Perspectives from economist and mutual fund titan Mark Bonham and WPP’s former EVP and M&A guru, Andrew Hall, moderated by Philip Guiliano, Partner, BrandActive
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As we begin to see a path out of lockdown, how will this experience have changed what consumers value? Which industries have the best chance to shape messages that will resonate? And what does this all mean for marketers and their businesses?
In a fascinating conversation, these leaders tap their own experience and mine clues from previous crises (such as the 2008 financial crisis and the Great Depression) to predict how consumer attitudes will change in the period ahead—and how businesses will need to adapt.
They discuss:
- Which consumer attitudes will predominate after this period of anxiety and depression
- How to understand where the money and attention will go, and why
- What it takes to be perceived (and perhaps to reposition) as a “savior” business
- A framework for evaluating your business on the “essential” vs. “ease of social distancing” matrix
- The need for agility, and the outlook for M&A
Listen now to the full 53 minute podcast or read the transcript below.
Transcript:
Philip:
Hello and welcome to our podcast on how the lock down experience of 2020 will influence key trends, behaviors and attitudes of industries and consumers. Joining me in this conversation are two exceptional executives, legends in their circles really, Mark Bonham and Andrew Hall.
Philip:
Andrew Hall is one of pre-eminent financial advisors to the advertising and marketing community. He was the EVP and head of corporate development at WPP for eight years as they built out the world’s largest advertising holding company. After leaving WPP, he founded the Black Tulip Group, an advisory and investment firm focused on the marketing, media and information services industries.
Philip:
Mark Bonham is an economist and a financial and investment professional who founded two successful mutual fund management firms in Canada. He has a Master’s degree in economics, from the London School of Economics, and has founded his own charity, the Mark Bonham Charitable Foundation.
Philip:
Thank you so much for joining me, Mark and Andrew. So here we are, and certainly this is a unique time to live through. Multiple generations the world over are enduring large-scale, abrupt disruption due to this kind of this pandemic for the first time in their lives. The social change elements, health concerns, personal finances and other factors are of paramount importance and how the economy will continue to move forward.
Philip:
So, as marketers work on their go-forward plans, they are looking for insights to guide their processes. Mark and Andrew, both of your careers have hinged on your ability to foresee patterns and trends and predict how consumers will react. That process has often included looking back at what has transpired in the past. Mark, putting your economist hat on for a moment, could you think back to consumer behaviors, trends, attitudes that you’ve seen emerge in previous disruptions or crises and share which of those you think might apply today?
Mark:
Yes, absolutely and thank you for having me as a part of this discussion and I am very grateful. Firstly, just to add some color, I started my first mutual fund company back in 1987, two weeks before the stock market crash. I have been around the block in terms of these types of crises and lived through them and been able to, I’d say, profit from them. So, yes, I have developed a number of insights in terms of consumer behavior and business behavior.
Mark:
Whenever an event of this magnitude happens, the first reaction of everyone is to be very cautious. They are very afraid of the unknown and they tend to step back very quickly and retrench in terms of activity. In their day-to-day lives they get scared, of course. They are nervous. What does the future hold? What does it mean for my business? What does it mean for me personally? So the very first knee-jerk reaction is one of extreme caution and that is very understandable.
Mark:
There are a few individuals, however, in any type of instance such as this crisis event, who tend to have a bolder attitude. They view distressed situations such as this as opportunities. The reason that they become opportunities is because there becomes a very distinct difference between the value of assets and the price of assets. As an investor or a businessperson who is sensitive to their marketplace, the first thing you note is that there is a discrepancy between that price of value. You try to think, how do I react to that? How should I change my business behavior or reorient my business around that discrepancy between the price of whatever that happens to be—my service or a product and the value of that product. How do I react to this discrepancy?
