Courtesy of the lockdown, business owners now face the best opportunity they’ve ever had to work “on” their businesses rather than “in” them. Rethinking one’s strategic plan might be a good idea right now because there is more than just Covid-19 pressing on the way we run our businesses these days. Changes need to be made and its better to take control of what you can change rather than be swept aside by the virus force affecting so many.
1. Loss of Easy Credit Access
When the NZ financial sector was deregulated over 1984-87, banks operating here did a lot of bad lending, contributed to the late-1987 sharemarket crash, then tightened up their riskier lending in areas like property development, after which finance companies took over.
A second general tightening of lending criteria and willingness happened after the GFC of 2008-09. Now there is a third wave of tightening underway, though it comes in two stages.
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In the short-term banks will have almost no interest in new credit proposals. All their resources for most of the rest of this year will be devoted to existing clients who are facing the biggest aggregate hit to their revenue and debt-servicing ability that any of us have ever seen.
But once the dust settles, banks will still be making less credit available than for the past ten years. They will have higher capital requirements to meet (delayed one year for the moment), balance sheets to rebuild, tighter financing constraints and money to pay back to our central bank, and even more pressure from their Australian owners.
Businesses will need to plan for future growth to come a lot more from retained earnings and new capital. The need for a well-functioning and accessible sharemarket in New Zealand has now lifted tremendously.
2. Higher Minimum Wages
Labour shortages may have gone for now, but wage costs at the lowest end of the payment spectrum have risen a lot. Rising wages are actually a vital element in driving growth in productivity, economy-wide profits, and the economy overall. This is because price signals are needed for resources to shift from low-value activities to high ones. With labour shortages, higher wages cause low-profit firms to close down, people shift to higher-profit businesses, and the economy improves.
We don’t have labour shortages for now, but that does not mean labour automatically gets deployed to highest-profit and productivity sectors. Higher minimum wages may not be welcomed at the moment by many businesses, but they are an important component in raising living standards long-term for all of us.
3. End of the Tourism Boom
Between 2014 and last year visitor numbers to NZ rose 40 percent, with their spending soaring 70 percent. This growth could not be sustained. Now, not only has growth flatlined, the entire sector for now has gone. A rationalisation of operators was always coming, and what gets left after this biggest of all weeding out phases will hopefully be good, profitable, well focussed businesses aimed at quality rather than bulk quantity of tourists.
4. Labour Shortages
Businesses have for years been struggling to find both skilled and unskilled labour. We’ve become reliant on near 200,000 people here on temporary work visas – most of who will now be leaving in the coming year. Businesses were needing to shift their capital spending to labour-saving technologies. More importantly, they were needing to first of all figure out how many staff members they could reasonably secure in coming years, and then figure out what level of output they could target. That in turn would drive advertising budgets.
This is the complete opposite of the traditional business model of maximising customer inflows and then finding the resources to service them. This constraint is now largely off the table for most businesses and what we need is the opposite of labour-saving investment, for perhaps the next 2-4 years. After that the shortages will likely return. So put this factor in your five-year plan.
5. Loss of Social Licence to Operate
Businesses have been getting increasingly challenged to show they are reducing their plastic use, and show they are cutting carbon emissions. These pressures to change have been coming not just from online clicktivists, but also younger staff members and the public more generally, as we have grown concerned about these newly recognised forms of environmental pollution.
The need to address these issues remains and firms would be wise to keep these pressures near front of mind this year as they adjust to a smaller economy and consider their strategic direction.
6. Loss of Pricing Power
Before the internet it was hard for a consumer or business buyer to find alternative products. Searching for information cost time, stress, money, and petrol. Now such searching is virtually costless online, and businesses which raise prices will in most instances find immediate consumer resistance. This makes maintaining profits hard when costs go up.
Handling this change in pricing power requires focussing on one’s most profitable clients, products, and locations and moving away from less profitable areas.
7. Climate Change
Heightened inundation risk along rivers and seashores means businesses (and home owners and investors) need to think about how asset values will change as inundation worries grow, insurance becomes expensive or not available, and banks eventually refuse mortgages.
There are other pressures out there which mean for most businesses their strategic plan and direction needed to change even before Covid-19 came along. Now, with that outbreak affecting us all, we’ve each got three-seven weeks remaining to do the deepest thinking and planning about our business direction that we’ve ever had the opportunity to do. Take this opportunity to do what the experts have for years been telling us we need to do – work “on” your business rather than just “in” it.
- Tony Alexander is an economics commentator and former chief economist for BNZ.
