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Double it!

Sandeep Murthy
20th March 2020

"Whatever ramp time you are budgeting for in terms of demand coming back - double it. However long you think you need cash for - double it." When this is over, companies that have been household names will disappear and a new crop will emerge. How you prepare and use resources today will determine which group you are in.

A lot is being written how to manage during the current COVID-19 pandemic. This article does not add to the myriad of advice and perspective that is being offered on that topic. This article highlights what the world will look like post this crisis. It is not meant to be alarmist, it is just a reality that we need to prepare for. 

 If countries go into a shut down, as many are now gearing up for, businesses will be faced with prolonged periods of  zero revenue. Most large, well run public companies (outside of the tech giants) don't have more than a few months of cash to survive a zero revenue scenario. If the shut down gets prolonged, beyond an initial 30 day period, or if the ramp back to consumption is slower than anticipated, this will decimate many businesses. 

 Take hotels for example, in Singapore, many hotels are running at less than 15% occupancy. If this continues for 6-9 months it will be equivalent to having had zero revenue for a few months. Hotels will not survive. Bill Ackman, the activist investor and a large shareholder of Hilton, has said that Hilton may not be able to survive this pandemic. 

 “The hotel industry and the restaurant industry will go bankrupt first, Boeing is on the brink, Boeing will not survive without a government bailout,” Ackman said.

 “Every hotel is going to be shut down in the country. ... If we allow this to continue the way we have allowed it to continue, every hotel company in the world is done. No business can survive a period of 18 months without revenue,” Ackman said.

Marriott President and CEO says that COVID-19 is like nothing his 92 year old company has witnessed, that includes the Great Depression and World War 2. It is having a more severe financial impact than 9/11 and the GFC combined. In the earlier crises they saw a 25% decline in revenue. When COVID-19 started in China they immediately saw a 90% decrease in revenue in China. Today, since it has spread globally, they are seeing a 75% reduction in revenue across most markets. He highlights the measures they are taking including no brand marketing and advertising, no new initiatives, 50% cut in pay for all executives, shutting down floors of hotels and reducing food and beverage outlets.  He also pointed out that as things have started to stabilize in China they are seeing some signs of demand returning - which is somewhat encouraging.  

If there is a prolonged shut down with zero revenue, what happens to travel is a good proxy for what other industries will have to deal with. Shares of Hilton are down nearly  50% and Marriott nearly 60% in March alone. 

These are unprecedented times and we are in uncharted territory. There has never in our lifetimes (or in the past 100 years) been a situation like this. When the pandemic is finally brought under control, the pain from a market perspective will set in. We need to prepare for that now. Over the past days, we have all had many hard conversations and made many tough decisions.  We need to be ready for many more such days with tougher choices ahead. Keep evaluating what you truly need to survive and make sure resources are allocated in a manner that maximizes runway. 

Technology and technology enabled businesses are the future. If you are solving a real consumer pain in a unique differentiated way, you will not only survive this, but will thrive on the other end. Now is the time to double down on product innovation and think through real customer pain issues. Now is the time to use the cover of a lack of focus on growth to invest in features that will drive true customer delight and increase retention. Now is the time to make your business and product stronger. 

In a conversation last night a good friend, who is an astute investor, said, "Whatever ramp time you are budgeting for in terms of demand coming back - double it. However long you think you need cash for - double it." When this is over, companies that have been household names will disappear and a new crop will emerge. How you prepare and use resources today will determine which group you are in.

 

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