lockdown #57

Yes, its time for the BEANS!

#57 is all about when society realises that funny is more important than money.

As the Clash famously sang.......rebellion....money....

Being in lockdown, we've all had the chance to look in the mirror, not in a 1982, Dollar, Mirror Mirror way, but in a '....my budget is 50% alcohol and 50% food....' way.

So how will Covid-19 affect the economy. There's all this debt mountain doom but in every crisis there's winners and losers.

Pubs are going to be hit harder than ever and the economic meltdown that ensues will be where fixed costs are high, inevitably the high street. If your fixed cost based is largely property, its a sore one.

Online retailers have been inching towards success but Covid-19 has been the virus to end all computer viruses as online shopping takes a quantum leap. Online retailers are huge winners. The over 40's have learnt just how much can be bought online.

I'll write up somewhere else the terror of the 2nd peak after the first lockdown loosens its grip, but this will become the scariest time for care health workers as the great unwashed (us) start to socialise and spread the virus. June and July will take the current care home cull to new and terrifying levels, but this is an economic post, although I am going on for longer than usual.

Care homes, like other building centric businesses, eg hotels, I view as infrastructure businesses. Golf Clubs have buildings that they could easily sell and fund their golf courses, if members were happy to operate out of the boot of their car, but club members largely choose not do to so. They aspire to have changing facilities, bars and restaurants. What Golf Clubs know is that there is a lot of infrastructure costs associated with buildings. In this crisis its quite ironic that the costs, of running a loss making building, decline, so it actually makes the golf club more profitable that it doesn't have to staff the building. The variable costs (staff & stock) are rarely covered by the variable income (sales). There may still be costs associated with insurance, utilities but there's no cleaning, no bar staff and no phones needing answered. For a Golf Club, compared to a Waterstones or a Wetherspoons, therefore closing the doors is a good thing. This is because the club own the clubhouse and in the high street retail world properties are often rented, leased or have mortgages. If they are owned then there must be a suitable return on capital to cover the mortgage or the business would just sell the property.

The banks in the UK, from 1987 onwards, decided that they could get huge prices for asset stripping, so they closed branches and sold the properties to pub groups like Wetherspoons, amongst others to make a turn from them by running them as pubs.

Pub groups rely on turnover to generate the profit to pay the mortgage. Ha Ha, I hear you laugh, some names we'll be glad to see leave our High Streets, but sadly they wont be alone. Volume businesses like Greggs should be fine because their floorspace generates much more revenue than say a Waterstones or WH Smiths. Good news for the independent book sellers whose passion so often goes unrewarded. They will prosper in the post lockdown world, if they can get through the hard months ahead.

Shop fitters will be in decline as I just cant see who will fill the retail space, except tesco metro and other pop up supermarket stores who can max out the low rents that'll have to be offered. All of this leads me full circle to what I wanted to discuss, REITs.

Real Estate Investment Trusts have been a great funding vehicle for capital projects, unfortunately though there will be a lot of bad investments about as smart REITs "sell on" big shopping complexes at what appears to be a huge discount. They'll be largely given away, or at least that's what the buying REITs will feel. These parcels though will be potentially toxic so REIT buyers beware.

I'm looking at Care Homes too. An independent care home owner told me recently how they had managed to keep occupancy at 93% and as such had paid off the building costs in a little over 9 years. A truly rags to riches story of taking a £1m mortgage and then selling the business debt free 10 years on for £2m.

Now take the current owner, who has just seen occupancy fall to 75% and is still trying to service the £2m debt they took on for buying it. The Care Home cull I described 2 weeks ago is going to massively affect them. Occupancy rates could fall to 20% if Covid-19 wreaks havoc on the home. That effectively puts the new owner into administration because all care homes are likely to have low occupancy and new residents will be at a trickle.

The care home sector is therefore doubly battered. First they have to cope with the trauma of the virus and then many of the staff will fall victim to redundancy.

I'm really angry that this stuff is just not getting exposure as smarter people could start working on a transformation.

There needs to be a lot of help put into the care sector, I'm not suggesting it needs nationalised but we do need a national plan. Care should not be left to financial markets to decide the future of its industry.

Airlines are clearly starting to act because they know that the mortgage on their planes is huge.

Back to these big asset companies my next tip for tough times is copy shops.

Photocopy shops survive on copying. If they dont then the copier leases cant be paid. If you want posters made up for a party, a gig, you use them. If there's no public gatherings, demand for these one off ventures dries up. In Edinburgh if there's no Edinburgh festival, no flyers, ouch!

This leads nicely to the impact on the economy by region. Hotels, Air BnB throughout the and have been hammered, Edinburgh hotels in particular are going to see occupancy plummet as the cancellation of the festival rps through the city. Some of these seasonal jobs are taken by the visitors to the city so the citizens of Edinburgh may not feel it as much, but those kids who move home to rent their flat, or those businesses who rely on exhorbitant August rentals to cover the mortgage for the rest of the year will find their business model under pressure.

This all leads me back to what industries will win. Drugs will win. Drugs are a safe home when there is carnage all about. Drug companies are dipping their toe into the online home delivery. These are regular sales so breaking into this space will see pharmacists doing very well. Like opticians with the online delivery of lenses, if the over 60's start to receive all their medication to their door, they will be very loyal customers for years.

Consumable products and the grey pound make for a very good business case. Remember its not just the odd aspirin, nowadays we have drugs for many an ailment.

To be continued