidence beyond delayed shipments of goods from China and stomach-churning volatility in financial markets.
Large and small businesses, which borrow heavily to run their operations, will find it harder to tap credit as the outbreak curtails economic activity. If companies are unable to tap credit to pay their rent, make payroll or finance other activities, it could force them to slash costs, lay off workers, pause investments and even declare bankruptcy. That, in turn, could worsen the recession that's now widely expected and affect the financial markets — already stressed from stock-market plunges — where investors buy and sell the debt issued by companies, making it even harder for companies to borrow.
"The economy is coming to a half of a dead stop," said Michael Greenberger, a professor at the University of Maryland Francis King Carey School of Law. Businesses are having trouble opening or getting customers to engage regularly, said Mr Greenberger, whose research focuses on financial stability. "All of these businesses are going to at some time have to re-up their loans, renew their loans, roll them over. With the decline in revenues, the ability to borrow money is going to be very problematic."
Such measures could ease a potential credit crunch for companies, which rely heavily on borrowing to function. Larger companies often issue bonds to investors or tap credit from banks to fund operations, refinance existing debt, build plants and even buy other companies. When the bonds are sold into the financial markets, credit rating agencies give them a letter grade, which signals their quality. Grades with As are the best. Relationships with B or C grades indicate a higher probability that investors will not recover their value, because the companies that issued them might stop making payments — but they provide better returns.
Interest rates have been so low in the past decade that even the shakiest companies have found buyers for their debt because investors were looking for higher returns. From 2009 until last year, corporate borrowing surged 60 per cent, to $9.3 trillion, for companies in the United States, according to the credit rating agency S&P Global Ratings. As of May, nearly $3.8 trillion was in corporate bonds rated BBB, at the low end of what qualifies as "investment grade." BBB-calibre bonds made up 17 per cent of the global corporate debt market in 2001 but now constitute more than half, according to BlackRock.
Nervous companies have begun drawing on lines of credit from banks, trying to create a buffer against the oncoming dry spell. Industries that rely on so-called consumer discretionary spendings, such as travel, airlines and retail, as well as companies with international supply chains such as autos and electronic goods makers, are more likely to be squeezed by the slowdown inactivity.
Hilton said earlier this month that it was drawing down a $1.75 billion revolving credit facility as a precautionary measure. Air France-KLM said on Friday that it tapped a similar $1.2 billion loan, giving it more than $6.1 billion of the total buffer. Other companies vulnerable to plummeting tourism, such as the Walt Disney Co. and SeaWorld Parks & Entertainment, took similar steps.
Oil and gas companies, already smarting from Saudi Arabia's oil price cut earlier this month, are now grappling with lower demand as people and businesses scale back. Having borrowed heavily from regional banks to finance fracking and drilling, dozens of these companies now face possible bankruptcy.
The intensifying demand for cash from companies — what Morgan Stanley analysts said last week had become "a full-blown liquidity scramble" — could strain the entire global financial system and also make it difficult for banks to manage their reserves.
Companies are also putting their merger-and-acquisition plans on hold — in the first quarter, the number of deals announced in the United States fell by 10 per cent, to 2,103, according to Refinitiv data. Contracts often require billions of dollars in financing, and companies that can postpone such plans are doing so, including Xerox, which said it put its efforts to acquire HP on hold to focus on the pandemic.
In our base-case scenario, continued spread within established complexes, as well as community transmission in new compounds, drives a 0.3- to the 0.7-percentage-point reduction in global GDP growth for 2020. China, meanwhile, continues on its path to recovery, achieving a near-complete economic restart by mid-Q2 (despite the current challenges of slow permissions and lack of migrant-worker capacity). As other geographies experience continued case growth, movement restrictions will likely be imposed to attempt to stop or slow the progression of the disease. This will almost certainly drive a sharp reduction in demand, which in turn lowers economic growth through Q2 and early Q3. Demand recovery will depend on a slowing of case growth, the most likely cause of which would be "seasonality"—a reduction in transmissions similar to that seen with influenza in the northern hemisphere as the weather warms. Demand may also return if the disease's fatality ratio proves to be much lower than we are currently seeing.
Regions that have not yet seen rapid case growth (such as the Americas) are increasingly likely to see more sustained community transmission (for example, expansion of the emergency clusters in the western United States). Greater awareness of COVID-19, plus additional time to prepare, may help these complexes manage case growth. However, complexes with less robust health systems could see the more general transmission. Lower demand could slow growth of the global economy between 1.8 per cent and 2.2 per cent instead of the 2.5 per cent envisioned at the start of the year.
Unsurprisingly, sectors will be affected to different degrees. Some sectors, like aviation, tourism, and hospitality, will see lost demand (once customers choose not to eat at a restaurant, those meals stay uneaten). This demand is mainly irrecoverable. Other sectors will see delayed order. In consumer goods, for example, customers may put off discretionary spending because of worry about the pandemic. Still, they will eventually purchase such items later, once the fear subsides and confidence returns. These demand shocks—extended for some time in regions that are unable to contain the virus—can mean significantly lower annual growth. Some sectors, such as aviation, will be more deeply affected.