Mark:
Admittedly, only a small minority, I would argue, of businesspeople or individuals look at distress in that situation. But those tend to be the individuals who over long-term tend to very much profit from distress type situation. I think the same behavior will exist today. There are these wide discrepancies now between price of assets and values. Most people are very cautious and are in their cocoon, but there are certainly active people looking at what do I do as a result of this? How do I take advantage of this type of situation?
Mark:
In terms of projecting a message to the market, if you are businessperson or an individual, it’s important to present yourself as a solution in a crisis situation as opposed to being a part of the problem. Because individuals will be very much looking for saviors, if you will.
Who is going to help me through this situation? So it is very important for business people and others to present themselves as providing a solution to the situation not being, exacerbating the problem. So companies that do well in this type of crisis will be healthcare companies, technology, communication companies, basic service providers such as food services industries, insurance companies. Well, they really should be taking advantage of this opportunity to convey the value of insurance, for example. That is what they did during the Depression and both world wars. Insurance companies came through those types of crisis situations very well.
Mark:
And finally I would like to just state how in situations such as this individuals, their sensitivities are very heightened. What I mean by that is that they react very quickly to any news that comes in. So you have to be very sensitive to the news that you do put out as an individual or as a company.
Mark:
The small gestures in this type of environment have huge impacts on businesses. A couple of examples of that are, sporting goods chain Sport Chek in the UK tried to take advantage of the situation very early on by saying that they were a necessary company to get around the regulations requiring non-necessary companies to shut down. There was a huge backlash against that—in social media and in terms of boycotting the company. a positive example would be 99-year old Captain Tom in the UK marched hundred laps in his back yard, and he raised $34 million for the National Health Service. Small gestures can have a very [big impact in distress situation.
Philip:
Yeah, absolutely. Andrew I am curious about the consumer side of things. We just got the business side there. On the consumer side, do you see what consumers may value more or what they value less coming out of this?
Andrew:
Well I think right now there is an overall feeling that there will be less consumerism going forward, but I think that might be, picking up on what Mark said, symptomatic of the environment that we have right now. It is not an easy question to answer for two main reasons.
Andrew:
The first is, we don’t know how long this going to go on. Here in the UK, the Chief Medical Officer’s statement yesterday saying that he didn’t think that this would get back to normal until the end of 2021 or towards the end of 2021. And yet in New York we got some data today suggesting that the infection rate is much more widespread than people had believed. I think 20 or 25% of people in New York City are testing positive for antibodies which would suggest a faster recovery. So obviously the longer it goes on the more profound the impact. I think the impact on consumers is going to be deeply uneven.
Andrew:
If you look at what consumers are valuing right now, which gets to what Mark was highlighting in the first question, the data across countries is pretty consistent. The three things they are valuing are household supplies, groceries and home entertainment. Every other category is down. A lot of them are down a lot. In some countries, France being the leading example, every category is down. So what they are valuing in France is cash.
Andrew:
If you look at other epidemics, at this point the data mirrors what Mark was saying when he answered the first question: Consumers have shown a rise in things like anxiety, depression, anger but at the same time a need for economic control. There are essentially two schools of thought here. The first would be, when the lock down ends, there will be some level of pent-up demand. People will want to go out and buy things that they haven’t been able to buy whilst they have been stuck at home. The second, which is at the other end of the spectrum, is the what I would call the “don’t need it can’t afford it scenario,” which is that people have figured out by being stuck at home that in fact there’s lots of stuff they have been buying that really they don’t need. And it is possible you might get both of these at the same time. Even with the same person. Some things might fit the pent up demand model, and some may fit the don’t need it can’t afford it model. That is against an overlay of an undoubtedly poorer consumer.
