The COVID-19 virus has hit us like an earthquake. The immediate impact was panic purchasing of water and toilet papers along with a tremendous shift in spending. We no longer visit sit-down restaurants, and take-out and drive-through places are not compensating for the drop in in-store revenue. Grocery stores have extensively increased their sales volumes and revenues. This shift is prolonged, and even if the economy re-opens soon, it will be in phases. Fun and Entertainment will be dead last on the list of things we will do again after people can enjoy the parks, visit their places of worship, municipalities and public services are functioning. In the meantime, we are dealing with the aftershocks that are hitting our industry.
The immediate impact is almost over and we are getting used to the 2m/6ft social distancing while standing in line before entering and leaving our grocery stores. For the remainder of us we will stay at home and do little else. We generally live healthier lives, and our dogs get walked every day by every single member of the family, only they live healthier lives than we do.
While I was writing this one of my customers called about how they have had a local outbreak in their facility, kind of what we expected a few weeks ago. I have also read that JBS, Smithfield, Cargill, Maple Leaf among others had to suspend operations in some of their facilities. These are huge capacity cuts for the agricultural supply so that demand of e.g. live hogs is so low, that livestock prices are taking a huge hit. On the other hand, pork, other especially cheap meat commodities and processed foods are still in high demand and prices in some areas are at record highs. Primary processors in meat, poultry, dairy, and produce are now making a higher profit than they did at their all-time high, while farmers are hurting, some even spraying their unsaleable milk as fertilizer on their growing fields and then tilling under their crops.
Every week new unemployment claims have reached record highs. This signifies that families have a reduction in income and need to start saving on their food cost. While restaurants remain shut down, premium foods, especially meats, have lost their traditional markets. When I went to my local ALDI store last week, I found a whole denuded beef tenderloin for $6.99/lb next to 90/10 ground beef for $5.99/lb. Ok, the tender was a ‘no-roll’, but still – it is already that bad, and it isn’t going to get better any time soon. I would not be surprised if we see USDA prime beef cheaper than USDA choice in wholesale facilities soon for the premium steak cuts.
The rippling effect seen in the industry
While restaurants are shutdown, they of course, do not have any income. As they do not have any income, they need to choose who they pay and whom they do not. This causes a rippling effect in the economy as their vendors (landlords, broadline distributors, etc.) need to wait for their cash. The delay in payments will soon affect food companies which were previously not as dependent on the restaurant industry, did perhaps 50% or less of their volume in the food service industry. With the funds delayed, cash is in short supply. Banks are stepping in with free or cheap loans to bridge that gap, but there will be some blood on the street, no doubt about it.
Ramping back-up the economy
In most civilized and industrial economies, the discussions on restarting the economy have begun. The most reasonable approaches involve Corona testing, antibody testing, and contact tracking. The idea of these limitations on our freedom has been managing the incoming supply of the sick with the treatment capacity of our healthcare system. Depending on the geographical region you are in, the ‘curve is flattening’, which means that the daily number of positive corona cases and hospitalizations are reduced, and our healthcare systems get some relief. Governments now need to decide on how they adjust the throttle. While keeping the number of people needing healthcare assistance below the maximum capacity, they will re-open some aspects of our economy first, others later. It is fair to assume that things like governmental services (courts, department of motor vehicles, schools) along with places of worship, parks and recreation will be first. Things that are purely entertainment, like sports events, amusement parks, vacation travel and movie theaters will be dead last on the list, while the rest will fall somewhere in between. Don’t make the mistake and believe that this ‘Restart’ everyone is talking about will bring back the economic activity to what it used to be. No, this is going to be a slow ramp up, and we will see sections of our economy shut all summer long.
If you want to see into the future, use your local convention center as a proxy. San Diego is my hometown, and the Convention Center is full of homeless people. The “United Fresh Convention and Expo” scheduled for June 16th – 18th has been canceled. The most important trade show of the year, Comic-Con International scheduled for the end of July is undecided right now, likely to be canceled. Without the conventions taking place, the restaurants downtown will not see the business visitors they need to survive, so even if the politicians decide to reopen, this does not mean that these events will take place and the people will still come. I think we would all do well if we look at our current way of living as the new normal and celebrate every single new freedom we will regain.