March 4, 2021 New Challenges for Businesses as Pandemic Year Recedes

With a volatile year behind us, businesses will continue to see rapid change in the economy and the competitive environment.

By Lisa Walkush, national managing principal of industry at Grant Thornton LLP

Introduction

With the arrival of vaccines for COVID-19, we can begin to think about what the world is going to look like as this pandemic recedes. No company was immune as the coronavirus upended the economy last year, and no business is likely to escape the uncertainty and volatility that will characterize the recovery period that follows. What’s unknown is how much of the change in consumer behavior and the economy will be permanent, or the extent to which pent-up consumer demand will lift the economy as pandemic restrictions lift.

Each industry and individual company experienced the pandemic differently. Some faced deep disruptions, and others were actually boosted by the pandemic’s economic impacts—provided they were prepared to pivot to meet shifting needs. The companies that have come out of the pandemic in the best position are those that had the leadership and the resources to respond to the changed landscape. The businesses that will see the greatest success in the coming year are those that can understand and anticipate future changes, and act to take advantage.

One such change is the impact of a new administration in Washington, which will have an agenda focused on the pandemic, the economy and may introduce policies and additional stimulus funds that will affect specific industries.

In this paper, we examine seven industries that span the spectrum from those significantly disrupted, such as travel and hospitality, to those riding a strong tailwind, such as technology. We identify key trends to watch to help understand how this year may unfold for individual businesses and entire sectors.

The companies that have come out of the pandemic in the best position are those that had the leadership and the resources to respond to the changed landscape. The businesses that will see the greatest success in the coming year are those that can understand and anticipate future changes, and act to take advantage.

Travel and Hospitality

For airlines, hotels and restaurants, everything rests on how quickly their customers return. There is clearly significant pent-up demand that will be unleashed as the pandemic recedes. People are more than ready to go places again once restrictions ease, and at the very least, dine out once restaurants are open and allowed to operate at full capacity. But will demand come all the way back?

International travel is going to lag behind domestic travel. The recent executive order from President Biden that requires a negative COVID-19 test before boarding a flight to the U.S. from abroad should serve as a reminder of how far away we remain from any return to normal. And business travel, lucrative for both airlines and hotels, may take many years to return to pre-pandemic levels. Organizations that have perfomed well for a year without having their employees on the road may  hesitate to return to the old way of doing things. A loss of business customers may also hurt restaurants that used to depend on business meals and high-end corporate events.

Life Sciences and Pharmaceuticals

The development of diagnostic tests, antibody screens, treatments and vaccines count as major accomplishments for the life sciences industry, enhancing their reputations and boosting their revenue. This work was done with astonishing speed: Most of the work took mere months after this novel coronavirus started its spread across the world. These achievements in the face of a global threat came about due to a combination of diligent science, new alliances, a different way of meeting problems and designing solutions—and of course a significant influx of funding from the government through its Operation Warp Speed vaccine development program.

It will be important to know how the partnerships, alliances and funding mechanisms formed in response to the pandemic evolve to bring other novel therapeutics and medical interventions to patients. This includes the question of how the industry will be impacted by the success of the messenger mRNA technology used to develop several of the leading COVID-19 vaccines. Research and development may be permanently changed. It bears watching to see whether clinical trials and drug approvals move more quickly in the future, following the playbook pioneered in the past year. Companies, governments, health authorities and health organizations may well communicate and cooperate differently moving forward.

Health Care

While much of our attention has been appropriately focused on hospitals and ICUs in the past year, the health care industry as a whole has been struggling. The pandemic has created financial and logistical strains on health systems locally, regionally and nationally. Routine medical care, elective surgeries and—much too often—critical medical treatments were pushed aside as a result of either patient fears or lack of available capacity.

The question now may be whether there is lasting damage to our healthcare delivery system in the U.S. because of the pandemic. If there is, healthcare businesses will be expected to change as a result. For example, telemedicine—not widely used before the pandemic but quickly adopted as a delivery tool for clinical care—is most likely going to become a permanent fixture. Hospitals and medical centers pressed to serve all COVID patients may seek greater financial stability, and given the new administration’s promises during the campaign, their calls for greater funding could receive a welcome hearing.