In the pessimistic scenario, case numbers proliferate in current complexes and new centres of sustained community transmission erupt in North America, South America, and Africa. Our pessimistic scenario assumes that the virus is not highly seasonal and that cases continue to grow throughout 2020. This scenario would see a significant impact on economic growth throughout 2020, resulting in a global recession.
In both the base-case and pessimistic scenarios, in addition to facing consumer-demand headwinds, companies will need to navigate supply-chain challenges. Currently, we see that companies with strong, centralized procurement teams and good relationships with suppliers in China are feeling more confident about their understanding of the risks these suppliers face (including tier-2 and tier-3 suppliers). Others are still grappling with their exposure in China and other transmission complexes. Given the relatively quick economic restart in China, many companies are focused on temporary stabilization measures rather than moving supply chains out of China. COVID-19 is also serving as an accelerant for companies to make strategic, longer-term changes to supply chains—changes that had often already been under consideration.
Telecoms and Technology
The most apparent and most immediate business impact of the coronavirus pandemic has been a significant disruption to supply chains. Having originated in China, the region was struck as a large number of citizens contracted the disease, and many were forced into quarantine. This led to partial and full shutdowns of plants and factories, some of which were being used by prominent technology companies to manufacture their goods and products. For example, Apple experienced shortages on its iPhone supply as a result of the company's primary manufacturer, Foxconn, shutting down much of its production in China. Ultimately for Apple, this will lead to a significantly reduced forecast in iPhone shipments through Q1—by as much as 10%, according to estimates by Apple analyst Ming-Chi Kuo cited by MacRumors. And while companies often have contingency plans, which revolve around ramping up production in a region that isn't impacted, the rapid spread of the coronavirus across the globe makes it very difficult to pinpoint which areas would be least affected. Even then, the momentum and resources of the Chinese economy will not be easily replicated—"Made in China" initiatives have seen the government invest billions in advanced manufacturing sectors, including telecommunications equipment and semiconductors.
Global media ad spending is likely to take a hit due to the coronavirus, according to newly revised eMarketer estimates, but for now, nearly all of the related slowdown is attributable to China alone. In 2020, eMarketer expects total media ad spending worldwide will reach $691.70 billion, up by 7% from 2019, per its updated forecast. That's a decrease from eMarketer's previous forecast, which estimated worldwide ad spending would rise by 7.4% to $712.02 billion this year. eMarketer's new forecasts were completed on March 6, 2020, and represent a full-year outlook.
Growth in total ad spending. eMarketer has downgraded China's 2020 ad spending growth rate to 8.4% from 10.5%, due to a reduction in spending across all media formats, including digital.
Growth in digital ad spending. eMarketer now expects digital ad spending in China to grow by 13% in 2020, compared with a previous estimate of 15.2%. While digital media consumption in China is increasing as consumers spend more time at home, some advertisers are pulling back spend over concerns that supply chain shocks might keep them from getting products to market.
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Additional event cancellations could cause advertisers to miss out on typically reliable, high-profile opportunities, which may not have appealing substitutes within the year. A significant number of cultural and industry events have been cancelled or postponed over the past few weeks, ranging from Facebook's F8 developer conference to the NBA season. And just yesterday, the NCAA cancelled its annual March Madness tournament, which was estimated to have generated $655.1 million in ad revenues last year, per Standard Media Index estimates cited by Ad Age. Still, the possibility of an even higher-profile cancellation looms: If the Summer Olympic Games in Tokyo are postponed or cancelled, that will cause a meaningful reduction in worldwide ad spending. To be clear, eMarketer's revised forecast assumes that the Olympics will still take place in June 2020 and do not account for the March Madness cancellation.
Cashless payment adoption and usage could tick up worldwide. In response to the outbreak, the World Health Organization (WHO) is recommending that consumers pay contactless rather than with cash, if possible, as a means of limiting the virus' spread through microorganisms on the money. Some countries are taking this a step further: South Korea, for example, is quarantining all money received at the central bank for two weeks before disinfecting it and putting it back into circulation, and China is undertaking similar efforts. Measures to restrict some money, combined with mounting concern that might push consumers to heed the WHO's advice, could boost non-cash payments, which we already expect to grow at a 10.5% CAGR from 2019 to 2024—mainly if similar measures are implemented in markets with more massive cash usage than in China and South Korea. This type of increased usage could speed up the adoption curve for these payments by attracting customers who would have otherwise continued using cash.
