Big corporations and chains to profit in the wake of Covid-19
Antonio's, my kids' favourite pizza-by-the-slice joint, will be fine. The rest of downtown Amherst, Massachusetts, where I live — I'm not so sure.
Antonio's is — or was, before March — perpetually swarming with high school and college students, local adults, and the occasional out-of-towner. It's a hub of the Pleasant Street district, which is, by my count, home to three cafés, three bubble tea shops, more than 40 bars and restaurants, a century-old stationery store, five hair salons, two bookstores, one toy store, five boutiques, one movie theatre, and a florist.
Maybe Pleasant Street isn't quite as hip as Williamsburg, Brooklyn, but it's a great place to meet friends, browse or get ice cream. The large majority of the businesses are owned by women and members of minority groups, according to the Amherst Business Improvement District, and have fewer than ten employees.
What will be left of that vibrant downtown when we emerge from the coronavirus crisis?
Eventually, the overall economy will recover, more or less. People will need to buy things and pay for services. But the coronavirus will radically reshape Main Streets across the country, accelerating changes long in the making — chain stores will replace mom-and-pop businesses, some storefronts will remain vacant, and cash that once went into local hands will be redirected to Amazon and Walmart. (Amazon chief executive Jeff Bezos owns The Washington Post.)
The pandemic will reinforce and exacerbate what were already the two key economic trends of our lifetime: consolidation and inequality.
For decades, large businesses have been taking market share from small businesses, and the corporations at the top of the pyramid have been consolidating into ever-bigger megacorporations. In the 1980s, half of retail shopping took place in independent stores; today, it is less than one quarter.
From 2002 to 2017, Home Depot and Lowes almost doubled their joint share of the home-improvement retail market, from 42 per cent to 81 per cent. Even before the coronavirus struck, in 43 metropolitan areas more than half of all groceries were bought at Walmart.
Those trends will be amplified: many small businesses and weaker corporations won't have enough capital to outlast the pandemic, and their customers will be claimed by a handful of winners with the cash and technological infrastructure necessary to survive and prosper in the new environment.
For independent businesses, it's all about cash right now. In Amherst, three out of four businesses have already had to stop operations or at least cut back. Across the country, the number of people working as business owners fell by more than 20 per cent from February to April, and the picture has only become grimmer since.
Yelp reports that 140,000 businesses on its site closed between March 1 and June 15, with 40 per cent of the closures permanent. Today, fully 18 per cent of small businesses — defined as those with fewer than 500 employees — in lodging and food services expect never to return to their pre-pandemic level of operations.
And while the economy seems to be improving, recovery is a long way off — perhaps further than it seemed a month ago, as coronavirus cases climb. There's simply no avoiding a severe recession caused by the widespread shutdown of the economy and prolonged by the diminished purchasing power of tens of millions of people whose expanded unemployment benefits will probably run out before they return to work. (They're due to expire July 31, and Congress is fighting over what new relief to offer.) The Congressional Budget Office doesn't expect total economic output to return to its pre-pandemic level until the second half of 2022.
What's more, even as the economy picks up, social-distancing, masks, sanitising, etc — all necessary to prevent fresh outbreaks — will severely limit retail and restaurant capacity and deter some customers from bothering to come out. Until there's a vaccine — and perhaps even after that — bricks-and-mortar retailers will need to develop processes for managing traffic flow and minimising human contact, and self-checkout will become a competitive advantage.
When they do eat out, hungry families are more likely to use drive-through lanes or kerbside pick-up after ordering online. Competing in this environment requires scale, technology and cash: Scale to justify major new investments, technology to build new systems and processes — such as online-to-kerbside order fulfilment — and cash to pay for it all. Most mom-and-pop businesses don't have those resources.
Main Streets will therefore grow blander and more corporate, and a swath of storefronts will go dark permanently. That's because the coronavirus has turbocharged the longstanding shift to online shopping.
According to an analysis of transaction data by Adobe, US shoppers spent 50 per cent more online in April and May than usual. Amazon, which already had about 40 per cent of the online retail market, was the biggest beneficiary, but Walmart, Target and Best Buy all doubled or almost doubled their internet sales.
The move online was driven first by shutdown orders but is likely to stick, at least among some consumers, as an acquired habit, further increasing corporate concentration because the e-commerce sector is dominated by so few players. Even large companies that lagged in moving business online, or had weak balance sheets, will have a hard time surviving — witness the recent bankruptcies of J. Crew, J.C. Penney and Nieman Marcus.
