The Service Sector Still Awaits Its Second ChanceMauldin Economics
In 1920, 26% of the US population worked in the service sector of the economy. Today it is 86%. At least, it was before coronavirus prevention measures shuttered a large part of our economy.
Now, 30 million people have filed for unemployment in the last few weeks, and potentially 10 million more in the gig economy have lost part or all of their income.
Unlike manufacturing, retailing or agriculture, service businesses can’t hold inventory. They can’t just close for a few weeks and then make up for lost time. There is no second chance to sell that hotel room night, plane seat, restaurant meal, haircut, Uber ride, or cocktail.
Revenue has been vaporized, not deferred. So, having permanently lost weeks or months of revenue while many fixed expenses continued, service businesses are deeply in the red.
There will be no return to business as usual as long as the virus remains a health threat. Service business can’t simply open their doors again. They have to reengineer everything they do. Processes that took years or even decades to design and optimize are now unworkable. Replacing them isn’t going to happen in a few weeks. And making processes efficient enough to match previous profit margins will take even longer.
Restaurants and other service businesses make money by filling a defined number of chairs with a defined number of people who spend a defined amount of money in a defined length of time.
Interrupt any part of that formula, and everything falls apart. That is what these businesses will return to when they’re allowed to reopen.
Everything will be a lot of extra work now. Customers have to feel safe. Governors can lift their lockdown orders, but they can’t make people shop. Nor can they make businesses open.
In parts of the US, restaurants are being allowed to reopen at lower capacity, usually 25% or 50%. They can’t turn a profit that way, even without all the extra costs.
So, perhaps the financially smartest thing they can do is stay closed, and many are. Maybe they will open in a few weeks, if the virus and associated restrictions ease.
Meanwhile, workers stay unemployed and everyone’s spending remains muted.
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Article By John Mauldin, Mauldin Economics