Andrew:
There is no doubt, whilst some people won’t feel much an impact, the vast majority of consumers are going to have less wealth. Thinking about my personal situation in terms of things I value for—which is a bit dangerous because projecting across the entire population from one person is obviously not necessarily a good methodology. First I would say human interaction with friends and family. The second I think is all those essential things that we take for granted that all of a sudden become really important. Food, telephones, internet connection, television, somebody collecting your garbage. Many of those things are in fact delivered by people on relatively low or absolutely low levels of income. Perhaps there will be a change in value there. The third is something again that Mark talked on about, Captain Tom Moore. The pro-social, taking better care planet, taking better care of other people, caring more about the community. All of those sorts of things. The first two are certainly, have been widely reported as having been important to people across the community across the economy. The third one I would hope that that will be the case, that we emerge from this with a society which is more thoughtful, more caring, more empathetic. But I think it is way too early to say that.
Philip:
It brings on my speculation hat and just the curiosity of, do we think that there are going to be things that come out of this that actually endure long-term or is this the moment in time before we regress back into what felt more comfortable just a few short months ago?
Andrew:
I think it might be both. I think we might get some things which are changed forever. An obvious example would be what currently conducting the worlds largest ever working at home experiment.
Philip:
Totally.
Andrew:
It seems to be inconceivable that nothing will change as a result of that.
Mark:
Obviously the longer this goes on, the more comfortable individuals are with their changed circumstances, such as online schooling or online banking, as opposed to the old way of doing things. The longer it lasts the more comfortable individuals will become with the change.
Philip:
I think that corporate real estate would be the industry I would least like to be in for the next five years. Mark, I am curious from your perspective, going back to the companies themselves for a second, how may they need to change how they typically go to market to adjust to the new needs that we are seeing now? I’m thinking about retail and you had mentioned, banking. But also thinking the relative dynamism that exists right now in consumer needs and wants and behaviors, back to Mark’s comments. So, as we think about all of that, how are companies going to need to change how they go to market?
Mark:
Firstly, as a direct result of this, healthcare are issues that have moved up the ladder of importance for individuals and business, much as the environment has in the past, and profits of course and all that sort of thing. But healthcare now is on the agenda and it is going to impact the way business operate going forward because it will always that, now this sensitivity of re-emergence or of another similar type event. That could very much impact workflows, work processes that occur in the business place but also the messaging you send out to your employees, to your customers, how much you care about their health. How much that is of concern. Everything, social distancing has been an experience, so how is that going to play through your messaging. So healthcare will now have a role in how companies operate. I think that is a little bit new.
Mark:
Secondly, I think there is still… It has heightened the sensitivity of business to consumer sentiment and opinion. Businesses will really have to double down on consumer sentiment and feedback and opinion. Not that they haven’t in the past, but I think again, going back to my point that sensitivities are very high in crises, and businesses have to double down on consumer opinion and feedback. They will have to communicate more and make communication very much a two way street. It can’t be a brash communication strategies. It has got to be very much two way communications and empathy, or empathetic communication strategies.
Mark:
And then of course embracing technology, even more than they have in the past. Because the sort of cocooning we are in right now, really has raised the relevance of technology even to a greater degree than it has in the past. You can imagine if this crisis has occurred 20 years ago or 15 years ago, before social media had really fit in everyone’s household or this type of online communications, that it would be a different type of world response to a crisis such as this. So technology just re-emphasizes how technology is changing the world and really moved that up, speeded up that process very quickly.
Mark:
And finally, I just would like to emphasize how this has really brought home how adaptive businesses now have to be and how flexible production, for example, how quickly companies can change even what they are producing. We have automobile manufacturers now producing PPE or we have distillers producing hand sanitizer. It has really shown the value of adaptation in the business and how quickly one can respond to change. Business will be more sensitive to that, I believe and recognizing how they can profit from being more adaptable than ever anticipated in the past. That’s a big change, I think, for a lot of businesses.
Philip:
Andrew, I am curious. It feels to me that based off of that and what we are seeing in the market, it is also forcing companies to have to try and figure out how to be much more predictive and back to Mark’s reference to technology, it is less about being reactive to customer’s current needs, particularly over the short-term here over the next year or two, and more predictive around where the needs are going to fall. I don’t know if that is true. I am curious what you see companies are going to have to do in order to stay relevant?
