COVID-19 Workout

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COVID-19 Workout

The coronavirus outbreak in March roiled the national and global economies, caused millions of job losses, and depressed financial markets. Some industries were hurt more than others. As the world awaits a vaccine, DBusiness proposes a workout plan for 10 affected business sectors and considers the opportunities that have come to the forefront for prospective investors.

Retail // Bars and Restaurants // Sports and Performing Arts // Live Venues // Transportation // Movie Theaters // Casinos // Health Care // Banking and Financial Services // Hospitality


Retail

Stores large and small endured multiple — and, at times, conflicting — restrictions on their operations. In the early days of the pandemic, merchants deemed “essential businesses” had their work cut out for them. Home improvement stores, for example, were ordered to close off certain sections in a bid to contain the virus from spreading, but the measures were quickly loosened after state officials realized people couldn’t buy a baby seat or a garden hose.

Masks were required for all staff and shoppers, but the state left it up to individual stores to enforce the measures. Once additional retailers were allowed to reopen in June, it took time for shoppers to learn all the protocols.

Barbershops and salons were subject to longer closures, although Karl Manke, a longtime barber in Owosso, defied the shutdown orders and reopened in early May. Gov. Gretchen Whitmer subsequently pulled his license and imposed heavy fines, but he continued to operate. To challenge the state action, Manke sued the state and lost in a lower court before the Michigan Supreme Court ruled 7-0 that he had every right to work.

Across the retail landscape, several storied department stores filed for bankruptcy. Other operators were able to pivot and add or expand their online sales. In some cases, digital retailers like Amazon have acquired closed department stores and converted them into sorting or delivery operations.

One bright spot has been the franchise industry. Mark Cory, owner and franchise placement specialist at FranNet of Michigan in Grosse Pointe, says the industry typically receives more interest from prospective operators during an economic downturn.

“Our industry is counter-cyclical,” says Cory, a former Little Caesars pizza franchisee. “When times are bad, people have more time on their hands and they give the franchise industry a serious look. The period since COVID-19 broke out is no exception. We’ve also seen a surge in franchises that offer virtual services like education, IT services, or digital marketing.”

Other popular franchises include quick-service restaurants, home health care services, commercial cleaners, landscapers, and painters.

Once we have a vaccine, there will be a lot of opportunities for good store locations and real estate,” Cory says. “And anyone who has digital offerings will see dividends long into the future.”

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Bars and Restaurants

Across the spectrum of the restarant sector, confidence is rising after a near-collapse of the industry following the closing of bars and eateries due to COVID-19. Once the industry reopened in June, tables and chairs had to be spread out and capacity was limited to 50 percent. In July, bars that served minimal food were closed again due to safety concerns.

For those restaurants that opened their doors, the new normal called for operating “a business within a business” to meet new and numerous health requirements, including masks and gloves for all employees and regular testing of staff members. If one employee tested positive for COVID-19, the entire restaurant had to shut down, undergo  cleaning, and pass health inspections.

Still, some relief was provided by the state and local communities. Takeout and delivery options flourished, especially among eateries that already offered such services. Discounted alcohol helped offset limited seating capacity, while many cities allowed restaurant owners to offer or expand sidewalk seating, often at little or no cost. With the onset of cold weather, however, it’s not clear how long people can endure the outdoors.

bars and restaurants illustration
Illustrations by Brian Britigan

Some eateries have acquired pods that are heated and set up outdoors. Other restaurants have fully enclosed their sidewalk seating and added heat. But the temporary spaces beg the question: How is an enclosed space outdoors better than being inside a spacious dining room, especially with upgraded air filtration systems?

“The larger restaurants will be better able to get through the crisis,” says Zaid Elia, founder and CEO of The Elia Group in Birmingham, which owns 220 Merrill in Birmingham and Parc in Detroit, as well as the DoubleTree by Hilton in Bloomfield Hills.

“If you have 60 seats and now you’re down to 30 seats, it’s pretty hard to make everything work and still pay all of your bills. For larger restaurants with good locations, you have a fighting chance to make everything work. The estimates I’ve seen show more than 25 percent of the restaurants that were closed will never reopen. They just can’t make the numbers work.”

