By Liz Hoffman and Jennifer Maloney
The coronavirus pandemic brought the global economy to a
screeching halt this spring, sparking fears of a corporate
bloodbath. As the year ends, it's clear that the crisis has rewired
the economy in surprising ways and served up unexpected
opportunities for some big businesses to prosper.
Dog hiking vests and festive sweaters for pet lizards flew off
the shelves at PetSmart Inc. Universal Pictures embraced the rise
of streaming and reset Hollywood's balance of power. Neiman Marcus
came out of bankruptcy with a clean slate and new money from Wall
Street. Salesforce.com Inc.'s CEO tired of Zoom calls, then agreed
to pay $27.7 billion to own Slack, a tool to connect remote office
workers, a big bet on a permanently changed workplace.
"We've had 10 years worth of change in 10 months," said Rajeev
Misra, CEO of the Softbank Vision Fund, the world's biggest
technology investor. He went into the crisis worried the market
would leave his startups for dead, only to ride a record
stock-listing boom to big gains.
The biggest companies, in many cases, were the ones that came
out on top. They slashed their workforces. They cut costs and
re-routed their supply chains. Investors plugged financial holes,
encouraged by central bankers who lowered borrowing rates and
flooded the global economy with cash. Consumers quickly got back to
spending money, shifting their dollars online and replacing dinners
out with at-home cocktails and overseas vacations with local
getaways.
The tactics that helped many corporate titans thrive -- laying
off thousands of workers, going deep into debt, and grabbing market
share from struggling competitors -- will shape the recovery for
months, if not years.
Moreover, even as vaccines begin to be deployed, the pandemic
and its fallout continue. The death count keeps rising, and food
banks continue to report heavy use. Small businesses have been
battered and millions of Americans remain without jobs. Some pivots
might yet turn out to be short-sighted, some predictions overly
optimistic. November's retail sales slowed as infections surged, a
sluggish start for the holiday shopping season. In recent weeks,
giants like Coca-Cola Co. and General Electric Co. have outlined
plans to cut more jobs.
But corporate profits have snapped back. So have stock
prices.
"I would have never guessed that I would be telling you this
story today, " Toll Brothers Inc. CEO Doug Yearley said in an
interview last week. "Back in March, we were all scared. We were
scared personally, and we were scared for our business."
During the last economic crisis, in 2008, the housing market
crashed. This time buyers queued up in virtual open houses for new
Toll Brothers developments in Boise, Idaho, and the Atlanta
suburbs, spurred by falling mortgage rates and a desire for
space.
At the end of June, stock analysts were projecting a 25% drop in
the third-quarter profits of the companies in the S&P 500
index, according to FactSet. Their actual profits fell just 6%.
Gains in health care, consumer goods and technology compensated for
sharp declines among energy and industrial sectors.
When Neiman Marcus Group Inc. sold a 7-carat diamond ring in
April to a customer who had never seen it in person, its chief
executive glimpsed a new hope for the embattled luxury retailer.
Neiman Marcus had temporarily closed its stores but top customers
were still opening their wallets.
Fashion houses kept shipping to the high-end chain even after it
closed its stores in March, furloughed many of its 14,000 workers
in April and filed for bankruptcy in May. "Not only the customers
but the brands supported us," said CEO Geoffroy van Raemdonck.
"Then it was a question of how quickly we could reopen the
stores."
Neiman Marcus emerged from bankruptcy protection in September
with fresh financial backing from big investors. It has reopened
all of its 40 remaining stores, including Bergdorf-Goodman in New
York City.
Easy Money
Royal Caribbean Group stopped sailing in March and started
packing financial sandbags. "You could never be too rich, too thin
or too liquid, " CEO Richard Fain told his board of directors. The
cruise operator borrowed from banks and sold new bonds to investors
as it burned about $300 million a month, its ships in harbor and
its reputation under fire. By October, it had laid off or
furloughed 23% of its U.S. shoreside employees and repatriated more
than 44,000 crew members to their home countries.
A bottomless well of investor cash kept companies like Royal
Caribbean alive as revenue vanished. Ford Motor Co. in April set
out to raise around $3 billion and ended up with $8 billion. Boeing
Co. sought federal aid -- a rescue that would likely have made the
U.S. Treasury a major shareholder -- then changed its mind and
raised $25 billion from bondholders with far fewer strings
attached.
Investors put a record $11 trillion to work this year, about
half of it into corporate debt, according to financial-data firm
Refinitiv.
John Zito, deputy chief investment officer atApollo Global
Management, spent his 39th birthday, Saturday, March 21, in his
home office. The investment firm had settled into a defensive
crouch in February, moving a third of its assets into cash and
other ultra-safe holdings. He wanted to go on offense. "You'll
never get another chance like this," he told his team, dialed in on
a conference call, "to buy great companies at tough prices."