Andrew:
I think I would answer that in the stages of the epidemic-slash-lock down. It has changed and it is changing as we move forward through the situation. I have got the advantage of being here in the UK which has been probably about two weeks ahead of North America and the development of the epidemic and equally two weeks or so behind the main European countries.
Andrew:
I think the first two weeks of the epidemic was simply a mad scramble to some of things that were being talked about earlier on. People were trying to figure out at a very practical level how to operate their business with remote workers. It was all about internet access and telephones, Zoom and all of these various things. In fact, people I think have made great progress in that part. I think the first two weeks were really, really chaotic. Then when people got that done, and I think this is the stage we are in now, I think the industry I am involved in primarily the main focus is on cash conservation. I will get on in a minute to explain why I think that is the case.
Andrew:
Most people are in survival mode, if you want to call it that. Whether it is applying for the PPP in the United States or, as we have here, the government systems for following employees and so forth. Businesses are really focused on survival. I work quite a lot with early stage companies. My experience is that most businesses can do that probably for about 90 days or so, and will try and conserve cash if things are not going well. I don’t think we have seen the heavy duty restructuring, bankruptcies and so forth starting to play out. I am seeing a little bit of it, but probably that is another six weeks away or so.
Andrew:
Obviously, there have been some industries that have been really, really heavily impacted such as hospitality and travel and so forth. The way I am thinking about this, is sort of a two-by-two matrix with ease of social distancing on one axis and how essential the product or service is on the other. And so, the box you want to be in is obviously where the product or services is essential–and the social distancing is easy. Some of those companies are Amazon and Netflix–these are sort of the poster children for that. If you go around that chart, the box which is “essential service ,- difficult to social distance”- things like retail and healthcare, those guys are going to figure out, which Mark was talking about earlier, how to deliver their product or service differently to manage the social distancing situation. It is not an economic problem in the sense that there is demand for what it is they have provided.
Andrew:
The box which is non-essential- easy to social distance, which is most of the companies which I am involved with, there the problem is different. The problem is really an economic problem, which is of aggregate demand and the question is, is it temporary? Is it more permanent? How long will it last? And so forth and hence the focus on cash preservation. Finally, the box that nobody wants to be in, which is difficult to social distance-non essential service or product. That means travel, cruise lines, cinemas and this sort of thing. The answer, to be brutal, is going to be a level of mothballing. Do we honestly think that anybody is about to get on a cruise ship anytime soon? I think that is a fairly easy question to answer.
Andrew:
Now, in that structure I would say a couple of other things. The first is there is a need corporate leaders to have real honesty with people. The political leaders who have done the best are people like Angela Merkel, Jacinda Arden. They tend to be very upfront and honest with people as to how a situation is. Mark touched on this point earlier, there is going to be a significant divide between those that do the right thing and those who don’t. I can give a couple of examples on each side.
Andrew:
From a very personal point of view. My son is applying for university, my eldest son, and both he and I are on what’s called a tier-two risk list in the UK. It means we are people that are required to stay at home and not go outside for underlying health reasons. That encompasses about two million people in Britain and divided into tier one and tier two, tier two being the less severe situation.
Andrew:
So, the first is an example of what not to do. Harvard University is currently involved in a spat about accepting relief money from the U.S. government despite having a $41 billion endowment. I think the less said about this the better, frankly. On the positive side, John Lewis which is a very highly regarded company here in Great Britain, the most highly regarded retailer I would say, which runs both non-food and food stores. They shuttered all of their non-food stores and retrained and reallocated workers from their non-food business to Waitrose, which is their food business, in order to provide more capacity for tier-two risk list deliveries, which they have done. Am I grateful that they did that? Absolutely. Do I think it was the right thing to do? Absolutely. Will I as a result always be a loyal Waitrose customer? Damn right I will. I think people won’t forget that kind of stuff.