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Sports and Performing Arts

As the sports world returns to some normalcy following the outbreak of COVID-19, the arms race to offer the best stadiums and facilities among professional and collegiate teams has come to a halt. Every new stadium that opened or underwent a massive renovation typically set a new standard for fans, while the competition for top coaches and players sent annual salaries through the roof.

Metro Detroit, blessed with three relatively new stadiums for its four professional teams, is set for decades to come. The major colleges across the region and the state also have added extensive improvements to their athletic venues and practice facilities in recent years. While professional and college sports have returned to action, mostly without spectators, performing arts venues aren’t as fortunate.

With so much new technology, live sports have long offered a virtual front row seat to all of the action. Multiple cameras, complemented by a wider array of player stats and trends that appear on TV and smartphones, provide plenty of compelling action. When the pandemic hit, sports owners were able to pivot fairly quickly and provide a wide array of virtual content to fans sitting at home.

But digital offerings in the performing arts world can’t capture the emotion of watching an operatic singer or hearing a drum solo. Such performances are best enjoyed live. What’s more, many performing arts venues are run by nonprofit organizations. Without a healthy endowment to carry a theater or a musical company through a long period of closure, some live venues may not be able to reopen their doors.

They also can’t afford to make multimillion-dollar investments in audio and visual equipment. While the Detroit Symphony Orchestra has long offered a popular online channel for its content, other organizations aren’t as fortunate. In turn, the loss of live performances has had a huge impact on all the people who work to produce a memorable event, from actors and singers to sound engineers and set designers.

“The power of music has served as an enduring beacon of hope and joy through one of the most uncertain eras of our lives,” says Anne Parsons, president and CEO of the DSO. “We are so passionate about restoring the presentation of live music for our audiences, whether that’s socially distanced and outdoors, or virtually in your living room with DSO Digital Concerts.”

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Live Venues

As one of the top entertainment draws in the world, both for concerts and sporting events, metro Detroit’s stadiums and performance centers had no Plan B when their facilities went dark in March to limit the spread of the coronavirus. Little Caesars Arena, Ford Field, Comerica Park, the Detroit Opera House, the Max M. and Marjorie S. Fisher Music Center, and every other indoor gathering venue was closed, along with outdoor facilities like DTE Energy Music Theatre and Meadow Brook Theatre.

In early October, as government restrictions were lifted, performance venues began to reopen with some limits on capacity, and patrons in most cases were required to wear masks. But it will be a long road back before fans can enjoy a sold-out concert by Beyonce or Elton John.

At the same time, many of the professional sports leagues returned to action, starting a condensed season minus any fans in attendance, or finishing off prior playoff activity. How the teams make money this year and next remains unclear, as so much of their revenue is derived from selling suites, season tickets, food, beverages, apparel items, and memorabilia. TV contracts only go so far, and some leagues renegotiated player contracts to account for a falloff in ticket sales.

live venues illustration

For performing artists, online entertainment portals proved popular with fans. Virtual concerts, stripped-down outdoor performances broadcast live (for a fee), and special promotional items were made available. Both the Detroit Opera House and the Detroit Symphony Orchestra held virtual performances or set up productions outdoors with limited capacity. Other artists, meanwhile, took time to record new material.

The search for an alternative to live performances bore fruit for several longtime producers. In September, Detroit-based Paxahau, a dance music events promoter and producer of the annual Movement Music Festival, one of the longest-running dance music events in the world, announced an exclusive partnership with Twitch, an interactive streaming service for entertainment, gaming, and musical offerings.

As part of the deal, Paxahau, a boutique production company that specializes in booking, event management, and promotions, launched Paxahau.TV. Exclusive content is streamed weekly, while four Movement-themed virtual festivals will be made available on Twitch’s website.

“The Twitch community brings a unique energy to live-streaming that we didn’t find anywhere else,” says Jason Huvaere, president of Paxahau. Considering the deal brings access to 17.5 million average daily visitors, the Detroit dance music culture can expand its wings.