Entertainment is concentrating, too, shifting from movie theatres, concert halls and stadiums to video-streamed to TVs, computers, tablets and phones. While sectors such as movie distribution were already highly concentrated, online video is even more so, dominated by a handful of tech companies — Google, Netflix, Amazon, Disney and Apple — and piped into your house by monopolist internet service providers. At the peak of the shutdowns in April, consumption of streaming entertainment increased by 81 per cent, according to Nielsen.
Concentration will also grow as the strongest companies buy up weaker ones that nonetheless have valuable brands and other assets — just as JPMorgan Chase, the least shaky of the major banks, absorbed Bear Stearns and Washington Mutual during the 2008 financial crisis and emerged as the largest bank in the country.
Or weaker companies will be taken over by private-equity firms flush with cash, hunting for bargains. A decade ago, these firms scooped up hundreds of thousands of houses at rock-bottom prices. This time, they will take over struggling companies and commercial real estate properties and either strip them for cash — cutting back on long-term investments to pay themselves special dividends — or sell them at huge profits when the economy recovers.
All of these changes will profoundly affect the distribution of resources among business owners, managers and workers. The winners will mostly be executives of large corporations, partners at private-equity firms and investors in both — in short, the very rich.
Businesses that serve the wealthy will be fine: in a world of increasing sameness, variety will be a luxury. Hermès could probably double its prices and sell by appointment only. Investment bankers can pay exorbitant amounts to eat at independent Michelin three-star restaurants with appropriately distanced tables.
In contrast, working-class and lower-skilled workers will experience lasting economic harm. Many people who lose their jobs during recessions suffer permanently reduced income — earning about 20 per cent less, on average, than if they had not been laid off. They may never find jobs in their old occupations, since companies learn to make do with fewer workers after downturns.
Indeed, after the 2008 financial crisis, many people never returned to the labour market. They dropped out: while the unemployment rate had fallen to historic lows by 2019, the share of the population aged 20 to 64 that was working or looking for a job was still more than a percentage point below its 2008 peak — a difference representing more than two million people.
What jobs remain will be largely offered by big corporations adept at squeezing productivity out of lower-skilled workforces. Amazon, renowned for its brutally efficient warehouses, has already announced 125,000 new permanent jobs. Over time, more and more people will work for a handful of large, non-unionised firms that see employees as an infinitely renewable resource: interchangeable inputs to be replaced from the reserve army of the jobless if they become too demanding or get sick with Covid-19.
None of this should be a surprise. Increasing inequality is the fundamental economic fact of our age. Since the late 1970s, the income share of the top 1 per cent of earners has risen from 11 per cent to more than 20 per cent of national income. Those gains have been almost exactly balanced by losses among the bottom 50 per cent.
There are many reasons for this trend, including corporate concentration, the private-equity boom and technology, which both displaces lower-skilled workers and enriches a highly skilled elite. But the coronavirus amplifies the importance of all of them. The pandemic could compress decades of economic change into a matter of years.
All this will further hollow out what was once known as the American Dream. In our national mythology, the road to success involves working hard, saving money, getting a loan from the community bank and starting a small business — a path open to anyone, of any background, from anywhere in the world.
In truth, entrepreneurship has been in a slow decline for decades. The rate of new business formation by people in their prime working years fell by half from 1978 to 2009 and has remained flat since. Still, starting a business remains an important enabler of upward mobility. I have seen it happen in Amherst: half of the downtown restaurants are owned by non-native English speakers, according to the business development association.
Last week, I walked down Pleasant Street and talked to the owners of seven small businesses. No one was ready to admit defeat; I started a company myself, so I'm familiar with the stubborn optimism of the entrepreneur. But fear and uncertainty were common.
“Everything is going to change,” said Amy Benson, the owner of Zanna, a clothing boutique. “If there's a second wave and no financial aid,” said Dawn Eichhorn, the owner of Hair East, “then I'll have to think about closing.”
In contrast to the old egalitarian model, however flawed, the post-coronavirus American Dream will be accessible only to children of the fortunate: get an elite education, work for Google or Goldman Sachs, and start a technology company or become a partner at a private-equity firm.
We were already heading this way. The virus is bringing us there faster.
• James Kwak is the Jesse Root professor of law at the University of Connecticut, and the author of Economism: Bad Economics and the Rise of Inequality, among other books. He previously cofounded Guidewire Software