Ecommerce is likely to grow as consumers eschew physical stores and crowded gathering places—but this could create logistical challenges. Over a quarter (28%) of US internet users are already avoiding public areas or travel, and 58% plan to if the situation worsens—and it already has since this survey was conducted—per Coresight Research data. This avoidance is trickling down into shopping: Three-quarters (74.6%) of US internet users said they'd be likely to avoid shopping centres and malls if the coronavirus outbreak in the country worsens, and over half would avoid shops in general. A decline in brick-and-mortar retail, which comprises over 85% of US retail sales, could shift day-to-day shopping to digital channels, like Amazon or other e-tailers, and boost sales—effects already seen by providers like RedMart in Singapore, per CNBC. Further, it could bolster the use of omnichannel commerce, like buy online, pick up in-store (BOPUS), for customers who want to shop in-store but avoid crowds. Such a surge in demand for e-tail could overwhelm logistics providers and workers, which might require e-commerce companies to revisit their strategies for order fulfilment and delivery, including potentially slowing down fast-shipping approach, to keep up with surging demand and keep workers safe. It's worth noting that changes in online shopping habits may be particularly prevalent among older customers—the group most susceptible to the coronavirus and most likely to avoid stores because of it, but least likely to shop online. A shift toward online shopping among this population could provide a short-term boost for sellers. Still, in the longer term, it may also increase sales if these customers continue shopping online after the outbreak subsides.
Telemedicine providers are extending the reach of healthcare professionals as patients are being advised to seek care from the comfort of their homes. One of the top pieces of advice to inhibit the spread of the coronavirus being passed along to the US public by health organizations is to limit time spent in public settings. And so, the US government is encouraging consumers to turn to virtual consultations with docs in non-urgent situations instead of making trips to the hospital. With more people being steered toward virtual care, telemedicine providers see substantial upticks in use. One such firm, PlushCare, had witnessed a 40% bump in appointment volume since December—a month before the first case was reported in the US. For context, the company says seeing a 10% increase in size during flu season generally. And we think that as US consumers—the vast majority of whom had never tried telemedicine in 2019—get more comfortable with telemedicine now, they will continue to rely on the tech once coronavirus outbreaks subside, providing telemedicine providers with long-term growth opportunities.
Health tech firms are implementing alert systems that grant busy doctors access to the latest updates on the coronavirus without needing to leave their standard workflows. Because agencies like the Centers for Disease Control and Prevention (CDC) are providing frequent updates about the coronavirus, it's necessary for healthcare firms to stay on top of the latest developments. However, this could prove difficult for inundated organizations that need to step outside of their workflows to get this information. That's why it's beneficial to have timely outbreak updates inputted directly into EHR systems. And digital health firm OptimizeRx is doing just that: The company is embedding CDC alerts about the coronavirus into its cloud-based platform deployed by leading EHR firms to ensure clinicians are granted access to the latest coronavirus-related info. Its ability to link providers with the most recent news should boost OptimzeRx's value in the eyes of partners, and we should see EHR vendors racing to include tools that give providers access to real-time updates.
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McDonald's employees have pushed the fast-food giant to bolster its paid sick leave policy in the wake of the coronavirus epidemic.In a call on March 10, employees and members of the advocacy group Fight for $15 called for paid sick leave, as well as proper sanitation training and paid time off in the event of store closures.
A McDonald's spokesperson told Business Insider it's the company's "expectation that crewmembers stay home when they are sick." While policies differ depending on the state and restaurant ownership, McDonald's has decided to pay employees of corporate-owned establishments if they are required to quarantine.
McDonald's also announced it would cancel its Worldwide Convention in Orlando and instead convene managing directors and franchisees online. In a video announcement on March 6, Kempczinski said the decision "was not made lightly" and came after consulting with a wide swath of McDonald's leadership as well as considering global travel restrictions and updates from the World Health Organizations.
"While I wish our system can come together in person this year, I can promise you this — we can do something extraordinary," he said in the video. "We will look to change the format to a digital experience and host the most inclusive Worldwide Convention in our history."
Thanks in part to the coronavirus, shares of Yum Brands dropped 15.6% in February, the Motley Fool reported. But Yum Brands itself doesn't directly operate popular chains like KFC, Taco Bell, and Pizza Hut in China. Yum China spun off from its franchisor and former parent company in 2016. The Shanghai-based independent company has the exclusive right to run KFC, Taco Bell, and Pizza Hut franchises in China, and it also owns a slew of other brands.
In the company's latest earnings call, CFO Ka Wai Yeung said the coronavirus epidemic — which broke out just before the Lunar New Year, a significant holiday shopping period in China — "caused significant interruptions to our business." "The impact comes from the temporary closure of our restaurants as well as a substantial decline in sales to the restaurant that remained open," Yeung said.
The CFO went on to explain that "travel restriction, suspended festivities, and shortened operating hours" had also been pain points. As a bright spot, Yeung said "delivery is holding up well" for Yum China. "Now to better serve our customers and protect our employees, we rolled out contactless delivery, which is very well received by our customers," Yeung said. "Besides, we also rolled out orders online, picked up in-store, contactless services and saw some encouraging early results as well."