Determining Your Coronavirus Game Plan
As states and nations start reopening their economies, the business world looks a lot different than any of us could have imagined 90 days ago. We are surrounded by uncertainty in our social and professional lives, and anyone who expects business as usual to return soon is mistaken. The remaining course of the disease, the economic impact of closures, the effects of unprecedented monetary stimulus, the changes in consumer behavior, and the course of public health regulations are all unknown. Vacation rentals have been severely affected and will continue to be affected. Many in this industry have wondered—at least privately—if their businesses can survive. Will yours? How do you know?
Every business involved in the vacation rental industry needs an answer to that question and a clear game plan for the next year or more. “Winging it” is not a smart approach to get to the other side of this disruption. But with so much uncertainty, how is it even possible to plan or prepare?
Today, “business scenario planning” is typically run as a type of sensitivity analysis to answer questions like “If I raise prices 5 percent, what happens to my profitability?” or “If I lose my top three homes, what happens to my cash flow?” This approach depends on stability in the larger environment that cannot be assumed with COVID-19. COVID-19 has closed restaurants, schools, and theme parks; reduced air travel to levels not seen since jet engines were first invented; and pushed the price of oil to $20 per barrel. So where do we even start when it comes to business planning now?
As is often the case, military intelligence has tools that can be adapted for business. In the 1950s, Herman Kahn and the Rand Corporation developed an approach to scenario planning specifically to understand radical discontinuous change. There is no “crystal ball” to predict the future, but Kahn’s approach to scenario planning can help businesses understand and prepare for a range of possibilities to get ahead of the curve instead of falling further behind by surprise. Kahn’s approach has four basic components:
1. Identify the drivers.
2. Set a time frame, link the drivers, and develop scenarios.
3. Consolidate the scenarios into two to four “stories” that describe the future.
4. Identify the implications for each story and what actions might be appropriate.
The three scenarios presented in this article draw on proprietary research completed by Cunningham CPA and can serve as a starting point for your scenario planning work. They should be adapted and customized for your specific situation and business. For example, a business that owns a portfolio of beach rentals in Florida has a different story than a ski condo owner in Colorado.
Scenario Planning Drivers for Coronavirus Uncertainties
Your best coronavirus game plan will depend upon the unique characteristics of your business as well as the following:
The course of the disease;
The path of consumer psychology;
The duration and extent of shutdowns; and
The Generic COVID-19 Scenarios
The following three scenarios are possible over the next 18 months:
1) SWOOSH—Best case: Swift opening for most jurisdictions in the spring/summer of 2020, constrained by consumer behavior and ongoing but light public health regulations. This scenario includes few new and ongoing hot spots and localized lockdowns even as business steadily returns to something that looks “normal.”
2) MEANDER—Mid case: Slower opening following a test, trace, and isolate strategy with more significant new and ongoing hot spots and/or regional and localized lockdowns.
3) RELAPSE—Worst case: Openings delayed and/or reversed with major subsequent waves; overwhelmed hospitals; and the resumption of concurrent regional, national, and/or global lockdowns.
These scenarios rely on the assumptions below. But if the assumptions prove incorrect, the scenarios would be changed.
Breakthrough treatments and vaccines will not become available within the time frame of this analysis.
The federal government and the Federal Reserve will provide whatever level of fiscal and monetary stimulus is needed to avoid a deflationary depression.
Fiscal and monetary relief will not result in a major devaluation of the US dollar.
Economic distress will be tolerated by the population and will not lead to severe social unrest or crippling crime waves.
Supply chains will continue to adequately meet food, electricity, health, and other basic needs.
SCENARIO 1: SWOOSH
Best-case scenario for a vacation rental business
COVID-19 is still “out there,” but a combination of distancing, hand washing, and warm weather keeps the curve adequately flat. Hospitalizations do not exceed capacity, and the number of deaths continues to decline week by week. The US avoids new acute waves like the ones that affected Milan and New York.
Public health authorities loosen restrictions, but some restrictions remain. Many businesses adopt incremental measures such as requiring gloves and/or masks to be worn by employees and/or customers. Temperature measurements become routine, and extra cleaning and sanitization measures become the norm. Properties may incorporate enhanced or certified sanitization and safety procedures. Large events like conventions and sporting events likely remain postponed, and venues like theme parks remain closed. If large events do occur, they fail to achieve historical volume.
