Navigating recession and recovery in the 'new normal'

This article was current at the time of publication.

As we move towards a new sort of normal, not all businesses will survive the demand shock of the COVID-19 pandemic.

"Some are in an uphill battle and are not going to win," says Andrew Albury CPA, a partner at MGD Wealth Brisbane, a Queensland-based firm that offers advisory, administration and compliance services to a range of clients from business owners, entrepreneurs and executives to farmers and self-funded retirees.

"Others are considering how to cut down on obvious costs," he says. "For example, a lot of big businesses are re-evaluating what they thought their need for office space was. I'm seeing that play out numerous times."

Talking to clients about risk

According to Hugh Zimmerman CPA, a director at Perth-based Galluccio Griggs, which caters mainly to small-to-medium enterprises (SMEs) including retail, hospitality, property, and specialised industries and service industries that support the mining sector: "Clients are very conscious of the vulnerabilities of their business right now and wondering how they mitigate risk."

There is a sense of nervousness about what is going to happen when the federal government stimulus finally ends, Zimmerman says.

"But the message we are giving clients is [that] it's not all doom and gloom. Businesses need to focus on the things they can control, including renegotiating costs, considering downsizing or upgrading their digital capacity.

"We are also continuing to see a real shift in culture in the remote working space, for accounting practices as well as their clients."

Recovery and reinvention: a complete structural reset?

For many businesses, recovery will be a two-step, not a one-step process, says economist Michael Drew, a professor of finance at Griffith University in Queensland and chief investment officer at MGD Private.

"Rather than talk about a V or U-shaped recovery, we may need to think about a W," Drew says. "Our strong view is that returning to normal hinges on a clinically proven vaccine or treatment."

Industries that have been challenged structurally, such as airlines, bricks-and-mortar retail, hotels, restaurants and the entertainment sector are really going to struggle in the next 12 to 18 months, he predicts. Some may need a complete, structural reset.

According to Zimmerman, a member of CPA Australia's national Public Practice Advisory Committee, one of the first industries in Western Australia to get hit by the lockdown was crayfishing.

"The income of a client who makes around $1.5 million a year literally dried up overnight with restrictions on travel in and out of China," he says.

While exporting live crayfish has returned to normal, numbers are down because of freight constraints due to limited airline flights between Australia and China.

Another client, who had an indoor volleyball business, ceased trading as social distancing came into force.

"It has reopened, however is not operating at similar pre-COVID-19 levels," Zimmerman says.

"This is partly due to the client demographic and their higher exposure to current unemployment levels. My understanding is that this is a common theme for leisure-based businesses."

At the other end of the spectrum, Drew says businesses with an online presence such as telehealth, pharmaceuticals or streaming services continue to be very well positioned.

"We've seen the NASDAQ reflect that," he says.

There's a lesson here for public practices too. Zimmerman's firm is focusing on its ability to service clients in the cloud space and re-evaluating its practice software.

At MGD Wealth (of which MGD Private is a part), Albury says: "We have generally been early adopters of IT and are continuing to find efficiencies in that space."

In line with digital trends, cashless and contactless retail, restaurants, and deliveries have the potential to boom post-COVID, Drew believes.

Modified business as usual

Thankfully, fortune has not only favoured those invested in technology.

One of Galluccio Griggs' clients, which builds specialised mining machinery, has seen a 50 per cent increase in orders for the new financial year.

"Mining was still regarded as an essential service here and, during lockdown, FIFO [fly-in fly-out] workers were able to pass through the border without quarantine," Zimmerman says.

A furniture retailer client also had the best month on record in May, he says.

"People who would normally have been travelling decided to upgrade their furnishings. Even in a recession, some people will still want to upgrade their TV, go out for dinner, or do some home improvements."

Green shoots are being seen elsewhere in what Drew describes as a modified business-as-usual segment including such industries as banking, consumer goods, agriculture and freight transportation.

"Their business model requires some re-engineering, but nothing like those where a structural reset is required," he says.

Albury says large McDonald's and Subway franchises clients struggled but are now trading well after transitioning to more drive-through takeaways and avoiding face-to-face contact with customers.

A Sunshine Coast-based pineapple grower, who saw his crop rot after restaurant demand bottomed out during lockdown, has made a strategic decision to move into mainstream vegetable crops.

"If hospitality gets shut down it should, in theory, be replaced by increased household demand," Albury says.

Surviving a recession

In the shadow of a recession, the behavioural story is now the key to reigniting consumer and business confidence, Drew says.

"Australia is feeling the full brunt of the global pandemic, global slowdown, and some geopolitical challenges with China affecting outbound and inbound trade," he says.

"One in four people globally has lost an income stream and we are in a liquidity crunch. However, if a bigger percentage of the economy is affected by unemployment, we get into a far riskier position where insolvency — not just liquidity — becomes the issue.

"Sadly, we will see a percentage of businesses going to the wall."

Every business needs to consider core operational issues, including supply chain, cash flow, outstanding debt, assets, investments and market vulnerabilities.

Albury says: "Where we are seeing one big issue is around investment in commercial property, at the big end and small end of town. What's brewing right now is that valuations may drop 20 to 30 per cent."

Zimmerman, who landed a graduate job in 1991 towards the latter part of the last recession in Australia, and was almost immediately made redundant, says the experience permanently shaped his views on financial issues. "I have always made sure I had diversification in my income sources," he says.