Businesses must be bold if they want to survive
It’s a difficult time for companies, but battening down the hatches is the wrong approach, says Matthew Lynn.
With the economy in its deepest recession in a century, and with a second wave of Covid-19 still a real possibility, it is understandable that many companies are simply battening down the hatches and hoping to get through the crisis intact. Sometimes survival is the best you can hope for. Yet a moment of crisis can also be one of opportunity. Markets have suddenly been thrown wide open for the first time in a decade or more, with the epidemic changing the way everyone works and buys things. Many assets are available at fire-sale prices. And lots of struggling sectors need to be rescued. An astute tycoon, or an ambitious company, can strike deals that would have been impossible six months ago.
A few have started to make their move. Restaurant entrepreneur Hugh Osmond, one of the creators of Pizza Express, is reported to be raising cash for a shell company that will buy up assets in the UK. Next is in the final stages of taking over the lingerie chain Victoria’s Secret after it went into administration. The online fashion retailer Boohoo has snapped up brands such as Oasis. And the restaurant chain Carluccio’s has been bought out by Boparan, one of the UK’s largest private companies, which already owns both Giraffe and Ed’s Easy Diner. Those few examples aside, very few companies have started buying up their rivals or launching themselves into new markets.
Opportunities on a battered high street
In fairness, they have plenty of other challenges to cope with. But fortune favours the brave. In retailing, there are chains in deep, deep trouble, but they still have great brands that can be reinvented online. Boohoo’s acquisition of Oasis’s online business should allow it to reach out to a whole section of the market that had never heard of its own brand of teen-orientated fast fashion. Likewise, Next has recognised that Victoria’s Secret is a great brand even if its lavish UK shops were no longer viable.
But there are surely plenty more opportunities out there on a battered high street. The shirt retailer TM Lewin has collapsed into administration, but that is still a pretty good brand in menswear. Ted Baker’s shares are down from 350p to less than 80p – it is hard to believe that is not an opportunity for a retailer that wants to expand into the fashion market. Likewise, many restaurant chains are running out of cash after their doors have been closed for three months and lots of the big names are closing sites permanently. But people will surely want to eat out again.
The property companies, too, will be in deep trouble very soon, especially if they are concentrated in retail and office space. Lots of companies are not going to be bringing all their staff back to their desks for a long time, and lots of shops are never going to open their doors again. But they still own fantastic assets in an overcrowded country and those properties have plenty of value. Likewise, car dealers have had a terrible year, but pretty soon we will all be buying a new electric vehicle. And hotel chains are in the doldrums, and so are night clubs and cinemas, but we will all be going out again one day and spending as much money as ever. Many businesses won’t ever be this cheap again. More chief executives need to be a bit bolder and make their move.
The City must take the lead
Most aren’t, however, so the City needs to take the lead and apply some pressure. Fund managers should make it clear to CEOs that they will back them if they make a risky move; they will support a rights issue to fund a takeover; be more than happy for bonus schemes to reward CEOs who build during this crisis. And they won’t immediately call for a removal of a boss who starts taking a few gambles. After all, most big shareholders don’t have anything else they can do with their money. Bond yields are already close to zero. Cash doesn’t yield anything. If they are not buying equities in companies that are growing, they don’t have any alternatives. Shareholders should tell CEOs to take a deep breath and start expanding. In a few years’ time they will regret it if they don’t.