Date: June 12, 2020
How should we manage the rest of the pandemic?
The critical economic period is from the peak of confirmed cases to the time when effective universal testing, widespread contact tracking, effective universal vaccination and treatment are achieved. Its duration is unknown. It is the time when there is an itch to re-open the economy, and it needs an effective sequence of re-openings to manage the risks.
The primary sector, agriculture and fishing, and the secondary sector, manufacturing, construction and energy production, are the lowest risk for re-opening and should be re-started first. However, they account for only 11% of employment and 13% of GDP. The next businesses to be enlivened are in-store general retailers and bank branches. They account for 10% of employment and carry medium risk of infection. Re-opening should be started more slowly because the businesses require protection for customers as well as for employees at work and on their commute.
Paul Slattery is co-founder and director of consultancy Otus & Co. Ltd.
A third of employment, carrying the highest risk of infection, is the experience business sector: hotels, restaurants, bars, casinos, cruises, spas, sports clubs, cinemas, theaters, museums, hairdressers, schools, hospitals and travel, among others. Hospitality is based on physical proximity and multiple interactions between customers and employees. Thus, it needs the most comprehensive protection program, and it should not be re-opened until it has it.
Hotel chains have advised customers to adhere to authoritative guidelines on travel and to maintain physical distance guidelines within hotels. These are fundamental, but insufficient. Hotels have an obligation to discover, as far as possible, if any arriving customer or employee can infect others or can be infected by others. Proposed virus testing at international airports before departure and on arrival, may reduce the risk and should be extended to hotels because their customers arrive from all directions and leave to both domestic and international destinations.
Given that it takes two weeks to incubate the virus, most customers will be long gone from the hotel before they will be aware that they have been infected or have infected others. Without testing of customers and employees and without an effective contact tracking system, the virus will have been let loose. The longer it takes before hotels can open with this degree of safety, the longer they will need funding support from the government.
The central character of hospitality businesses is welcoming customers into contexts for social and physical interaction. Restaurants, bars, spas and conferences will have their capacity slashed, operating costs will need to rise and they will be unprofitable. The prime function of hotels has been reduced to meeting the physiological needs of customers to sleep, eat and drink when they are away from home. Operating hotels under these virus protection guidelines for both employees and customers abandons brand specifications and reduces the prices customers will pay.
Consequently, hotel ROI has been postponed. The longer it takes to achieve effective universal testing, contact tracking, treatment and effective universal vaccination, the longer it will take for pre-COVID-19 demand to return to hotels and the longer it will take for their economic effectiveness to be re-activated. Hotels can set relevant health conditions for customers and employees to be admitted to and leave the hotel. However, if they do not, they have the obligation to let the market know that their hotel is insufficiently safe.
How can the economy and the hotel business advance in the post-COVID-19 era?
Before the arrival of COVID-19, the pattern of employment and contribution to GDP in the U.S. was well established. The primary and secondary sectors have been in decline for at least 100 years. The public sector has been constrained since the Great Recession ended in 2009. The service business sector’s rate of growth has collapsed since the start of the century. In contrast, over the same period, the experience business sector has been the fastest-growing for employment.
The policy challenge for the U.S. economy is that its experience business sector is the only sector able to generate long-term real growth in demand, employment and contribution to GDP. For it to accelerate, it will need new government and corporate policies to propel its demand and supply.
There are three priorities. First, before the pandemic, half of the population lived in owner-occupied homes. They are the main market for regular participation in hotels. The U.S. Bureau of Census calculated that the median net worth of owner-occupiers of homes was 80 times larger than home renters. The other half of the U.S. population lived in rented homes and their participation in experience businesses is substantially less frequent. The source of new U.S. demand for hotels is the 17% of its population whose income is middle level including young professionals with student debt who are stuck in home renting.
To increase their participation in experience businesses they will need to be elevated to home ownership, raising the market size of the sector from half of the population to two-thirds. Without this policy change, growth in domestic demand for U.S. hotels will shrivel.
The next government policy change is to increase inbound visitors. Since 2015, growth in inbound visitors to the U.S. has been sharply exceeded by growth in outbound travellers, limiting the performance of its hospitality businesses.
The third necessary policy change is for government and corporate spending on travel infrastructure to increase significantly, since demand for experience business requires customer travel from and back to their home. If domestic and inbound demand is accelerated, so travel infrastructure will need to be extended and improved.
Over time, the U.S. experience business sector has the capacity to become its largest sector, but only if we manage the recovery effectively and the proposed policy changes are made. The worst outcome for the U.S. economy and its hospitality business will start from inadequately prepared hotels triggering new infections.
It will be compounded if government and corporates neglect the necessary policies to keep experience businesses alive during the critical economic period; if they continue to obstruct growth for the sector in their domestic market; if they fail to attract more inbound visitors and if they continue to underinvest in travel infrastructure. The result will be the creation of toxic conditions for the hotel business; unemployment will be increased and weak economic performance will last for years.