Philip:
I agree. The brands that doing the things that are just the right thing to do right now, if they are established brands, they are creating endearing followings, right? You talked about the distillery, Mark, that is now creating hand sanitizer, who had heard of that before, right? The pizza company in New York that is delivering to hospital workers–delivering tens of thousands, maybe hundreds of thousands at this point. I saw that weeks ago at this point. People have never heard of, and now there they are heroes just by doing the right thing. Andrew, I am curious on the marketing agency side of things, particularly given your background. How do you see that aspect of things being disrupted? A few weeks ago, we were at this really interesting influx point where agency still had a ton of resources, a ton of capacity, because of client shifts and things of that nature that clients could have capitalized on. Now we are a little bit further down that line. So I am curious what changes you expect to see in the agency landscape?
Andrew:
Based on the answer to the previous question, if you think about it too much in matrix that I just described, I would say the vast majority of them, at least in the short run, maybe the long run is different, in the short run are in the easy to social distance-non essential service box. There are a few that would be… a small few that would be in the “essential service-easy to social distance box.” I would imagine prices PR seems like a pretty good place to be right now. There are also people who are finding social distancing very difficult. Thinking about the event marketing business, for example. That is going to be significantly more challenging.
Andrew:
What I described earlier, which is what I am seeing, is that most of the companies are focusing on cash preservation plus reduction. That sort of strategy. It obviously varies from sector to sector and company to company, but we are seeing budgets being cut, projects being put off etc. It is difficult to predict exactly how that is going to play out. The other thing I would say, in relation to this, is the industry—and and I am talking here primarily about the big companies—in the smaller companies there is a wider range of performance. There are many, many small companies and some of them are doing extremely well. The industry in respect to big companies was not in good shape going into this. Many of the large companies are having significant problems. The disruption we are seeing I suspect will be an acceleration of existing trends.
Andrew:
There may be a couple of different things. There could definitely be a change to organizational structure, given what I said earlier about home working and so forth. You raised the point about central city real estate, and I think that’s going to be an issue not just for cost reasons but also because I would question if this goes on for a long time, whether people will want to commute into big cities, in places like New York and London, where the commutes are long. I could see that that could be a real problem and working from home. I think actually that is long overdue. You know there was a real effort in innovation in the industry. Some other companies have experimented with different hub and spokes structures. We are seeing a bit of that already. San Francisco is probably the single best example because it is so expensive, the real estate, and these were moving to a different organizational structure.
Andrew:
Will there be more consolidation? I am not sure. Probably. I would say certainly in some sectors. The other thing I would say is, going to have see a different strategies approach from the bigger companies. I think continuing to do the same thing only harder isn’t going to solve the problem.
Philip:
Right.
Andrew:
I think there was a recognition of that before COVID-19. I presented at a conference a little while ago and I talked about how for most of my career, in fact almost all of my career, the big marketing services companies have all followed the same strategy and for the first time, very recently, we have seen different strategies from them. I think that is a reflection on the fact that the strategic direction that they were going in wasn’t really working.
Philip:
Yes.
Andrew:
So, that is how I would think about it. I think the other trend we have seen in the industry over the last two or three years or maybe a little bit longer, are likely to continue. Finally, obviously the marketing business is dependent on consumer behavior, so the answer I gave to the first question is really, really relevant here. If we get fundamental change in consumer behavior, for marketing agencies to be successful operating like that.
Philip:
That aspect of things may be your saving grace for agencies. As we are working through what we are working through right now with the clients we have currently, what we are seeing is a lot more appetite to grow in-house agency capability, grow internal staff and outsource a lot less. Even in the last four weeks or so. Clients have shifted their focus pretty significantly in that regard.
