Competitive sectors face the hardest hit from coronavirus

The package of economic support offered by the Treasury — from a standing start — is one of the most impressive among any western country.

But the cascading consequences of the coronavirus crisis mean that there are all kinds of areas where the pleas for help continue to come.

Small businesses, for example, are the heart of the economy, and will be at the heart of any recovery. But anecdotal evidence suggests many are shutting up shop.

A major problem, according to my contacts, is that while they have received significant help with payroll and business rates, rental costs remain a burden.

For most high-street firms, rent is second only to staff as an expense. A 2017 report found that retailers paid £20bn in rent versus £53bn in staff costs. Across the hospitality industry, which has been particularly hard hit by recent events, rent is the second highest cost, and still has to be paid even if the shops are closed.

One landlord I spoke to insists that he and others want to help. But many are either too highly geared, or face restrictive debt covenants.

And while the government is offering loans to help bridge the gap, and many landlords are offering rent holidays, tenants will still face a stack of debt when they do reopen.

Our data team at the Centre for Policy Studies has been looking at the detail. In most parts of the hospitality sector, including casual dining, nightclubs and pubs, rental costs are greater than operating profits.

In sectors such as retail, many firms are already operating without much of a margin for error. Pile on the added burden of repaying the rent bills, whether to your landlord or the government, and many small firms are apparently choosing to shut up shop instead.

With the future so uncertain, and margins already tight, the calculation may be as much psychological as economic: people choosing to prioritise their families over their firms.

Of course, Rishi Sunak will be deluged with pleas for him to throw another few billion onto the pile. He and his team will have the data to tell how serious this problem is — and may well be able to resolve it via facilitating rent holidays, suspending debt covenants, or extending loan terms rather than direct bailouts.

If there is further support, it must, like other measures, be strictly limited to the duration of the emergency: we cannot bail out every landlord and tenant in the country, especially those already leveraged to the hilt.

But there is another point here. It is already clear that the coronavirus will not only damage the British economy, but distort it. Sectors such as hospitality, retail or aviation are suffering hugely, through no fault of their own.

The government’s interventions, while completely necessary, will inevitably exacerbate this. For example, some firms seeking government lending were, insiders say, clearly unviable even without the crash.

It is in the national interest to keep them alive, but in the process the state is taking on a level of moral hazard, not to mention what are likely to become bad debts. So some firms which should have folded will survive, and some firms that should have survived will fold.

As Adam Smith set out in tablets of stone, the point of capitalism is to serve the consumer. The entire justification for the market is that it delivers better goods at lower price. And for that to happen, we need vigorous competition.

The problem is that a crisis like this turns that logic on its head. The firms, and sectors, that are best positioned to survive are those where a cosy cartel have been creaming off the profits.

Even if they failed to build up a sufficient war chest during the good years, there is probably ample scope to cut their prices and costs during the bad.

By contrast, in those sectors where competition is already robustly effective — like much of the high street — there is not much margin for error. The recent squeeze on retailers’ profits reflects the cut-throat nature of the competition they already faced, from rivals both online and off.

A recent CPS report, Resentful Renters, pointed out that in the construction industry, an economic crash is invariably followed by a collapse in the number of small and medium sized housebuilders — allowing the bigger firms to grab more of the market and consolidate their profits.

The most obvious, and important, cost of the coronavirus crisis is the cost in lives. But for the economy, the danger is not just that it leaves us with fewer businesses, but that the normal, healthy process of survival of the fittest firms is replaced with very uncreative destruction.

Main image credit: Getty