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Transportation

The airline industry has suffered the most among transportation services, due to a steep drop in business and leisure travel caused by the outbreak of COVID-19. According to McKinsey, a large management consulting firm, all travel categories have suffered from the virus, although bright spots include car trips, RV and boat sales/rentals, marinas, and RV trailer parks.

Based on consumer surveys by McKinsey, every travel sector — domestic and international flights, short-term home rentals, hotels and resorts, cruises, trains, rental cars, and buses — are cited at the bottom of the list for “intent to spend.” In one survey, airlines were rated higher by consumers for overall quality due to thorough cleaning measures and a lack of lines. What’s more, most viruses and other germs don’t spread easily on flights because of how air circulates and is filtered.

“You do see, across all this data, increased reticence for consumers to resume travel versus other day-to-day activities, and versus spending on discretionary categories that was quite depressive at the beginning but is starting to come back,” says Tamara Charm, a senior expert at McKinsey. She adds vehicle service providers like Uber and Lyft have also reported a sharp drop in revenue due to the virus.

When the airline industry will reach pre-pandemic levels is anyone’s guess. Planes are getting fuller by the week, but the overall industry is down by 50 percent. The drop in passenger traffic also impacts hotel booking, vehicle rentals, airport parking lots, and dining and retail offerings both inside and outside airports. Private jet charters, meanwhile, have been on an upswing in recent months.

Road trips have increased, although most one-way trips average only 500 miles. Longer trips are typically family vacationers visiting national parks. General RV in Wixom reported 200 motor homes and trailers were on its lot this summer, whereas they normally have up to 600 different models from which to choose.

On the infrastructure front, it’s been a boon year for road construction projects — fewer vehicles on the road has allowed more work to be completed. Still, reduced travel has impacted service stations, bars, restaurants, and retail outlets. Grocery stores, on the other hand, are enjoying record sales.

While the crisis has roiled traditional supply chains and logistic operations, a huge boost in e-commerce orders has impacted brick-and-mortar stores; more merchants are now adopting online sales and delivery services to survive. According to IBM’s U.S. Retail Index, the e-commerce sector is expected to grow 20 percent this year. During the second quarter of 2020, e-commerce retail sales in the U.S. were $211.5 billion, up 31.8 percent from the first quarter and 44.5 percent from the same period a year ago.

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Movie Theaters

With filming back in action, from Hollywood studios to “No Sudden Move,” a Steven Soderbergh-directed HBO crime thriller being filmed in Detroit and starring Don Cheadle, David Harbour, Roy Liotta, Jon Hamm, and Kieran Culkin, the movie theater industry is back from the brink. Films that had been delayed are now making it to screens.

But the closures of theaters took a huge revenue source out of the movie business, impacting the traditional summer box office season, which normally accounts for 40 percent of annual ticket sales. According to an estimate by Wedbush Securities, North American box office profits will total $4.4 billion in 2020, down 61 percent from last year. (In 2019, box office revenue was $11.4 billion, a 4 percent dip from the prior year.)

To recoup their losses, some operators rented out their theaters for business meetings and classroom activity, with mixed results. Others, like Emagine Entertainment Inc. in Troy, found success setting up drive-in theaters that offered popular films.

MJR Digital Cinemas in Bloomfield Hills has a long runway going forward, given its theaters offer state-of-the-art audio, sound, and screen technology, while smaller art houses like the Maple Theater in Bloomfield Township and the Main Art Theatre in Royal Oak may have a harder time making ends meet with fewer seats.

With 5,500 indoor theaters nationwide and cold weather setting in, getting fans to return indoors will hinge on the installation of clean ventilation systems and acceptable safety standards, along with a blitz of advertising and word-of-mouth buzz about major film releases. At the same time, theater owners have to deal with new expenses with the addition of sanitation equipment, protective gear, plexiglass barriers, and cleaning protocols.

So far, movie studios haven’t fared well in releasing movies with limited screens or through streaming services. There wasn’t one hit among several potential blockbusters released since March, including “Tenet,” “The New Mutants,” “Bill and Ted Face the Music,” and “Mulan.”

On the international front, where COVID-19 restrictions are often less restrictive, new films did fairly well, but in America the recovery awaits a blockbuster or two — hope lies with “Wonder Woman 1984,” “Coming2America,”  “One Night in Miami,” and more.

