12 Jan 2020 Round-up: Risk Management Winners and Losers
2020 will for many, go down as one of the most volatile years in modern history. From environmental disasters to a global pandemic, our behaviours and habits had to quickly change and adapt to a new situation. Sectors saw themselves struggling to pull through the crisis whilst others found new opportunities and chances for growth. Risk practitioners found themselves under the microscope, as their plans to protect brands and reputations were put to an acid test.
For businesses to do so well in times of VUCA (volatility, uncertainty, complexity and ambiguity), they either have to rely on being lucky (hard one to sell to investors and regulators!), OR, they need to have a thorough understanding of their strategic risks
In all the economic and social volatility and profound uncertainty of 2020, there have clearly been some winners and losers. Often this was at the sector level as parts of the economy have evaporated (tourism) whilst others have blossomed (tech). But winners and losers can also be found at the micro level, where certain businesses have evidently outperformed their peers in adapting to changing circumstances.
Our argument is that for businesses to do so well in times of VUCA (volatility, uncertainty, complexity and ambiguity), they either have to rely on being lucky (hard one to sell to investors and regulators!), OR, they need to have a thorough understanding of their strategic risks, precise monitoring of business environment changes, with a well-resourced set of contingency plans to draw upon.
For the winning sectors, we saw companies aggressively invest in opportunities and growth.
The e-commerce marketplace was a clear winner. Large-scale and network effects helped, but even small retailers who were quick to erect online shopfronts did so much better than those who over-relied on their High Street/Main Street assets. Amazon added 100,000 new jobs globally to manage extra demand. Chinese e-commerce company JD.com rolled out a fleet of autonomous delivery vans and introduced unmanned operations as they adapted to social distancing requirements. It was also used to deliver food and medical supplies in Wuhan, the epicentre of the COVID-19 outbreak.
Pharma companies were also one of the winners, adapting to disruption in their supply chain, research priorities and changes in frontline healthcare delivery. Certain companies even repurposed their operations. The Scottish craft brewer Brewdog saw themselves switching production from their signature brew Punk IPA to BrewGel Punk hand sanitiser, to help combat nationwide shortages. We can’t help but feel that Brexit realities in 2021, will be creating a lot more of these sudden “opportunities” to plug supply chain holes.
Tesla’s share price is a halo indicator of a bigger trend: the march of investment funds away from traditional assets, towards companies offering less tangible goods and services. At the start of 2020, whilst Covid-19 was hardly on anyone’s minds, their share price $95. 12 months later it was at $880, representing a Market Capitalisation of $834Bn. The next biggest auto company is Toyota, with a MarCap of $213Bn by comparison. Given that Tesla only produces less than 0.5% of global car output, it’s a hefty price tag. What Covid seems to be doing is accelerating the introduction of driverless vehicles where Tesla are perceived to be better placed as a technology company to exploit this shift, rather than the more stodgy and traditionally perceived car companies.
There certainly seems to be a correlation in people’s minds between tech and sustainable solutions and if anyone is in doubt at this, they should study what has happened to the MarCap of carbon-based energy companies in the last 5 years (the biggest, Exxonmobil has declined 35% in just the last year).
The major losers saw themselves in a situation where they struggled to keep their processes during the pandemic, as customers and revenues were eviscerated. With flights at a standstill, the global airline industry said it would need up to $200 billion in emergency support and Boeing called for $60 billion in assistance for aerospace manufacturers (but mainly, themselves). As an industry that has few options to diversify, airways like Norwegian Air were pushed to cut 85% of its routes due to the travel restrictions and furloughed around 90% of its total workforce. Virgin Atlantic had to halt 85% of its fleet in April and asked staff to take up to eight weeks of unpaid leave to avert job losses. At present, the airline business model is unviable and competition surrounds how well these companies can hibernate until the proliferation of vaccines makes infection-free flying feasible once again.
The majority of cruise operators had to cease their sailings and bankruptcy was likely for most. Royal Caribbean Group reported a net loss of $1.6 billion and aimed to use the time where they weren’t operational on developing new health and safety protocols to protect their guests, crew and the destinations, as reported by Richard D Fain, CEO. Carnival Corporation (owner of many cruise brands including the now infamous Covid-carrying Princess Cruises), took advantage of the buoyant corporate funding markets to acquire $6Nb of new capital to offset its estimated $500M/month cash burn. Norwegian Cruises also prepared for 12 months of cruise suspensions as a downside scenario, so we may well expect to hear of very troubled waters coming up for other lines who were not so quick to secure extra funding in the earlier stages of the pandemic.
