Forecasting Catastrophe: The Model Matters
Updated: Jun 1, 2021
With few exceptions, and yes there a few exceptions, most small businesses were tragically affected by the COVID-19 disruption. Some were positively affected, but most experienced bad to very bad to results. For example, if you were in the pizza delivery business, you probably did well. However, most business models were not able to easily adjust their space configurations or product offerings to respond to the changing demands from customers and the authorities that required, or rather demanded, compliance with ever-changing rules.
January 2020 held so much promise.
COVID-19! What in the world is that and how has the business world changed since COVID-19? Well, the valet business, a simple business model, seems to have evaporated. And what about dentist offices? That model was very simple as well – a few staff, a dentist, and perhaps, at the most, one or two staff interaction with you, the patient. Dentists already took precautions to keep you and themselves protected from bacteria. However, that business was completely shut down, in some cases for 90 days. There was no "drive-thru" dentistry to help dentists/entrepreneurs survive.
Now let’s consider the pest control business. Pre-COVID-19, few people wanted a stranger to come into their homes to spray for pests. I thought it was also a great business model. The owner pays a tech/driver $15 per hour, the tech uses your water, sprays a chemical along your baseboards for less than one hour, and leaves you an invoice for $150. The profit margin in this business is great: 10% payroll, the cost of the vehicle, and the small cost of the exterminating chemical. However, this beautiful business model is also now a total risk. It could, however, morph into a COVID-19 sanitizing company that kills pathogens. This would change their offerings to meet today’s COVID-19 issues. In this case, the business model is flexible and can survive.
With few exceptions, and yes there a few exceptions, most small businesses were tragically affected by the COVID-19 disruption. Some were positively affected, but most experienced bad to very bad to results. For example, if you were in the pizza delivery business, you probably did well. However, most business models were not able to easily adjust their space configurations or product offerings to respond to the changing demands from customers and the authorities that required, or rather demanded, compliance with everchanging rules.
Some models suffered so tragically that they may never return to normal. The valet parking business mentioned earlier is one example. Having random strangers jump into your car to park it seemed like such a good idea for so long. Here in Houston, there are literally thousands of restaurants that offer valet parking services. The model is so simple and easy to offer – no inventory to count and no serious training requirements. But today, it makes no sense at all. Not only is the driver, who is getting in and out of 50+ cars a day, at risk, but also the vehicles’ owners.
Will business ever get back to the pre-COVID-19 levels? It's my belief that it will be a long time before it does. Sports bars that boasted nearly 100 flat screen TV's and the ability to serve 300 people on NFL Football Sundays are changed drastically simply because 1) there's no football to watch and 2) the cable bill is higher than the food revenue.
Sit-down restaurants have a particularly tough challenge as well. Imagine the Governor telling you that you can only open to 25% capacity and must comply with social distancing requirements. Could you have predicted that those two words would be strung together, "social distancing"? What is that? In any case, imagine 25% capacity, yet your expenses are still 100% and your revenues have dropped 100%. If you can convert to pick up and delivery orders, you might be okay, but a 75% drop in seating capacity is itself catastrophic. Sit-down restaurants plan their revenue on how many times per day part, i.e. during breakfast, lunch, or dinner, they can "turn" their tables. A restaurant with 100 tables should turn them four times per day part in order to make an acceptable profit.
Let’s look at this closer. If you work the breakfast shift, you know about how many times you can turn the tables in your section. On a good Saturday morning you may have a table section configuration that includes, 4-four tops, 4-six tops, and 2-two tops for a total of 44 customers when the section is full. If the section turns four times per shift, the waiter could conceivably wait on a total of 176 diners per shift. If the average check, i.e. spend per person, is $20 x 176 diners, that section will generate $3,520 in revenue. If the waiter makes 15% in tips then they could make $528 per shift. This includes the hourly wait staff pay rate in Texas of typically $2.15 per hour.
Now take into account fast food restaurants where food costs would typically hover around 32% of sales and paper costs around 3% of the sales. Your cost for paper will go up substantially for takeout during COVID-19 while your labor costs would go down because of to-go orders. Your in-store sales are nearly gone and the money from the stimulus check was restricted to payroll only. Wait staff generally only report the wages you pay them for taxes and it’s rare that they report all of their tips. So, your wait staff cannot survive on the stimulus money at all. In any case, if you use the stimulus money to pay your waiter rates, it won't help them much because they live on tips not the pay rate.
Now you have to reconfigure your dining room and kitchen to be compliant with the new regulations for service and cleanliness. At a time when funds are low, the cost to reconfigure will be vast. And remember all the food you had in the freezer and in refrigeration pre-COVID-19? Well, the shelf life expired long ago and if you have a heavy protein [meat] menu, the cost of that expiration was extraordinary. Fresh poultry has a 3- to 5-day shelf life and kill date and beef, though easier to manage than poultry and seafood, is still very expensive to manage. Training and retraining staff is costly and though you try your hardest to hold onto your best, most reliable people, you will lose some of them. Chances are they have to move on to wherever they can get employment.
Now, let’s say a typical occupancy [rent] expense for a fast food restaurant is 10% of sales. When sales are zero, that means you can't last very long at all. If you can get your landlord to put the missed payments on the back end of your lease, then that would buy you some time, but what about the cost to modify the space? If your landlord has no interest in continuing to participate in your suffering from lost revenues, because, after all, the revenue they depended on is gone since you have no sales, then your problem is not solved.
The decisions made by authorities have been catastrophic to your business and planning for a catastrophe is very difficult when what befalls you is not something any of us have ever seen before. The business model you choose has everything to do with the type of catastrophe you can survive as well as how long you can survive. The people you elect to have authority over your business have everything to do with how you survive a catastrophic event. Perhaps now we can agree that the model matters.
- Darryl King
Entrepreneur, at the Intersection of Business and Politics