Philip:
I am curious because you touched on consolidation in the agency space. I am curious a bit more on the consolidation you might expect in the market. Last week was the first time since 2004, that there was no billion-dollar M&A deal announced, which is to be expected at this particular point of time especially, Andrew, as you are talking about the cash saving mentality. That said, this kind of a downturn does create targets. I am curious what you would expect to see coming out of this one, being that it is so different. It is not just an economic downturn. It is an economic downturn, it is a business model shift, it is a consumer sentiment shift, a social shift. What do you expect to see Mark, from an M&A point of view?
Mark:
The initial reaction as you mentioned, of course, is going to be negative because companies will be focused more on cash preservation, doing an impact assessment on their own businesses, you know M&A may not be on the top of their agenda initially. It is going to be much more defensive attitude as opposed to offensive attitude from the initial stages of any crisis. As Andrew pointed out, liquidity not only for the consumer but for business is going to be a very top priority in the short-term, because that ensures survivability over the crisis itself. There is going to be a lot of attention to liquidity. M &A activity, I would argue, is in a catch 22 situation in any type of crisis, because any seller who steps up to the plate is appearing to be desperate so “oh there must be financial problem” — and maybe there are. So obviously any type of advice, if you will, that they receive in an acquisition transaction would be affected by that negative opinion of their being desperate to sell.
Mark:
On the buyer’s side, of course, their attitude will be, “well this is the time to get a good deal.” So they will be out there looking, once they do start looking at M&A, they will be looking for a deal thinking, well, this is a crisis situation so I should be able to snap things up at a more than respectable price. It is a challenging situation from both buyer’s and a seller’s standpoint in terms of a meeting of the minds, in terms of a transaction. It gets harder to do M&A activity in that type of environment, short-term.
Mark:
Again if you go back to my point that any type of distress creates a discrepancy between the price of an asset and the value of that asset or service, then a crisis situation will create distress. A distress situation will create a discrepancy and will create that opportunity for M and A. So it is in some way inevitable at some point. Astute investors will identify that discrepancy and will try to take advantage of it, if you will.
Mark:
I think the emphasis in terms of successful mergers and acquisitions in this type of environment are ones were both the buyer and the seller have a meeting of the minds, or have a realization that yes, from the sellers point of view, I need to sell but the successful buyer will be the one who doesn’t try to take advantage of the situation but rather embraces the nature of the situation that is causing this discrepancy in price and value. Successful transactions that occur will between parties that are partners in any type of M&A activity. That is the way it has got to be approached from a business standpoint. I am looking at this as an opportunity, but not from a pure opportunistic stand point but from a business building standpoint. How do I add to my business building strategy through a distressed situation or crisis situation. Those will be the ones that are really successful in the long-term and that actually happen. The opportunity is there for it, but execution will still be critical.
Mark:
There will be winners and losers in any distressed situation. As Andrew has pointed out, the cruise line industry is certainly highly questionable as to when it will turn itself around and become more of a winner. So there will be obvious winners and losers. There will be situations that buyers will be able to really take advantage of a seller in a desperate situation. It will happen. Whether that happens long-term successfully or not is another issue. The buyer could be snapping up assets that are worthless anyway. I think there still has to be two parties at the table and if you approach it right, as being partners in building a business and absorbing another viable business, then it will work out but it will be a long-term play. I do not think it will be a short-term play.
Philip:
Since we are on the money topic, I am curious, Mark, where do you see the money going? In 2008 there was a boom in start-ups coming out that. In this area, where do you see the money going? Is it the Zoom’s and the established emerging companies that have proven track records and are able to capitalize on this moment in time? Or do you see this going into the start-up area? Do you see any sort of sway in the balance there?
Mark:
Well, the first challenge is there may not be a lot of money, because the economic impact could be quite severe. A 25% or greater decline in GDP is pretty material. The liquidity as I said earlier is still going to be very important factor in all of this. It is still yet to be determined what the liquidity situation in general will be as this plays out. Money will still be very tight. We are in a low-interest rate environment, so that’s very helpful. We have governments pumping liquidity into the system so that is obviously very positive.