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Casinos

When Michigan’s gaming operations were allowed to reopen in early August, their facilities were limited to 15 percent of their capacity. By comparison, tribal casinos, which have few state restrictions to abide by, are operating at as much as 80 percent capacity, while Hollywood Casino Toledo and Las Vegas operators are running half full.

The new rules in Michigan mean all visitors to non-tribal casinos are subject to a temperature check and must wear masks. Indoor smoking and vaping have been moved to outdoor areas, while customers may not play poker. In addition, there are no self-serve buffets, hundreds of slot machines have been turned off to promote social distancing, and valet services are curtailed for the foreseeable future.

While casinos across Michigan have struggled to regain customers, the state and communities like Detroit that tax gaming revenue are facing major gaps in their respective budgets. Last year, MGM Grand Detroit, MotorCity Casino, and Greektown Casino collectively paid the state close to $118 million in taxes, while Detroit received $184 million, or about $600,000 a day.

One area where casinos were expected to benefit in an era of limited social engagement was the debut of on-site sports betting, known as sportsbooks, which began in early March. From there, the Michigan Gaming Control Board, which regulates casinos, was expected to allow internet gambling and mobile sports wagering by early 2021.

To generate revenue for the government, sports betting revenue is taxed at 8.4 percent, while the Detroit casinos will pay an additional 1.25 percent in city taxes. The state currently has an online lottery, 23 tribal casinos, three commercial casinos, and two race tracks that host pari-mutuel horse betting.

In mid-September, the gaming board held a public hearing to review the proposed rules for the two new forms of digital gaming. From there, the board submitted the draft of the rules to the state before the Legislature reviews the regulations for final approval.

“The gaming board has limited ability to license before the rules go into effect,” said Richard Kalm, executive director of the gaming board, in a statement. “The licensing timetable also depends on the applicants and their diversity of complete and timely applications to us. Michigan must have at least one tribal and one commercial license approved before launch, which I hope can happen by (year’s end).”

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Health Care

As the fear of hospitals overrun by COVID-19 patients subsided once the initial wave of affected patients were treated and released, regional and local health care organizations were faced with a dilemma.

Stay-at-home orders had limited the spread of the disease, but it also cut down on a major revenue source for medical procedures as traffic levels and commercial accidents plummeted. Elective surgeries and routine appointments with doctors, dentists, and other health care providers also were restricted for months. At the same time, less-expensive telemedicine services were offered in greater numbers and frequency.

In what was once a fairly steady industry, the rapid ebb and flow of today’s health care sector will lead to more acquisition and consolidation activity, according to a recent M&A Survey by Dykema, a large law firm based in Detroit, and the Association for Corporate Growth. The survey indicated health care, technology, food and beverage, and retail are the industries to watch for M&A activity in the next year.

health care illustration

“In light of the significant impact of COVID-19 across our health care system, from increased hospitalizations to the expansion of telemedicine and accelerated vaccine/treatment research, we aren’t surprised to see that health care is the industry sector that comes out on top with regard to predicted M&A activity over the next 12 months,” the analysis of the survey states.

“After months of lockdowns, shelter-in-place orders, and virtual meetings, it also isn’t a big surprise that respondents selected technology, food and beverage, and retail as the next three sectors likely to see increased M&A activity over the next (year),” the analysis continues. “Just under 20 percent of all U.S. private equity deals in the first half of 2020 have been technology deals, according to Pitchbook figures.”

Last year, automotive, health care, and energy were identified as the industries to watch, but the recession has had a negative impact on vehicle sales and energy revenue. Health care, though, offers some upside following a merger or acquisition, but savings derived from reducing redundant staff positions or consolidating technology platforms has a finite timeline.

“Based on our experience in past crises, we’re planning for (overall) M&A activity to start picking up in the back half of the year as more businesses come back online and economic conditions improve,” says Brian Demkowicz, co-founder and managing partner of Huron Capital. “Barring any COVID-related setbacks, based on what we know today we would expect the market to continue improving.”

