How Will Coronavirus Impact Business In Canada?

By Kristen Sears and Rob Gerlsbeck

Coronavirus will create a number of challenges for businesses. What are they? And how can companies best handle them? We asked five Smith School of Business professors to weigh in: marketing professors Laurence Ashworth and Monica LaBarge; finance professors Wei Wang and Louis Gagnon; and strategy and governance professor Scott Carson.

Here, they answer our pressing questions:

What impact do you see on Canadian companies in the weeks ahead with coronavirus?

Laurence Ashworth: The most significant will be a change in consumption habits. Consumers are likely to cancel or reduce travel, delay large expenditures and stockpile essentials. They are also likely to avoid business settings that involves groups, such as exercise classes, bars, restaurants and supermarkets. We will likely see more online shopping, and possibly increased consumption of in-home entertainment. In short, people are likely to engage in what they view as “protective behaviours”.

The extent to which people engage in these behaviours will depend, in part, on their perceptions of the likelihood of catching the disease and the perceived severity of it. These perceptions will not always be accurate. One factor I suspect may play a role in these perceptions will be knowing of someone who has contracted the disease, such as a friend or a friend of a friend. Anecdotal information of this kind is extremely powerful and will have a disproportionate impact on people’s perceptions of the coronavirus risk and exacerbate their protective behaviour.

What are some issues businesses will have to deal with?

Monica LaBarge: From both the customer and an employer/employee side, nobody wants to come in contact with someone who may have the virus. So there is likely to be both reduced demand as well as a reduced ability to provide services if people aren’t wanting to come into work. This may include social service agencies, such as food banks and mental health services, which provide really important services to vulnerable members of our communities. The need for such services doesn’t stop just because there is a virus; in fact, they may become even more important since those populations may not have the ability to either stockpile resources or a safe location to self-quarantine. 

What’s the No. 1 hurdle companies will have to overcome?

Wei Wang: The single biggest issue for firms will be a shock to their cash flows as consumers stop or delay buying. For businesses right now, cash is king. The more short-term liquidity a company has the better it will be able to survive the bad situation. So, companies should start securing lines of credit as soon as possible. Ideally they’ll need a runway that will last two quarters or even longer. Coronavirus will be a lot different than the last crisis because for companies it will be about taking a sudden hit to their cash flows. The longer this situation lasts, the more business failures we are going to see. 

How can businesses prepare themselves?

LaBarge: From a staffing perspective, they have to figure out how they’re going to handle the potential need to close—either because they think it’s the least risky move or if there’s a quarantine. Are they going to pay their workers via their sick leave? Or allow draw-downs on vacation? Or temporarily lay staff off and and potentially allow them to access employment insurance?—if that even will be allowed by government.

From a demand side, it may be a good time to run sales—which could be made available online—so people can buy now and pick up later, so as to maintain some sort of cash flow. For businesses like restaurants, I would suggest they keep one eye on the emergence of cases and another eye on their perishable inventory, so that if they do have to close temporarily they don’t experience significant losses on that front.

What can businesses and government do to ease people’s fears?

Ashworth: Businesses can offer consumers alternative methods of conducting business that don’t involve person-to-person contact. After all, this is the main thing consumers will be trying to avoid. More generally, business and government need to consider how to keep people acting normally—in other words, how to stop people feeling like they need to protect themselves so much, given that most people probably have inflated views of the risk. Information that helps people form accurate impressions is critical.

Contrary to what a good deal of health practitioners have been advising, it may be useful to allow consumers to practise even minimally effective protective behaviour, such as wearing face masks, because such activities will increase perceptions of protection, causing people to act more normally. Obviously we’d like people to practise effective protection too, such as hand washing and self-isolation when necessary, but, at the same time, a good deal of what we need to do is persuade people not to engage in drastic behaviours.

How can government help businesses overcome the economic downturn that coronavirus may cause?

Wang: Governments really need to take three steps to help businesses. First, both here in Canada and in the U.S., they need to contain the virus. If that means shutting down the country, then that’s what they need to do. So far, we’ve seen some businesses closing and others have remained open. If the virus continues to spread, this approach may not work, and more drastic measures will be required. One reason investors in America were so concerned at first was that the U.S. administration did not seem to be taking coronavirus seriously. That, of course, has now changed.

The next thing government needs to do is increase testing for coronavirus. Until we can find out for sure the number of cases, we won’t be able to get the virus under control. So the government should really fund more testing—bring back retired medical staff and set up temporary testing stations. The hospitals already have enough patients with other conditions to deal with.

The third step is financial support for businesses. Governments should be offering tax cuts and giving direct loans to small businesses to help them. We are starting to see fiscal stimulus packages from both countries but up until now what we saw was the Fed in the U.S. and the Bank of Canada cut interest rates. The problem with that strategy is it doesn’t really directly help many businesses. The biggest problem with coronavirus for most companies will be taking a hit on cash flow and a longer cash conversion cycle. Companies will have difficulty paying overheads, paying suppliers and perhaps making payments on their loans. So more direct support for businesses is what is required. If we have these three measures in place, we might be able to get over the worst of coronavirus in two months.

Can we expect a long or short economic recovery from coronavirus? 

Scott Carson: To give some strategic perspective, consider the fundamental structure of business relationships at the industry level. The basic competitive relationships among rival companies within industries are unchanged by the current situation. Businesses still compete on price, differentiation and the strategic use of resources.

What is being harmfully impacted is at the firm level. First, buyer behaviour is highly volatile, largely because of declining consumer confidence. Second, coronavirus is causing havoc with both production and transportation supply chains, requiring adjustments to current-period business plans. 

But these economic shocks are not permanent. They don’t represent structural changes to industries or a major rethinking of long-range corporate strategies. As with pandemics in the past, such as SARS in 2002-03, avian flu in 2006 and H1N1 in 2009, the duration is usually not much longer than a fiscal quarter, and the economic recovery is V-shaped—precipitously down, then rapidly back up. So, we should be confident that business activity will pick up and the economy will recover.

What will be some of the more long-term effects on businesses from coronavirus?

Louis Gagnon: If anything, the coronavirus should be reminding industry captains, such as Apple Inc.’s Tim Cook, that it is simply too dangerous to put all our eggs in one basket and tie our supply chains too closely to any specific country or region halfway across the world. Money managers have known for a long time that diversification across many stocks and sectors makes portfolios less vulnerable and pays off in the long run. This is a lesson which business leaders in other sectors of the economy need to learn as well, especially those who have chosen to export their manufacturing capacity to other countries to drive down their costs. This is basic risk management.