Most of you reading this know that there’s a limit to the number of free articles one can read on this site. However, we’ll be marking these articles open to everyone. On a likely-weekly cadence we’ll publish brick and mortar updates using POS data we have from tens of thousands of merchants as well as data from many friends across the brick and mortar ecosystem.
The question on everyone’s mind is, “How bad will this be?”
Nobody knows. All we can do is make educated guesses. The good news is that Pac-Asia, where the Coronavirus originated, is a few months ahead of North America, making them a case study for expectations. Granted some of their containment methods will be different than those we employ here, but it’s as close as we’re going to get to a forecast of things to come.
Let’s look at what’s happened in China since the spread of the virus. The WSJ has great data here and we’ll curate the relevant parts below.
First, there’s been a drastic change in consumer spending as people quarantine themselves indoors. Below graphics from WSJ.
As can be seen in the above graphic, spend in brick and mortar (sans supermarkets) is down materially, with restaurants down 88%. Retail is not far behind it, with ranges from 50% to 75%.
Second, there’s been a massive swing of spend to grocery stores – grocery delivery app downloads in China were up 600% at one point as people flocked to more stable retailers. The change in consumer behavior is logical as we see it:
- Mass merchandisers offer cheaper prices than restaurants or retailers
- Mass merchandisers offer greater selection of lower-perishable items (canned, frozen goods)
- People see their food being made in a restaurant and don’t trust the $8/hr employee making it. However, they don’t see the $8/hr employee in the grocery supply chain and automatically assume it’s more sanitary
The goods news in China is that more sophisticated retailers (i.e. those with attorneys deathly afraid of being sued) have reopened for business. Both Starbucks and Apple, for example, have started reopening stores. Starbucks had at one point closed half their 4,290 stores and 85% are back open. Apple closed their 42 stores and all have reopened as well.
All-in you could say Apple and Starbucks closed their China stores for 6 weeks.
But here’s the risk.
The idea of a quarantine is to slow the spread of the disease and prevent health facilities from being overwhelmed from a rapid onset of the virus. You’ve undoubtedly seen the #flattenthecurve talk going around – graphic below.
However, as the number of infected falls, people may be lured back into a false sense of security and begin their normal routines again. This might trigger a relapse and result in a second outbreak, which would likely catalyze another period of quarantine and prolong the economic damage – image below.
The scary part of this second graphic is the x-axis:
These scientists modeled a relapse that wouldn’t abate for 12 months from the initial outbreak.
We need to be clear: these are models. That means they’re approximations based on things like incubation period, R0 (how contagious a disease is), and how long a person remains contagious (some estimates have put this as long as 37 days).
But it means things could be bad for 2-3 months as a best case, and a year – or longer – as a worst case.
Those reading this know that brick and mortar SMBs can’t afford 2-3 months without cash. These are generally low margin businesses and they need some consistent form of revenue to survive. They have no balance sheets.
The longer this goes, the greater chance the Coronavirus triggers a material recession, or even a depression. Soon SMBs lay off staff. The staff now have no income with which to support themselves. Then the businesses close. This affects the business owners, landlords, suppliers and distributors, and everyone else associated with the local merchant. All of a sudden spending nosedives and you have a full blown recession on your hands. Travel and hospitality is a non-trivial part of the economy, and it could be what drags us into the next crisis.
Governments cannot reasonably contract spending on everything but grocery and health care or > 80% of the population will become unemployed. SMBs – which employ half the US population – do not have the cash reserved to weather this. Economically speaking, it would actually be cheaper to infect everyone with Coronavirus and lose 1-5% productivity from the resulting deaths, which seem to be limited to older people with comorbidities who should isolate themselves anyway. Right now the markets are down 35% from their peak – which ties 1987 for the second largest drop in market value (36.6%) since the inception of the Dow Jones Industrial Average (the greatest slide occurred in 2008 when the markets lost 57% of their value from peak to valley).
So will this be a 2-month event or a full-blown depression? First is the data from Homebase, a cloud scheduling solution. Their data is week over week, meaning that Friday, March 13 data from Atlanta isn’t a drop of 11% over the same week last year, but represents a 19.3% drop since the markets started contracting. Seattle and San Francisco are down 45% and 70% respectively.
Next we looked at our data across more than 50,000 restaurants. Some trends are apparent:
- Overall market is down 35%
- Major metros are down more – add another 15% for some areas
- Major west coast cities and New York City are down the most, at around 65%
- Some will be down 90%+ as mandated closures take effect
What should merchants do?
For starters, focus on online ordering and delivery. This is a no-brainer. Foot traffic is slowing (and continuing to slow) and delivery will likely be your only revenue center for the next few months, especially as municipalities mandate closures. That advice applies to retailers too: boot up your ecommerce engines and work with your POS companies to integrate to third party platforms.
Also, everyone should use this time to see how badly they’re getting screwed by their merchant acquirer. Your processor usually has fees that trigger if you don’t hit the minimum volume, and your business likely won’t hit those over the next few months. The acquirers have also shown no qualms about making up fees, so be watchful for new fees while your business suffers. Yes, really: expect some derivative of “coronavirus” fee for a few hundred dollars per month. Look at our Statement Obfuscation Series to find common offenders, but here’s a list:
- Global Payments / Heartland / TSYS < – one of the largest offenders we see
- Vantiv / Worldpay < – has lately been padding interchange categories
- First Data < – be careful of their ISOs
Good luck out there. We will watch the data and report back if we observe any signs of rebounding.
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