On Monday, the private-equity firm started buying. Over the next
two weeks, it spent $800 million a day buying discounted corporate
debt and newly issued bonds from Boeing, PetSmart, Airbnb and
others.
Central bankers spurred investors on. Global governments have
pumped $28 trillion into their economies this year through stimulus
spending and financial-market backstops, according to Cornerstone
Macro, an economic-research firm. That amounts to nearly one-third
of global economic output, roughly what experts estimate was lost
in the spring.
United Airlines Holdings Inc. got $5 billion to pay workers
under the stimulus bill passed in March, but knew it wasn't enough
to compensate for its nearly empty planes. Wall Street filled the
gap. The airline sold shares and took on more debt, including $6.8
billion borrowed against its customer-loyalty program, an
arrangement quickly followed by rivals.
United and its union struck a deal that saved pilots' jobs --
CEO Scott Kirby wanted to avoid the years of retraining that would
be required to rehire them after the pandemic had passed. But
thousands of flight attendants, mechanics and others were
furloughed in October after government aid ran out.
United has lost more than $5 billion this year and last week
warned investors it was burning through more cash than expected.
Mr. Kirby resisted calls this summer to add back flights to capture
the demand many were sure would return.
"I bet I got 50 emails that said 'build it and they will come,'"
he said. "In the real world, if you build it, and they don't come,
you go bankrupt."
Moving Faster
Medtronic PLC didn't need money. It needed ventilators. It was
Sunday, March 15, and incoming CEO Geoff Martha was riding his
Peloton bike in the basement of his suburban Minneapolis home,
fielding one call after another -- the White House, the Federal
Emergency Management Agency, state governors, the prime minister of
Ireland.
"The numbers that they were asking for were orders of magnitude
bigger than the entire [ventilator] market," said Mr. Martha, who
became CEO of the medical-device maker in April.
So Medtronic began sharing its ventilators designs with anyone
willing to build them, and recruited manufacturers of auto parts
and spaceships to start making components on their assembly
lines.
In April, hospitals in Minneapolis and Chicago asked Medtronic
if ventilator settings could be adjusted from outside a patient's
room to reduce the risk to hospital staff. Medtronic designed a
solution, which was rolled out three weeks later.
"We've never done anything like that," Mr. Martha said.
Medtronic's sales, though hurt by the suspension of elective
surgeries like implants of its pacemakers, have rebounded faster
than expected. The company reported $7.647 billion in revenue in
the quarter ended Oct. 30, just 0.8% shy of the same period last
year.
Going Digital
The pandemic accelerated gains in the digital economy. Schools
went online. Food delivery surged. More than 86 million households
signed up for Walt Disney Co.'s new streaming service in its first
year. As a percentage of U.S. retail sales, e-commerce gained
nearly five percentage points between Marcy and July, equal to its
gains in the previous five years, Federal Reserve data show.
That was welcome news for the SoftBank Vision Fund, which was on
its heels early in 2020. It had poured billions of dollars into
technology startups with little to show for it and some
high-profile duds, like WeWork.
Mr. Misra, the fund's CEO, spent the early days of the pandemic
working with companies in his portfolio to slash costs, warning
them that they likely wouldn't be able to raise new money for a
while. "The market might be shut for 18 months," he told them.
Mr. Misra now says he was too bearish. Two dozen Vision Fund
portfolio companies raised fresh cash from private investors this
year. Twelve went public, including DoorDash Inc., the
food-delivery company whose IPO documents credited soaring demand
during the pandemic for some of its growth. After its shares rose
86% on their first day of trading earlier this month, SoftBank's
$680 million investment was worth nearly $12 billion.
"We knew we were in the right place," Mr. Misra said. "Covid
made it the right time."
Need to Pivot
Jeff Shell saw his chance. The boss of Comcast Corp.'s
NBCUniversal had spent years in a deadlock with movie-theater
chains, which had exclusive rights to show new films for months,
even as consumers had moved to streaming.
With theaters locked and dark this spring, Mr. Shell decided to
release "Trolls World Tour" -- an animated film his studio had
spent $90 million to make -- on streaming platforms like Apple and
Amazon. "We could have put the film on the shelf until the world
changed," Mr. Shell said, "or we could find a different way to do
it." Within three weeks, the film had racked up $100 million in
digital sales, and Mr. Shell told The Wall Street Journal that
Universal planned to release future movies for streaming, too.