Mark:
Yes, I think the reaction of entrepreneurs is very positive. They are thinking about opportunities and what type of business venture may come out of this. A good example is the story this morning, came out about a London School of Economics grad who is matching doctors. Doctors obviously don’t want to go shopping because they are concerned about passing on the germs, the disease, so he is matching volunteers to those doctors to do their shopping for them and deliver the groceries to their home so they don’t have to go to the grocery stores and perhaps expose others to the disease. So that is one example of an entrepreneur, if you will, who is coming up with a terrific idea that is short-term very successful. Whether those types of opportunities have long-term viability will be an issue. That will still be a criteria going forward, that any start ups or entrepreneurial ventures will have some type of longevity and value proposition to them long-term.
Mark:
A big challenge will be the fact that there may not be a lot of money going into start-ups for a little while yet. We will have to wait and see how long this goes on and what the real economic impact is, at the end of the day.
Philip:
Yeah. Andrew, this is one of those moments in time, you talked about how companies are going inside, saving resources, figuring out how they can do more for less or at least just saving capital. How are opportunistic companies using this time to come out on the other side stronger? What are they doing? What should they be doing?
Andrew:
I think a couple of things I touched on earlier. Right now everything is pretty much frozen. There will be a period of thawing, lets call it that. Some of which will be perhaps positive for some businesses and negative for others. It depends which box you are in and how well you manage it on the matrix I described. I agree with the points Mark was making about the LA point of view and so forth, and I would add a couple of other things.
Andrew:
Let’s just say for a minute that we have a fundamental shift of some description, right? And we don’t know what it is, but there is a fundamental shift of some description. I think you need to distinguish between businesses which have the viable business in the new paradigm and fall short of liquidity, that can be re-capitalized effectively and businesses which have a business model that is fundamentally challenged. One of things I have seen since I agreed to do this, just in the last few days, my phone is beginning to ring with people who are looking at some of the situations that have been put into place by private equity where perhaps either the parent company is in trouble, and the subsidiaries are doing well or one or more subsidiaries are doing well, or perhaps just the capital structure itself is a really big problem.
Andrew:
The problem we have is that essentially there has been an expansion since between 2008, the last bottom of the cycle. So, we’ve had a 12-year expansion in which for this sort of thing is very, very long. So people think there is no institutional memory and the longer the cycle goes on the more careless people become, if you want to put it like that. I think this would happen anyway, without COVID-19. But COVID-19 is going to make it a lot worse.
Andrew:
I think the answer with the companies that have strong businesses and strong balance sheets will come out of this the other side stronger. But I would also agree with what Mark said. I think there is, amongst those groups, whether its corporates or others — I work a little bit with family offices and people are worried about reputation. They do not want to be seen as taking advantage of a situation, having vulture-like behavior. They want to be seen as a part of the solution. I don’t think we are going to see that really until this 90-day period runs down. I am expecting what we will see is a lot of restructuring of industries as a result of a combination of the COVID-19 problem and too much leverage in the system. The advantage will be taken by people who have both the capital and management bandwidth to take on those sorts of problems.
Philip:
Yes.
Mark:
Yes, and I can add to that, that the fixed income market has been predicting this type of correction, if you will, in financial markets for a while. If you look at the shape of the yield curves, and even the junk bond market itself, the rate increases that were required and how many issues were moving from double Bs into junk bond status. There has been a lot of leading indicators like that showing that the market has not been healthy for a while, the overall market. This very well may have played out with or without COVID.
Philip:
Yeah. It is an interesting thing, Andrew, that you were touching on around people wanting to be a part of the solution, particularly at time when everyone is trying to be a part of the solution, everyone is trying to figure out how to be altruistic. It is so hard to get that message across, even for people that are giving there is an element of disbelief, I believe that it will square itself out of the market to make that happen.