In this scenario, restrictions on vacation rentals are lifted, and beaches and outdoor areas are opened. However, attractions such as concerts, festivals, and theme parks probably remain postponed or closed. Restaurants, miniature golf courses, go-kart tracks, pools, water parks, and other attractions may open but with reduced capacity.
Consumer fear broadly recedes, but individual behaviors and responses to COVID-19 are extremely diverse. Some consumers will be nonchalant and dismissive, and others will be extremely concerned and make significant changes. Behavioral changes noticeably reduce total demand for vacation rentals. Fewer people will opt for “fly-to” locations, and more will opt for “drive-to” locations. Some properties may be able to replace lost customers with new demographic segments. For example, vacationers who used to fly to Cancun or Orlando may become attractive targets for beach rentals. International travel remains limited; vacation destinations and properties that rely on foreign visitors need to attract new customers or face reduced occupancy.
Growing acceptance of remote working may create entirely new market segments for extended-duration “working vacations.” High-density urban properties and larger properties with crowded common areas and beaches may be viewed as less desirable. On the other hand, less dense properties such as single homes and duplexes with private beaches and limited-access swimming pools may increase in desirability. Properties relying on conventions, concerts, and retail shopping attractions to drive demand may suffer, whereas properties relying on low-density outdoor activities like beach activities or golf may experience increased desirability. Property managers will need to understand evolving consumer preferences quickly and adjust their offerings and marketing to keep occupancy and ADRs up.
Economic performance takes a deep hit, with the GDP contracting at a pace similar to the Great Recession of 2008. Higher unemployment drives consumer belt-tightening, and employers find it easier to hire and retain qualified employees. Federal spending on coronavirus relief and stimulus helps the economy recover steadily starting in Q3 2020 without triggering heavy inflation or major tax increases. Lingering concerns about safety, closed amenities, and household finances dampen the total demand for vacation rentals, but some properties perform well while others do not. Some properties will need intensive management to replace lost customers.
SCENARIO 2: MEANDER
Mid-case scenario for a vacation rental business
In this scenario the disease does not fade into the background quietly but continues to keep at least some hospitals very busy, generate headlines, and cause an unsettling number of deaths.
Governmental health policy in the mid-case scenario follows a more cautious route; economic reopening is slow, incremental, and subject to rollback. Policy objectives are more ambitious and focused on eradicating the virus using tracing and quarantines of sick as well as exposed individuals and their immediate families. Social distancing, temperature checks, masks, and other measures are strictly enforced by many jurisdictions. In addition to the closures mentioned in the “SWOOSH” scenario, public health authorities close or limit boating, beaches, pools, and other activities. There may be a degree of flip-flopping as restrictions are relaxed and reinstated.
Consumer behavior remains diverse but with much higher concern and lingering levels of fear as many consumers hunker down, pending a vaccine or treatment. Concerns about the disease lead to less travel and less interest in vacation rentals. The impact is most severe in locations that have limited access to amenities or closed amenities of all kinds. Booking and refund policies may need to be relaxed to attract customers.
Under this scenario, the broader economy performs poorly. Unemployment remains high, the stock market stays low, and lenders continue to raise underwriting requirements. Policy makers in Washington view March and April levels of stimulus and relief spending as unsustainable, and the economy starts to show signs of stagflation.
In this scenario the vacation rental market reels from a loss of demand, and there is heavy price competition to attract visitors. Lower occupancy and ADRs are a reality; management fees, maintenance, and housekeeping fees suffer. Credit risk becomes a larger issue as many vendors go unpaid. In some cases, companies and/or properties may not have adequate cash flow to service debt and pay HOA fees and may choose to sell or contribute additional capital to keep going. Some properties may have problems with HOA collections, and leveraged units may end up in bankruptcy. There will be temptations to defer maintenance and cut corners. As in Scenario 1, there will be a range of localized outcomes but few “bright spots” for vacation rentals.
SCENARIO 3: EXTENDED RELAPSE
worst case FOR A VACATION RENTAL BUSINESS
In the worst case, the disease continues on its rampage or reemerges with a vengeance after a pause in the summer of 2020. There are frequent and even concurrent waves in multiple regions and cities. These waves are broad and/or severe.
