BCG: Sixty-seven percent of U.S. retail companies under ‘stress’

More than seven months into the novel coronavirus pandemic, a disturbingly large number of U.S. companies are at risk.

That’s according to research from BCG Turn, the transformation, turnaround, and restructuring unit of Boston Consulting Group, which revealed that economic distress is deeply entrenched and shows no sign of letting up as the pandemic maintains its grip.

More than 60% of overall U.S. companies are under financial or operational stress as of the end of the second quarter of 2020, a 49% increase from the end of the second quarter of 2019, according to BCG analysis. And 14% are in distress—either challenged to meet their financial obligations or under operational pressure that requires significant restructuring, which is up 43% over the previous year.  

Retail ranked as one of the most hard-hit industries, according to the report, with 67% of companies stressed and 18% distressed. It was followed by travel and tourism (61% stressed, 16% distressed) and automotive and mobility (52% stressed, 16% distressed).  BCG noted there are winners even in the most distressed sectors. For example, while most of the retail sector has moved from "stable" to "stressed," but large groceries are doing well, with over 43% in stable territory

Health care providers, biopharma, the technology industry and transportation and logistics have been the least impacted. All of these sectors have been boosted by pandemic-related demand. 

"The COVID-19 pandemic is causing deep, structural changes that are likely to be long-lasting," said Luke Pototschnik, BCG senior partner and head of the firm's transformation practice and BCG Turn in North America. "The impact may be most severe on companies that were challenged to begin with. But the good news is that there are actions companies can take—such as generating short-term cash to fund long-term investment—that can mitigate the worst of the downturn and help set them on the path to recovery."

The findings are from the BCG Turn Radar index, which tracks a company’s distress based on over 20 key performance indicators in three categories: financial, market, and qualitative. The Radar index reports on over 25,000 publicly-traded companies, with more than $100 million in revenue, across 80 countries and 20 industry sectors. There were 721 US companies tracked for distress. A company is measured against its peers, its industry, and the overall sample, and its score places it in one of three groups—either stable, stressed (underperforming in its industry or under internal or external pressure), or distressed.

•    Bankruptcy rates will increase, partly as a result of the robust and trustworthy bankruptcy process in the U.S. and North America. 
•    Severe uncertainty is driving an appetite for data; industries and companies that provide data and analytics are likely to be strong performers. Technology will perform well in the long-term, even if the nature of office work is fundamentally changed. 
•    Travel and tourism will rebound once a vaccine is developed, trusted, and distributed at scale. Sectors such as retail that have deeper business model problems apart from the pandemic are likely to lag. 
•    Size may also be a predictor of survival. Radar shows that large companies, even in distressed industries, have more upside potential. 

"There are reasons why this makes sense," Pototschnik said. "Large companies typically have healthier balance sheets. They have greater access to capital markets. They have more diversified product lines and portfolios. And they are less vulnerable than smaller companies to private-equity and activist intervention. All of these factors seem to add up to a greater margin of safety."

Individual companies can act to improve their odds for recovery. Separate BCG Turn research identifies the steps that leading companies take in times of crisis that lead to superior performance. According to the research, leading companies act proactively, investing in projects that generate short-term cash in order to fund long-term investments. They increase the pace of innovation, streamline the organization to maximize efficiency and capitalize on digital, and build crisis management and scenario planning capabilities to increase their resilience.

"Companies that took these steps during the 2008–2009 financial crisis recovered faster and performed better than their peers," Pototschnik said.