Andrew:
I think that is true. Speaking from a personal point of view, we have been approached with few of those sorts of situations and you do have to try and be fair with people. Maybe that sounds very old fashioned.
Andrew:
A good example, if you think about what happened in 2008, it’s this on a very big scale. Warren Buffet ran around having his own TARP program, basically. He obviously is a person who did very well financially. But he didn’t come across in a predatory fashion. In fact, some of the deals were structured in a way that, if the situation were going well the receiver of the financing could pay him back, albeit he made a handsome return. That is particularly true in a family office category. People are looking at things and saying, well I don’t want to be predatory. I want to have a situation in which, and this sounds tripe, as a sort of win-win for both parties, i.e. the entrepreneur had a business that was clearly viable in the long run but had a short-term problem. The investor had cash and liquidity which they wanted a good return on at reasonable risk. The investor provided the liquidity and because it worked out really well the entrepreneur could continue in perhaps in a way they wouldn’t have been able to do without the investor’s help. Albeit that the return is shared with the investor.
Andrew:
That I think… and I don’t know whether Mark would agree with me, but I think that most of the people that I work with, that is how they are looking at the world.
Mark:
Absolutely, yes I agree entirely.
Philip:
Let’s shift through a couple of industries. I am curious Mark, post 2008, definitely a different animal since the financial crisis, financial service organizations had to contend with widespread distrust amongst consumers. People’s portfolios have gone down recently, come back a little bit over the last little bit. What impact do you see in financial services institutions this time around?
Mark:
Well the good thing is that this time around financial institutions are not the culprit or the instigator to all of this. Quite the opposite. They can actually position themselves as one of those saviors, as one of those positive solutions. They are working with government to get financial assistance out there very quickly. That is very positive. Consumers obviously feel that, see that impact.
Mark:
Nevertheless, there will be challenges. They are facing a decline in personal incomes and spending, that is going to have some type of impact going forward. There is going to be an increase in unemployment. Certainly in cities like Toronto where the financial industry is a huge employer, especially of the youth and graduates from business schools and so-on, I think there is going to be a big impact there going forward, in terms of slowing down in hiring in the next little while. That is going to impact the younger generation. There is going to be that movement from bricks and mortar to more online banking, which is a positive, I guess ,from reducing the overall overhead costs of running a financial institution, which I think is very positive. This has forced them to take online servicing much more quickly perhaps than their business plan might have previously envisaged.
Mark:
Going back to this opportunity for financial institutions to be a part of the solution, as opposed to being a problem, there still need to send out positive messaging and need to do positive things. A good example for that might be senior management pay. Like maybe… I notice there are some business now that are announcing that senior managers are taking a 20 to 30% pay-cut to help the other employees out, or customers, or what have you. Also, cutting dividends. Dividends have a very important role in the financial institution industry, both for the shareholders and also for the signals being sent to the marketplace itself. But are those dividends going to have to be cut and if so how are you going to position yourself in the cutting of the dividend? Those are issues that are going to have to be dealt with and hopefully they will be deal with very positively.
Mark:
Also, mortgage renewals. Again if the economy is a 25% decline in GDP there is going to be an issue with mortgage renewals and the banks are going to have to take a very proactive role in how they are going to deal with that, and come out looking good. They did that actually in the Depression, at least in Canada–perhaps less so in the United States and I don’t know the experience in the UK. Obviously, that was a big issue in the Depression and the 1929 crash. Banks actually did manage it fairly well. They had issues with farmers but they did renegotiate, they were flexible. All of those things are going to have to happen, if things play out negatively. So, the challenge is there but industry can really come out of this looking good, if management is proactive about coming out as a positive player in all of this and a savior in very difficult times for individuals.
Philip:
Mark and Andrew, thank you so much for sharing your thoughts with us today.
Andrew:
You’re welcome.
Mark:
Thank you.
Philip:
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