As we look to the future, the Kearney team sees two dominant forces shaping the hospitality industry. One is behavioral: consumer resiliency. The other is economic: the timing of recovery. The interaction of these two forces creates a frame in which we can imagine plausible futures that guide CEO decision making.
We anticipate four competing visions of the future. They are variations on a single theme: the impact of COVID-19 on the hospitality industry will be deep and its duration long.
In a Coresight survey published on July 13 (see Figure 5 below), a randomized sample of Americans were asked which public places they are currently avoiding. The conclusion? More than half (56.8 percent, as of July 8th) of Americans are unwilling to return to restaurants, bars, and coffee shops until they are confident they will not put their health at risk.
We expect the recovery geometry to be highly variable until a vaccine or an effective treatment is discovered. As state governors relax stay-at-home orders, regions of the country will alternate between bouts of public activity-lockdown followed by easing of social distancing requirements. These localized public safety decisions will follow COVID-19’s spread as it spikes and recedes across the nation and the world. This “hammer and dance” can be observed today in California, Florida, and Louisiana.
Scenarios of the future
In this high stakes and uncertain environment, a scenario-based strategy framework serves as a useful tool for CEOs and their leadership teams as they navigate this crisis. It helps to imagine different futures and develop effective strategy to manage this unprecedented moment in our lifetimes. Figure1 below depicts four competing futures envisioned by the Kearney team.
In the “Too Optimistic” scenario, broad economic activity returns to pre-pandemic levels in mid-2021, but social and economic activity does not. The pandemic leaves an enduring psychological impact, rendering consumers thrift-oriented in the post pandemic world. Bars, restaurants and hotels are unable to achieve expected topline revenue recovery. Having been too optimistic about the timing of a return to normal, executives did not undertake active cost reduction measures in the early stages of COVID-19. The result? Margins do not recover. Many businesses do not survive.
In the “Recovery with Vengeance” scenario, the industry enjoys the best of all possible futures. Scientists discover the COVID-19 vaccine early and the population is quickly inoculated. Consumers soon return to pre-pandemic social and economic behavior, the topline recovers rapidly and, because executives took aggressive action to reset cost structures at the outset of the crisis, post pandemic margin expansion exceeds expectations. Companies are better off than they were before the crisis.
In the “Sober Recovery” scenario, depressed economic activity persists for two years. Without a vaccine, the robust economy we knew in early 2020 does not return. Despite a multi-year period of depressed social and economic activity, consumers prove to be resilient. When the recovery begins in June 2022, consumer behaviors snap back to pre-pandemic characteristics, though the hospitality landscape they return to has changed dramatically. Surviving businesses have undertaken deep restructuring, consolidated through mergers, or gone out of business. As consumers return, so do revenue and margins throughout the hospitality industry. Overall, our direction of travel is good; our speed, though, is less than optimal.
“Protracted Recovery and New AbNormal” is the scenario we all hope to avoid. A prolonged economic recession combined with low consumer resiliency. The hospitality industry is forever changed: smaller scale, less profitable, and a shorter range of options available to consumers. Consumers are chastened by COVID-19 and suspicious of whether the recovery is real and lasting. The social and economic vibrancy we knew does not return, leaving companies with a protracted recovery and a new AbNormal in which to operate.
Actions to Take Now for An Uncertain Future
How should the hospitality industry respond? We see five actions applicable to all industry sectors:
- Fast-track digital selling capability. Non-contact selling across the value chain will dominate – B2B and B2C. Companies must commit to digital selling platforms and drive persistent online use among both business partners and consumers. With these platforms, companies are able automate the role of sales personnel, reduce selling costs and address fear of contagion posed by person-to-person interactions. The emerging question for industry executives is whether to invest in expensive proprietary digital solutions or to explore pooling investment with industry partners and competitors to develop shared digital platforms.
- Right-size route-to-market structures. The explosive growth of “touchless” e-commerce-based selling requires rethinking the route-to-market and the legacy sales coverage model. Accelerated adoption of digital sales platforms means legacy sales force constructs need to be reimagined. Executives need to rationalize, redeploy and retrain capabilities, evolving from a “product push” to a “solution development” orientation for consumers and value chain partners.
- Reset the cost structure. Match costs and infrastructure to shifting channel demand and associated revenue opportunity. Manufacturers and wholesalers as well as on- and off-premise establishments need to match their costs and investments to changing patterns of consumption brought on by COVID-19. Manufacturers need new service, product and packaging solutions, and wholesalers need to adapt commercial and logistics infrastructure. Successful companies will capitalize on this moment to variabilize their cost structure and centralize, automate, and outsource back-office activities.
- Ensure supply chain resiliency. Supply chain flexibility will be required as the business responds to localized economic recovery determined by the severity of COVID-19 spread. Companies will need a flexible supply chain to quickly respond to constantly changing demand patterns as the virus works through regional “hot spots.” A recommitment to scenario-based demand planning increased across all players in the value chain, from manufacturer through to point-of-sale, will separate winners and losers.
- Accelerate automation solutions. Automation available to commercial and operations functions presents opportunities to protect employees’ health and keep the business running. Companies need to invest in technology and data integrity to reduce human contact in all parts of the business. Doing so will require adoption and enforcement of data standards and policies that drive alignment within the enterprise and up- and downstream with industry partners.
Most businesses develop strategy in the context of a single imagined future against which they plan. This “bet the company” strategy formulation is flawed in more certain periods; it is potentially fatal in our current moment. The COVID-19 challenge is unprecedented. There is no playbook for how to respond. We are operating blind, figuring this out as we go. In this moment of great uncertainty, imagining multiple scenarios and taking action that prepares for all of them lays the foundation for a brighter future we can all look forward to.
About the Authors
Sean Ryan is a partner and Strategy practice leader at Kearney, a global management consulting firm; he can be reached at [email protected]. Aman Husain is also a partner in practice and can be reached at [email protected]. Himanshu Jain is a principal in Kearney’s Digital Transformation practice and can be reached at [email protected].