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Banking and Financial Services

The banking and financial sector, working with the Federal Reserve and the White House, has performed admirably during the COVID-19 pandemic. The U.S. mortgage industry, for example, weathered the economic downturn much better than the 2008 global financial crisis, given the federal government moved quickly to pass the CARES Act to grant relief options for millions of mortgage holders and businesses.

Lending institutions like TCF Bank, PNC Bank, Comerica Bank, and others worked closely with a range of clients seeking PPP funds to help tide them over a steep drop in economic activity caused by stay-at-home orders and other restrictions (the program ended on Aug. 8). In turn, the financial sector enhanced or launched digital and cloud-based technology platforms to assist customers with their needs.

The Federal Reserve, meanwhile, moved to drop borrowing rates in recent months, which accelerated refinancing opportunities for consumers and local mortgage firms like Rocket Cos. in Detroit, United Wholesale Mortgage in Pontiac, and others. A period of stable rates, prices, and inventory has kept the housing sector from growing too quickly, which helped set off the 2008 financial crisis.

The banking industry also has moved, over the past few years, to close branches due to the growing use of digital services. In the U.S., the number of full-service bank branches fell from almost 95,000 to just over 83,000 between 2010 and 2019, according to a Quartz analysis of Federal Deposit Insurance Corp. data. That’s 12 percent of all bank branches across the country prior to the pandemic. More than half of the top 100 U.S. banks reduced their footprint by more than 50 percent over the past five years, according to McKinsey.

In addition, a recent study by Troy-based J.D. Power shows nearly one-third of new account openings are now executed through a bank website or a mobile app, up from 22 percent in 2019. At the same time, the number of new account openings at branches has declined year over year by 10 percentage points, and now comprises just 55 percent of all new account openings. Those closed branches provide opportunities for landlords and small businesses.

One word of caution: As banks have increasingly gone digital, cyberattacks have been on the rise. New account fraud is fast becoming one of the biggest problems in digital banking, as 48 percent of all fraud value stems from accounts that are less than a day old, according to RSA Security. In addition, 57 percent of businesses have reported higher fraud losses associated with account openings and account transfers, rather than other types of fraud.

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Hospitality

If anyone doubts the future of the hospitality industry, consider the interest in the Bravado Event Center in Clinton Township, which went up for auction in late September. The three-story, 14,500-square-foot facility, located along Gratiot Avenue, received unprecedented interest and is poised to be sold by the end of the year.

Still, the hospitality sector will need to record many more success stories as it looks to overcome a steep drop in demand for hotel rooms, banquet facilities, and convention centers caused by the COVID-19 pandemic. Some large convention sites like TCF Center in downtown Detroit and the Suburban Collection Showplace in Novi received an economic injection as the federal government leased out the facilities to handle a potential overflow of recovering coronavirus patients. But since those leases expired in August, the facilities are in the same boat as every other meeting site: waiting for business and leisure travel to return.

According to a forecast prepared for the U.S. Travel Association by Tourism Economics, total travel spending in the U.S. will reach $622 billion this year, down from $1.1 trillion recorded in 2019. By 2024, the market is projected to be $1 trillion. Next year, spending is expected to be $855 billion, the bulk of which will come from domestic sources.

“Toward the end of March everything fell off the cliff, and hotel occupancy levels were in the high teens,” says Kevin M. Vessels, president of Hospitality Advisors, a hotel consulting firm in Ann Arbor. “Had doctors and nurses not stayed at hotels that were located close to their respective hospitals in the early days of the crisis, it would have been much worse.”

By May, hotel bookings started to creep up, while meeting and catering operations sought out new avenues of revenue — holding outdoor events, providing prepared meals to frontline workers, and selling healthy meal plans directly to families and fitness enthusiasts. As more government restrictions on travel and meetings are lifted, the industry will recover, although a spate of bankruptcies and lender workouts among hotels and meeting venues will likely continue.

“A bright spot in Michigan was the northern part of the state, as people (avoided) planes and jumped in their cars,” Vessels says. “As the cold weather sets in, it will be difficult for the northern hotels to draw the same demand, though (because) we have a four-season market, I expect the ski resorts and snowmobile trails to be busy. In metro Detroit and other major markets, business and leisure travel must return before the hotels pick up again.”

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