Charting the path of a slow recovery

It’s probably superfluous to say that the UK’s economy has contracted sharply since COVID-19 struck.  It’s also probably superfluous to say that it’s currently looking that the way forward is a long, slow and difficult path.  It is, however, arguably very pertinent to look at what this could mean for investors and where profits might be found even in challenging times.  Here are some thoughts.

New circumstances mean new opportunities for start-ups

The UK is not going to stay locked up forever.  In fact, people are already heading back to work and even out to play.  It is, however, very likely to undergo long-lasting changes as the result of the pandemic and business are going to have to adjust to them.  This is exactly the sort of environment in which start-ups can thrive since they have no prior baggage to weigh them down.  That’s not to say all start-ups are going to succeed.  They are always a risky area, but right now there is risk wherever you look, but that also means that there is opportunity. 

Established companies are going to have to adapt to survive

Admittedly this is true at any time, but it’s a whole lot more true now and it could prove something of a challenge for established companies, especially larger ones, to adapt to the post-COVID19 world. 

As an example of what this could mean in practice, compare Amazon and the real-world supermarkets.  They work along essentially the same business model, but Amazon has performed significantly better in every meaningful way and its stock has risen accordingly (literally and figuratively).

The obvious reason for this is that Amazon is not just digital-first, it is possibly the most forward-facing, technologically-astute company there is in the world today – and even it struggled during the height of the pandemic.  The supermarkets, by contrast, all still worked very much on a fairly traditional, real-world first business model.  As a result, when their online sales went skyrocketing, the shortcomings in their processes and systems became glaringly obvious.

You could argue that Amazon’s product range is much less focussed on food, hence it’s easier for them to manage stock right from warehousing to delivery.  There is some truth in this, but it’s not the whole truth.  Amazon most certainly does sell items which are data-limited and/or need careful handling.  The supermarkets are not all about food and not all food is difficult to transport and/or store.  In fact, not even all fresh food is difficult to transport and/or store.

If the supermarkets’ issues had been limited to delivering fresh food in large quantities, then there might have been a case for arguing that the comparison with Amazon was unfair.  This, however, was not the case.  Supermarkets were also struggling to deliver non-perishable foods and other groceries, whereas Amazon largely kept calm and carried on.

In short, if there’s one investment lesson to take away from the pandemic, it’s that all companies need to do whatever they can to eliminate obvious points of vulnerability in their business models.  This could be anything from relying on one specific service channel (such as real-world stores) to relying on a single supplier (or supplier-country) for a product.

Effective management is likely to be hyper-critical

Even at the best of times, the quality of the management can make a significant difference to a company’s prospects of success.  Now is not the best of times.  It’s almost certainly going to require skill, nerve and judgement to navigate the path ahead, especially with Brexit on the horizon.  This means that, for the foreseeable future (insofar as there is one), investors should probably pay a great deal of attention to a company’s management team before they decide whether or not they want to invest in it or stay invested in it.