This article was originally published in October 2020.
As we adjust to what may be a permanent shift from 95% to 80% capacity in the economy, we face penalties in terms of price, choice and quality.
Announcements of store closures and job losses are coming thick and fast. Mulberry, the luxury fashion retailer, is to axe 25% of its workforce. Monsoon Accessorize is to shut 22% of its stores. Centrica is to reduce its workforce by a fifth, as is Rolls-Royce. Accenture estimates that its revenues will be down 18% this year and is shaping up to make job cuts of at least 10%. BP and HSBC have announced global headcount reductions of 15%. Pizza Express is to close 15% of its restaurants and Marks and Spencer plans to cut 10% of stores by 2022.
The proportions may vary but are all broadly consistent with a 15% to 20% capacity reduction. The journey from a 95% economy (in February) to an 80% economy (now) requires massive adjustments: 95% can support a much higher cost base and headcount. While 95% was marginally profitable across the size spectrum of corporate activity, 80% is not. Loss-making activities, formerly cross-subsidised, have become unaffordable.
Larger service-sector businesses have scrambled to figure out how to operate profitably at 80%: fewer stores, fewer restaurant tables, fewer activities and a smaller headcount. Small businesses are burning through their capital: they are too small to make their own weather and must wait for the weather to change. Private businesses, large and small, are confronting commercial reality: capacity loss is becoming permanent as covid restrictions remain in force and human behaviour adapts to them. Households are internalising activities that they formerly bought in. Consumers have been forced to become producers, buying more ingredients and equipment but fewer finished goods and services.
The climate for pricing has changed radically as well: businesses have largely abandoned sales promotions and discounts and are successfully passing on covid compliance costs to customers. The crisis of supply means that cheaper choices are withdrawn from sale, competition is reduced, and the price basis rises. However, the political economy of the 80% economy is terrible: there is enormous pressure to extend income replacement programmes for political reasons, even though the money would be better spent on supporting the infrastructure of tomorrow’s restructured economy.
Don’t even think about sharing a piece of
your mind with the customer services team.
Blacklisting is back, internet style
Sadly, there is inexorable momentum towards a socialised economy dominated by big government and big business. Small may be beautiful, but it is also precarious and now dangerous. We are in transition to ‘life by appointment only’ – and electronic payment only. There is a dramatic curtailment of spontaneous economic activity.
In a socialised economy, customers must place orders and pay up front; they will be told when or even whether their order can be fulfilled. The cost of delay is transferred from the producer to the consumer. Businesses relying on passing trade and occasional purchase will fall by the wayside as the subscription model is rolled out relentlessly. Subscription brings the privilege of order fulfilment and improved access; failure to sustain ordering cancels the subscription and access to the service. And don’t even think about sharing a piece of your mind with the customer services team. Blacklisting is back, internet style.
All this extra process, procedure and regulation doesn’t come cheaply: some hefty tax increases are on the way to help bridge the cavernous gap between tax revenues and public spending: 25% VAT, anyone? We are soon to discover, in the company of our forebears, that the socialised economy is much more expensive than the market version, in terms of price, choice and quality.
