Friday, April 16, 2021

Corporate America is experiencing a K-shaped recovery

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“These are times when the strongest can get stronger,” Nike CEO John Donahoe said in September as he celebrated the digital investments and the robust brand that have helped the sportswear group grow. its profits even as Covid-19 closed its stores.

Nike was far from the only name known to boast resilient profits and a growing market share it already dominates. From Amazon to Starbucks, Mcdonalds For Mondelez, many of America’s biggest companies have grown this year, even as the Covid-19 unrest plunged smaller rivals into crisis.

Just as Blackstone was “a big winner coming out of the global financial crisis,” CEO Steve Schwarzman recently told analysts who follow the private equity group, “I think this is going to become another one of those times. acceleration. “

The uneven ‘K’ recovery that economists fear will divide the wider U.S. economy is playing out across U.S. businesses as well, as the pandemic widens the gap between the biggest, best-funded companies and those that lack wingspan, big markings or solid leaf balance.

Bank and central bank policies, coupled with changes in consumer behavior, have accentuated trends that were already putting more wealth and growth in the hands of a few large companies, according to academics, consultants and advisers at company.

This, some warn, threatens to reduce competition, stifle innovation and dampen small businesses that are supposed to be sources of job creation and economic dynamism.

“The past year has clearly been in a K-shape,” said James Manyika, president of the McKinsey Global Institute, noting that an MGI analysis revealed almost all of the “Superstar” companies at the top of his rankings had gotten stronger in 2020.

This partly reflected the fact that the group had many technology and pharmaceutical companies and most of its members had the global reach to overcome local waves of Covid-19.

But the winners of the year had also generally invested more in digital tools, which became essential as employees and customers dispersed.

Even within sectors, “the gaps between the most and the least digitized companies were huge,” Manyika said. From retailers forced to step up their e-commerce offerings to banks needing to move more transactions online, “digital transactions were ready for this time.”

‘It reminds them of their childhood’

The trend towards corporate concentration began long before the pandemic, with large U.S. state-owned companies capturing a growing share of economic activity since the mid-1990s, according to Professor Vijay Govindarajan of Dartmouth and colleagues. found in a study last year.

Small businesses have found it increasingly difficult to “escape the classroom,” they wrote, while larger companies have had the resources to invest in assets, including their brands.

The companies that entered the pandemic with the strongest brands have mostly extended their lead, with customers retreating to familiar suppliers.

“Consumers are really looking for brands they can trust during this time,” Michele Buck, CEO of Hershey, said during the chocolatier’s latest earnings call. Dirk Van de Put, Managing Director of Mondelez, owner of Cadbury, attributed his market share gains to the same phenomenon: “Consumers. . . went to brands they felt comfortable with. It reminds them of their childhood, ”he told analysts.

Safety-conscious consumers also frequented fewer stores, favoring companies that could supply a wide range of products. Walmart and Target have both cited such “travel consolidation” as working to their advantage.

Bureau of Labor Statistics The data show the human impact of a divergence that occurred partly along sectoral lines.

Courier and warehousing companies fueling the e-commerce boom, tech groups, and big banks and insurers were among the few to create jobs in 2020; layoffs have fallen sharply.

The same data set also reveals the gap between winners and losers in some industries. The only retailers other than those selling food and alcohol that created jobs in the year through November were big box retailers such as Walmart and Costco, and those selling materials. building and gardening supplies, such as Home Depot.

In their latest earnings statements, Walmart, Costco and Home Depot reported year-over-year sales increases of 5.3%, 16.9% and 23% respectively.

Each has seen their shares increase by more than 20% this year, even as Amazon’s growing dominance in e-commerce has increased its shares by more than two-thirds.

Much of the discrepancy stems from the easier access of large companies to capital, according to Olivier Darmouni, professor of economics at Columbia Business School.

Large public enterprises with good credit ratings record $ 2.5 billion corporate loans this year. This has positioned existing industry leaders such as Ford and General Motors to be ready when demand for their products begins to pick up.

In contrast, a study by Mr Darmouni found that the more expensive bank loans that small businesses depend on most have become much more difficult to access this year as banks tightened their lending standards. The increase in bank credit in the first half of 2020 “comes almost entirely from withdrawals from large companies on pre-committed lines of credit”, concludes his research.

“There is a very clear bonus to being tall,” he says. “The contracts that were signed at the right times are. . . reliable only if you are a large company. “

Line chart of comparable store sales (annual% change) showing some retailers made big gains during the pandemic

‘It does not flow’

The past year has shown not only how unevenly credit circulates, but also how political responses to the crisis risk amplifying the trend, Darmouni said.

“The Fed and the Treasury are used to helping big companies like big automakers and big banks. They are not used to dealing with small businesses. The big lesson is that it doesn’t spill over, ”he said.

The biggest corporate losses of 2020 were those that entered the pandemic with fragile balance sheets, like Hertz, the car rental company, and underprivileged operators in markets such as retail, foodservice, and hospitality. real estate that suffers from overcapacity.

“The pandemic has exacerbated the strength of the good and also exposed the weaknesses of the worst companies,” said Mohsin Meghji, managing director of the restructuring advisory group M-III Partners.

Poorly capitalized companies outside the top two or three competitors in their industry might ‘get tangled up’ in a strong economy, he said, but now ‘people are going to direct their capital to the survivors and take it out of those. who should not survive ”.

Mr. Meghji now expected “significant downsizing” in these overcrowded industries, with some weak companies selling to winners in their industries and others collapsing completely.

If that were to happen, he argued, “Covid could end up being an important catalyst in making the US economy much clearer and more competitive, because it forced what should have happened in five, seven or ten years. to happen much faster.

According to MGI’s Manyika, about half of the winners in one business cycle come out of the ranks of “superstars” in the next cycle. This, he said, raised questions about the duration of the K-shaped dynamic.

Businesses that have benefited from boosted consumer spending this year could suffer if policy interventions fail in 2021, while those that depended on a forgivable debt market “can only count on [their] balance sheet for so long before shareholders said ‘we can’t keep supporting this’, ”Manyika observed.

“Eventually, the demand has to come back.”

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