It is no surprise that the COVID-19 impact on business valuation as been vast. It has produced some clear winners and losers when it comes to business revenue and profitability, with each industry falling on the spectrum somewhere between bankruptcy and all-time highs. Depending on where your industry falls your business valuation will be impacted. Here is a look at some of the industries that have seen their business accelerate during the onset of the pandemic from a recent Vertical IQ article (https://verticaliq.com/covid-19-most-impacted-industries/):
- Beer, wine, and liquor stores (off-premise consumption): Total off-premise alcohol sales rose 26.3% during the time of COVID-19 compared to the same time period last year. The surge in demand (partly caused by the closing of bars and restaurants) caused alcohol prices to rise by 6.3%.
- Grocery Stores: The grocery store industry sales has rose by 14.5% in May 2020 when compared to May 2019, with the food and beverage store industry adding 43,500 jobs from April 2020 to May 2020. From May 2019 to May 2020, consumer prices for meats, poultry, fish, and eggs rose 10.0%.
- Internet, TV, and Mail Order Retailers: These retailers saw a 30.8% increase in sales when comparing May 2020 to May 2019.
- Amazon (its own industry): saw Q1 2020 worldwide sales rose 26%, although profits fell due to higher fulfillment costs and expenses related to COVID-19.
Some of the industries at the opposite end of the spectrum include the following:
- Restaurants: Sales at restaurants had dropped 39.4% in May 2020 versus year-ago. Consumer spending in restaurants has risen slowly since the industry bottomed out at the beginning of April. The estimated dollars spent per 1,000 people rose from $30,476 to $39,003 between the week of April 5 and the week of April 26, according to Technomic. Pre-COVID-19, the estimated dollars spent per 1,000 people was $54,686.
- Bars and Nightclubs: As states across the country continue to open up bars for business the practicality of this decision is still up for debate. Many owners have decided not to open up their business to reduced capacity crowds as they have deemed this unrealistic.
- Hotels: Industry employment was down 50.4% in May 2020 versus year-ago. Airbnb laid off 25% of its workforce due to the coronavirus’ effect on tourism. Hotel occupancy fell 45.3% to 39.3% during the week ending June 6 versus year-ago, according to STR.
So, the question is:
How have businesses in certain industries seen their valuations impacted by COVID-19 and how does this show up in a valuation model? It is clear that the revenue and in turn, profitability of many businesses has been hindered, potentially only in the short-term, but there may also be long-term consequences. And we know that valuation is, by its nature, forward-looking and heavily dependent on the long-term time horizon.
As cash flows are driven down in certain industries, we see a similar decline in valuations, however, the riskiness of certain industries has seemed to change due to the pandemic. This is captured in the discount rate in a valuation model and is typically recognized as industry-specific risk.
Businesses in the hospitality industry have always been deemed to be on the higher end of the risk continuum, and this was captured by a large industry-specific risk. It seems as though now, we must increase that risk premium by even more, given the uncertainty of the long-term stability of the restaurant and hospitality industry.
As there are industries seeing even more uncertainty, does it make sense that some industries may actually see a decrease in the long-term risks associated? It would seem as though online retailers have a more certain future given the acceleration of the consumer towards online ordering and touchless delivery. Telemedicine seems to be here to stay and the industries supporting the work from home economy are likely to warrant a lower industry-specific risk premium than the pre-COVID days.
It is critically important for valuators to assess the risks associated with a subject company in the context of the industry in which it operates. This has always been true. However, the changes taking place in certain industries make the industry risk assessment by the valuator even more significant in a post-COVID-19 world.
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