Traditional retailers were also the ones hit the hardest. In the US, the largest mall owner Simon Property Group announced in March that it would close all its malls across the country. In Europe, Penneys/Primark, which is a subsidiary of the Associated British Foods, a multinational food processing and retailing company, where Primark is the only non-food-related business, saw its profits plummet from £650 million a month to zero during the lockdown caused by the 376 chains having to shut completely, with no online business to fall back on. They were also pushed to furlough 68,000 staff members across Europe and £248 million of unsold stock. Overall, it will take traditional retail a long time to recover, and they might see their processes change and adapt e-commerce as a backup plan.
But not everything was losses and wins, some sectors fell into a no man’s land, where the uncertainty of their company failing or adapting their business model to take advantage of the new opportunities emerging.
A clear example is education, with most schools, universities and private education providers having to close their doors, the pandemic created the largest disruption of education systems in history, affecting nearly 1.6 billion learners worldwide. Even though the crisis brought to light the pre-existing education disparities, it also saw the distinctive rise of e-learning, and research suggests that online learning has been shown to increase retention of information and take less time, which is now allowing institutions to see the opportunity of expanding their scale and scope of their online operations, and potentially aim to make good quality education more accessible in the future.
Another industry that found itself in a tough spot was hospitality, becoming one of the hardest hit worldwide. In the UK, the hospitality industry shed 1.7 million jobs; in the US a reported 7.7 million people saw themselves in the same situation. However, in the midst of all that loss, there has also been a rise in the opportunities for diversification. For example, chain-branded hotels such as Marriott, Meliá and Barceló are advertising their facilities to people working from home. Marriott hotels introduced the Working from home with Marriott Bonvoy, who offers packages from day passes to stays at up to 16 cities around the world, with attractive perks and amenities at their guests’ disposal. “We are inviting our guests to work anywhere with Marriott Bonvoy to help them be more productive and achieve a better work/life balance by reimagining out hotel rooms as local remote workspaces for our customers,” said Stephanie Linnartz, Group President for Marriott International’s consumer operations, technology and emerging businesses in a recent interview.
Marriott’s success with diversification doesn’t just limit itself at their move to co-working. In the spring of 2019, just before the pandemic hit, they launched Marriott Homes & Villas, a luxury property lodging service that offered customers a private residence alternative to hotel rooms and aimed to rival against the success of Airbnb. From May to August 2020, Marriott saw record performances in top booking days and in the summer and its highest gross revenue since its launch, as travellers preferred the alternative of individual properties during a time of social distancing measures. Yet, even at the height of the service’s success, the prospect of new restrictions to travel and hospitality or the outbreak of a new strain of COVID that coils result in potential lockdowns worldwide could easily pose a threat. Not only that, Marriott, just like many other hotel chains, has had to make significant layoffs and furloughed thousands of employees during the pandemic, so it risks not having the adequate manpower to grow Homes & Villas to its full potential.
The Coronavirus outbreak has highlighted the importance of effective risk management, not simply applying risk management processes like a checklist to be completed; intelligent insights must be gained and courageously acted upon.
What can be learnt from a risk managers perspective about the way businesses have risen and fallen during this crisis? When dealing with such a fast-changing and evolving crisis as the current pandemic, we need to understand the shifts in our stakeholders’ perception to tailor our responses, being constantly alert and agile.
Another lesson is about how we identify and act on risks. A possible pandemic had long been listed as a threat, but when reality loomed, the required mitigations weren’t clear. Much emphasis is often placed on ensuring that language around risks is accessible and meaningful, but it is even more important than the actions to mitigate risks are coherent, comprehensible, and actionable. The more precise, the better. ‘What could we do?’ is the wrong question; ‘What will we do? Who will do it? When will they do it? How will they do it? What will they do if this does not work? What will it achieve? Is it enough in terms of cost vs benefit? Is it enough in terms of reduction of risk?’
Large organisations need imaginative and bold thinking when it comes to risk. Breaking a preventative optimism bias, or an “it can’t be that bad” mindset, needs to penetrate the top of organisations. This kind of thinking is needed across all industries, as planners turn their gaze to the next risk on the horizon.
On the other hand, organisations will also be reflecting on what they could have done differently. In many cases, planning for an event which seemed so unlikely might not have been the highest priority, in the same way that planning for a nuclear disaster in this day and age might seem unnecessary.
The Coronavirus outbreak has highlighted the importance of effective risk management, not simply applying risk management processes like a checklist to be completed; intelligent insights must be gained and courageously acted upon. Whilst a risk-free world is impossible, there are numerous steps businesses can take to adapt to challenges and reap the rewards of good risk management strategy. At the moment, the COVID-19 crisis seems to be easing in certain countries and worsening in others, and the threat of future waves of a pandemic are considerable. It is the organisations proactively analysing, renewing and renovating their risk management strategies now who will build the resilience required to sustain the next existential risk, whenever, and whatever, that may be.