The biggest U.S. theater chain punched back quickly. AMC
Entertainment Holdings Inc. said it wouldn't screen any Universal
movie until the studio reversed course. "You have to see the big
picture," Mr. Shell says his message was to theater owners. "There
are people out there trying to kill both of us." Netflix Inc. was
gobbling up a bigger slice of the movie business. Actors and star
directors had already made the jump.
Three months later, with most U.S. theaters still dark, a truce
was struck that will reshape Hollywood beyond the pandemic.
Universal's movies will move to streaming platforms after 17 days.
AMC will still get its opening weekend and share in revenue from
at-home rentals.
The two companies had been close to a deal in 2016 and again in
2018 but talks had fallen apart, said AMC's chief executive, Adam
Aron. "We did in 12 weeks what we couldn't get done in five years
of trying," Mr. Aron said. "Covid changed everything. Both sides
were willing to take more of a risk."
With the Pfizer Inc. vaccine now being administered and others
in various stages of government approval, executives are waiting to
see whether those changes are permanent. Mr. Aron is betting movie
fans will still want the big screen for a slate of blockbusters
pushed by the pandemic into 2021, including a James Bond flick he's
eager to see.
Surprising Demand
As restaurants and bars closed, Pernod Ricard SA saw one of its
biggest sales channels shut off. But consumers still wanted to
drink, and they started stocking up home liquor cabinets. The surge
continued after Memorial Day, when Ann Mukherjee, who runs Pernod
Ricard's North American business, had expected it to drop off.
Sales of Kahlúa rose. So did $150 bottles of cognac.
The company's U.S. sales in the most recent quarter rose 6% from
a year ago, even as many bars and restaurants remained closed or
capacity-limited. Ms. Mukherjee has built a team dedicated to
online sales. "Once a consumer figured out, 'I don't have to lug
all these bottles home,' who's going to go backward?"
U.S. food and retail sales fell sharply in March but were
climbing again by May and by June, were back above pre-pandemic
levels, according to Fed data.
PetSmart CEO J.K. Symancyk saw it, too. Pet adoptions surged as
people spent more time at home. Customers were buying hiking gear
for their dogs, Halloween costumes for their guinea pigs, Advent
calendars for their cats. Sales at the closely held company are up
this year, he said.
"I didn't know that Christmas costumes for a bearded dragon
would be a business that we're in," Mr. Symancyk said.
Another surprisingly resilient sector: new homes. Many of Toll
Brothers's home-construction crews had put down their hammers in
March after sales tanked. The company postponed land purchases and
road construction and laid off 10% of its employees.
In mid-May, Mr. Yearley, the CEO, started hearing from his sales
force: "We're hot." Traffic on the company's website was up and
customers were touring homes over Zoom. People wanted home offices
and gyms. As the coronavirus spread through nursing homes and
college campuses, they wanted in-law suites for aging parents and
adult children.
As companies allowed their employees to relocate, Californians
eyed Nevada and Idaho. New Yorkers flocked to Connecticut, a state
that Toll Brothers had all but given up on due to sluggish
sales.
By July, as mortgage rates hit all-time lows, Mr. Yearley said
he was confident it wasn't a blip. Toll Brothers is now
aggressively buying land. And it is hiring again.
Remote Work
It was after 11 p.m. and Marc Benioff had been on back-to-back
Zoom calls since 6 that morning. "I don't think I can do that
again," he told his assistant the following day.
Months into the pandemic, working from home had gotten to Mr.
Benioff, CEO of Salesforce Inc. But a few months later he would
make a giant bet on the future of remote work, agreeing to buy
Slack Technologies Inc. -- a $27.7 billion transaction that was
negotiated, in part, over Zoom.
The pandemic uprooted big tech companies from their California
offices but it also spurred demand for many of their products.
Apple Inc. gadgets and Google's online tools became critical tools
for remote work and school, and more companies tapped cloud
services from Amazon.com Inc. and Microsoft Corp. Those four giants
have added more than $2 trillion in market value so far this
year.
Digital tools like these have kept Rite Aid Corp. running. Soon
after taking over in 2019, chief executive Heyward Donigan began a
shift to remote work as a way to draw talent from around the
country to help manage a turnaround at the No. 3 pharmacy chain,
which is based in Camp Hill, Pa. "Who would have known that getting
set up with WebEx [video conferencing] back in August [2019] would
be a game changer in March?" she said.
Ms. Donigan has insisted on some face-to-face contact with her
executive team. In November, she held a meeting near Orlando, where
she expected the group could meet comfortably outside -- and ended
up drenched as pelting rain from a tropical storm blew in.
"At least we got to see each other," Ms. Donigan said.
--Alison Sider, Aaron Tilley, Suzanne Kapner and Sharon Terlep
contributed to this article.
(END) Dow Jones Newswires
December 18, 2020 12:14 ET (17:14 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.