If the coronavirus takes out a few corporate zombies, so be it
Flybe has been put into administration. The rent-to-own retailer Brighthouse is on the edge of collapse. Bristol Cars looks set to finally disappear from history. With the coronavirus hitting the economy hard, lots of businesses are starting to go under, and the chances are we will see a few more casualties in the weeks ahead.
That is a tragedy for the staff, shareholders and customers caught up in the crisis, of course. In his Budget next week, the Chancellor may well announce emergency measures to help companies through the next few months. And yet, in truth we should be careful about rescuing every business that runs into trouble. Why? Because in the decade since the financial crisis we have created an economy full of “zombies” – businesses kept just about alive by a cheap money. A sudden downturn may put them out of their misery, and when the economy finally recovers it will be healthier for it.
We will find out over the next few weeks just how bad the coronavirus gets and how much damage is done to the economy along the way. But it hasn’t taken long for a series of companies to be plunged into trouble. Flybe, Europe’s largest regional airline, went into administration on Thursday. Brighthouse, with 240 stores and 2,500 staff, has put administrators on standby and may well be forced under soon. Bristol Cars, the manufacturer of niche but stylish sports vehicles, was forced into liquidation earlier this week.
In some cases, such as Flybe, the collapse is a direct result of the virus. In others, it might just be a coincidence. The important point is this, however. There are plenty more travel companies, retailers and manufacturers that could disappear in the weeks ahead. Demand is plunging, people are staying at home and that inevitably means trade is drying up.
But just as the virus only appears fatal to people with pre-existing medical conditions, so the economic downturn may only threaten companies that were already in trouble. After all, it is not as if any of these businesses were exactly in great shape to begin with. Flybe has been struggling for a long time. It is only a couple of months since the Government backed a rescue plan, and it was making heavy losses before being bought out by its latest owner, Connect Airways. The airline industry has been fiercely competitive for years, and Flybe, with its regional focus, never quite managed to find a profitable formula.
Brighthouse had already been through one rescue, and Bristol Cars has been through plenty of them. An offshoot of the aviation company that was one of the forerunners of British Aerospace, it was never a hugely successful business at any stage in its seven decades of existence. In different ways, they had all struggled for years. It wouldn’t be any great surprise if a few other troubled businesses joined them very soon.
That may turn out to be the biggest impact the coronavirus has on the economy. In the decade since the financial crash, lots of companies have been kept just about alive by near-zero interest rates and constant blasts of printed money from central banks designed to keep the bull market alive. In more normal times, interest rates would have risen at the top of the cycle, and companies with too much debt and too few customers would have gone under.
In the last decade, that hasn’t happened. Interest rates were slashed to just about zero, a 300-year low, and a couple of minor tweaks aside have just about stayed there ever since. The result? Lots of what economists started referring to as “zombie” firms, a term first coined when Japan slashed interest rates to zero in the Nineties. They are the living dead: not quite alive, but still staggering on anyway. There are lots of them out there. A report by KPMG last year estimated one in seven UK companies could effectively be “zombies”.
Of course it is right to keep businesses alive when you can. No one wants to see businesses shut down, staff lose their jobs, or customers or suppliers suddenly abandoned. But that is only if they can be genuinely turned around, and restored to health. In truth, some companies are completely hopeless. And the problem is this: they tie up resources that could more profitably be used elsewhere. Flybe, for example, uses planes and landing slots without being able to make a profit. Once it has gone under, other airlines, or entrepreneurs, may well be able to work out how to use those machines, or that space, for something that is profitable. The same is true of all those Brighthouse shops if it goes under. No one knows quite what the future of the high street will be – flats, perhaps, or office space for small business – but there is no point in land and buildings being used on a retail concept no one really wants. The sudden shock of the coronavirus recession may finally finish some of them off – and free up resources to be used more productively.
The Chancellor will come under intense pressure to throw a lifeline to every business that runs into trouble. Bailout funds will be set up, and rescue packages offered. In some cases that will be perfectly justifiable. The coronavirus – fingers crossed – may well be a once-in-a-lifetime crisis and there is no point in letting it destroy decent businesses. But if it also takes out some of the zombies that would otherwise have disappeared when interest rates were normalised then that won’t be completely terrible. When the economy recovers, as hopefully it will as soon as the virus comes under control, the economy may well be healthier for some of the casualties along the way.
‘We will find out over the next few weeks just how bad the coronavirus gets and how much damage is done’