Public health policies revert to shutdowns as we saw in April 2020. While more relaxed periods may be sprinkled among the shutdowns, shutdowns continue to be in place for large parts of the population. These public health restrictions prevent resumption of normal commercial or social life. Many schools do not reopen after summer break; restaurants remain carry-out only; and shopping locations, bars, and other high-contact venues remain closed. Vacation amenities such as pools, water parks, and zip lines remain closed; beaches are closed or highly restricted; and fear is the dominant sentiment for most consumers.
Consumer behavior in this scenario is constrained by public health policy, fear, and family financial conditions. The ability and willingness to travel for vacation and the willingness of vacation communities to open public resources are limited. A significant portion of the population experiences financial stress.
In the face of public health shutdowns and psychological fear, a stimulus is unable to force broad economic recovery. Job losses expand and become long-term, large corporations start closing capacity, and layoffs expand. While this scenario may cause fleeting spikes of demand in specific vacation rental markets, the overall industry is hit hard and becomes depressed. Vacation rentals carrying a mortgage are no longer able to service debt from vacation rental income, and there are few buyers. Foreclosures spike, and many vendors providing cleaning, maintenance, marketing, and other services within the vacation rental industry will close. In some cases, vacation rentals may be converted to long-term rentals for remote workers who want to escape the city. All options in this scenario will be constrained by depressed securities markets, loss of household wealth, and limited job and earning potential.
How Does Your Business Perform Under Each Scenario?
The three scenarios above are starting points. You may need to extend or revise them for your geographic, operating, and customer profiles. Once you have a clear vision of the scenario, the next step is to think through how your business would perform within each one. You may conclude that only small tweaks are needed, or that a full rethink and reformulation of the business is needed. The strongest planning approach would be to detail full COVID-19 plans for each scenario even if you do not implement them. For example, you may feel that Scenario 3, Extended Relapse, is unlikely and choose not to invest much preparing for it. However, if we get to December and the virus is starting to rage out of control, you can get a jump on future events by having your plan ready to go. There are five key areas to think through to draw out your COVID-19 plan for each scenario:
1. Customer relationships
How do your current product and service offerings align with changing customer psychology and demands for each scenario? Can the offerings be adapted to better match customer needs? For example, if you manage rental units, can you deploy touchless check-ins, more fully equipped kitchens with updated kitchen packages, and higher-speed Internet service? How do you build confidence in your customers that sanitization is complete between stays? Do your marketing messages, channels, and audience need to be adjusted? How will you replace lost customers?
How does revenue change in each scenario? In addition to the level of revenue, are there changes in collectability? The pattern of revenue? Do you need to reduce pricing or offer incentives for retention? Is there an opportunity to increase price?
3. Cost and capital structure
How do anticipated changes in revenue play through in your cost structure? Business owners must understand their cost structure with attention to fixed versus variable costs. Fixed costs are things like rent or managers’ salaries, which do not change as sales go up and down. Variable costs do go up and down as sales go up and down and include things like sales commissions and costs of products sold.
4. Labor model
The labor model required to operate your business should be considered under each scenario. This includes the number of employees, the skills needed, and the anticipated wage levels and impact on the company’s cost structure. Is your staff prepared to operate in a virtual mode? Do you need to push some work to temporary or contract help?
5. Vendors and suppliers
Think through the impact of each scenario on your important vendors and suppliers. As we learned recently, assuming something as simple as toilet paper will be available can be a problem. Evaluate all services and products needed to operate your business. Are they subject to regulatory closure? Will they stay solvent and open? Are they adequately staffed? Is there a risk they will exit the market or increase their pricing? Do you have alternatives? This could be anyone from your IT vendor to your housekeeping service to a marketing service.
The vacation rental industry is already going through significant disruption, and that will not stop any time soon. Well-executed scenario planning will help you quickly understand the implications for your business as events unfold. Avoid the temptation to lock in one scenario; remain ready to adapt and update today’s scenarios (and the plans they spawn) as time passes and a different set of facts and uncertainties apply. Update your break-even calculations as your costs and pricing change, and understand how to maintain and drive profitability in a changing market.
You may face decisions to close or sell underperforming segments of your business or to consider opportunities for joint ventures, collaborations, acquisitions, or new business start-ups as the environment changes.
No matter what, the sun is going to rise every morning and set every night; life and business will find a way, even if that road is not now completely clear.