Energy

The pandemic roiled the energy industry, holding down demand and oil prices at historically low levels last year. Even before the pandemic, the oil and gas industry had been struggling with a range of issues, from oversupply because of shale production to rising competition from renewables. These will all persist, and they’re making the current downturn more pronounced than prior cycles. And yet, markets follow human behavior in the end: If the economy continues to rebound to pre-pandemic levels, the price of oil will likely rise this year. We could see the price of crude oil in the U.S. rally to $55 or $60 a barrel. And, because of the significant reduction in capital spending in the oil and gas industry in the past year, an upward price spike can’t be ruled out.

Renewable energy companies, meanwhile, came through the pandemic year well, and they stand to benefit from the new administration in Washington, which rejoined the Paris Climate Agreement on its first day. Incentives will continue to make wind, solar and other renewable energy sources more profitable—and thus more attractive to investors. Government policy is already helping renewables to be more competitive with oil and gas, and the disruption of the giant fossil fuel producers in the past year may make it a ripe moment for further changes in energy policy.

Manufacturing

The pandemic has shined a new light on the need for supply chain and production resiliency. Manufacturers have started to reexamine where mission critical parts and products are sourced, and they are focused on meeting customer demand in new ways. In this context, two trends are starting to take shape. First, manufacturers are taking a fresh look at how best to rationalize supply chains with a focus on customer responsiveness, security and geopolitical risks, along with the demands of tax optimization. Second, there’s an increased emphasis on how best to allocate capital to production capability such that it will improve operational efficiency and overall return on deployed production assets. 

Transportation

In the first months of the pandemic, volumes carried by large trucking companies such as Old Dominion Freight Line, Knight-Swift Transportation and U.S. Xpress dropped off, as might be expected with an economic shutdown spreading. But the negative effects for the transportation industry were mostly shallow and short-lived, aside from a few specific segments such as fuel transportation that saw more lasting downturns. Much has been said about how package delivery giants FedEx and UPS have benefited as coronavirus precautions led to a surge in online shopping, but long-haul freight carriers have also fared well. Even before last year, there was a dramatic change occurring in the logistics, distribution and warehousing businesses, and this has only been accelerated.

Indeed, as we come out of the pandemic this year and the economy appears to be strengthening, capacity is constrained in the trucking business. There is a shortage of trailers—and drivers. Changes in drug testing protocols at the start of 2020 resulted in some drivers leaving the industry, and then the expanded unemployment benefits in COVID-19 relief legislation in effect dampened interest in working in the industry. The capacity constraints mean the industry has pricing power right now, and this seems likely to persist this year.

Technology

The pandemic has erased any doubt that technology and telecommunications companies provide the backbone for business, education and government. There are so many examples: e-commerce’s growing dominance; telemedicine’s inroads in health care; remote learning to keep schools operating; tele-commuting that kept many businesses operating; and a shift to remote work across many organizations. These impacts are expected to endure. We’re seeing rapid growth for both middle market and large tech companies. The M&A market has been very active, as corporate buyers and private equity investors both respond to increased demand for computing capacity and innovation. 

But there are two sides to this coin. As much as our dependence on tech has helped boost revenues and profits and stocks in 2020, there may be backlash in 2021. Watch for increased regulatory interest in technology companies now, and further consumer upset about issues as varied as equal access, privacy, security and anticompetitive behavior.

Conclusion

Faced with the shock of the pandemic a year ago—as it suddenly shut down our economy and filled our emergency rooms—we could see that the operating environment for most industries was shifting in dramatic ways. Now, with the recovery from our COVID-19 crisis coming gradually, it would be easy to underplay the fundamental changes that are likely this year. There will be surprises and opportunities as we finally escape from under this virus and get back to something resembling normal. The businesses that will prosper will be those that can anticipate outcomes, plan for the recovery and react fast when there are changes no one predicted.

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