USA TODAY International Edition
Some businesses are spending more
Many add investments despite pandemic’s limits
Sergio’s Family Restaurants, with six Cuban eateries in South Florida, has been roughly breaking even during the COVID- 19 pandemic, with profitable locations subsidizing money- losing ones and the company scrapping to survive until the crisis is over.
Yet Sergio’s president, Carlos Gazitua, isn’t exactly hunkering down and conserving cash. The company spent $ 200,000 on a new 100- seat outdoor patio at its Coral Gables restaurant. And it plans to shell out another $ 200,000 to install a retractable roof on part of the patio and turn the restaurant’s rooftop into an event space, complete with a bar carved into an open shipping container.
Betting on Americans’ preference for al fresco dining and gathering during the outbreak, “We were saying this is not going to end very soon,” Gazitua says. “We’ve got to go for it.”
U. S. business investment soared over the summer and early fall, defying the pattern of the last two economic recoveries and bolstering the nation’s
comeback from the pandemic- induced downturn. Business spending overall rose at an annual rate of 20.3% in the July- September quarter and outlays for equipment such as computers, electronics and factory machines vaulted a record 70.1%.
Consumer spending made up most of the record 33.1% annualized increase in gross domestic product during that period. But business capital investment was a solid contributor and could help support the economy’s rebound if consumption temporarily fades as federal stimulus funding and household savings run dry in coming months.
“It’s been a pretty robust recovery for equipment investment,” says Jonathan Millar, deputy chief economist at Barclays.
Helping recovery, boosting jobs
Besides buttressing the broader economic recovery, healthy business spending often means more jobs: Equipment makers ramp up hiring to meet demand and buyers bring on employees to run the new machines. The nation has recouped slightly more than half the 22.2 million jobs lost in early spring. Capital purchases also increase the economy’s productive capacity, setting the stage for stronger growth down the road, Millar says.
Companies are often frozen by uncertainty in the early stages of an upswing. In the recovery from the 2001 recession, businesses were loath to open their wallets after technology- related spending binges led to the dotcom crash, Millar says. And since the Great Recession of 2007- 09 was sparked by a financial crisis, banks for years were less willing to lend to businesses, which were already leery of spending heavily amid weak demand.
Split- screen economy
The coronavirus pandemic, by contrast, has created a split- screen economy, with some firms taking cover and others reaping the benefits of a largely homebound populace. Online video
conferencing provider Zoom is thriving as white- collar employees continue to work from home. Amazon is notching record sales and profits as Americans increasingly buy products online.
Largely to expand its fulfilment and distribution centers, Amazon made a record $ 9.8 billion in capital purchases in the third quarter, up from $ 3.4 billion in the same period in 2019. Exxon, on the other hand, had $ 16.6 billion in capital outlays and exploration during the first nine months of 2020 as the outbreak hammered energy usage and oil prices. That’s down from about $ 23 billion during the same period a year earlier.
So far, equipment spending by the pandemic’s winners is more than offsetting the losers’ penny- pinching. In September, orders for core capital goods – a key measure of business investment – topped its pre- pandemic level by 3.4%, Millar says. In the previous two recessions, it took years for such spending to reclaim its prerecession mark.
For Standard & Poor’s 500 companies, capital spending in the third quarter was 6.2% higher than in the second quarter but 10.8% below the year- ago period, based on earnings results so far, says senior analyst Howard Silverblatt of S& P Dow Jones Indices.
Yet many small business owners, like Sergio’s Gazitua, are splurging in spite of their financial struggles in a highstakes bid to stay afloat until better times.
“We took a big gamble,” Gazitua says of the company’s $ 400,000 investment in the new outdoor spaces, the largest upgrade in the family- owned chain’s 45- year history. “We were holding our breath.”
So far, he says, it’s paying off. Although capacity in the 98- seat indoor dining area is still limited to 50%, the patio is helping the restaurant approach its pre- COVID- 19 revenue. Gazitua and his partners decided to buy the retractable roof after frequent showers during the summer rainy season. And their plans to upgrade the restaurant rooftop will accommodate corporate events and family parties, which have all but evaporated during the pandemic.
Gazitua believes he’ll be well- positioned if the current spike in coronavirus cases triggers another ban on indoor dining. And even after a vaccine is widely available and the crisis ebbs presumably next year, Sergio’s can cement a reputation as a mecca for outdoor dining and events, Gazitua says. The company, he says, has hired six employees to serve the patio and plans to add another six for the rooftop space.
The downside of his gambit? If it doesn’t pan out, the company largely will have depleted its savings.
‘ Scratching and clawing’
Many other beleaguered restaurants are spending on outdoor seating, heat lamps and drive- thrus to weather the health crisis.
Lefty’s Alley & Eats, in Rehoboth, Delaware, has spent about $ 90,000 to create a 38- seat outdoor patio, a drivein movie theater with a building wall doubling as a screen, and an ax- throwing area, slated to open Wednesday, says owner D. J. Hill.
He converted a storage room for the ax throwing and is hiring three full- time employees, including trainers and coaches.
“I’m trying to create new revenue streams that weren’t there before,” Hill says. “We are scratching and clawing every day to make it through this.”
Revenue, which was down 60% when Lefty’s reopened after the state shutdown, is now off about 30%. Still, the restaurant isn’t profitable, Hill says.
“If for whatever reason, this business doesn’t work out, I want to be able to say I tried absolutely everything I could,” he says.
Jonathan Slain, a small business consultant, has a similar outlook. His firm, Autobahn Consultants, has been breaking even during the outbreak but decided to spend $ 30,000 to turn a guest bedroom into a studio for Zoom meetings with clients. Video switching equipment lets him show multiple camera angles and a picture within a picture, while an audio mixer pipes in sound effects.
“It’s what I need to keep my current clients engaged,” he says, noting he often traveled to meet with them pre- pandemic and standard online video meetings can be numbing.
Keeping up with demand
Other businesses are buying equipment to meet demand that has surged because of the outbreak.
TerraSlate, which makes waterproof, tear- proof paper, has seen sales rise 18% because restaurants are buying its paper for menus that can easily be sanitized and even run through the dishwasher, says Kyle Ewing, president of the Denver- based company.
“Luckily, it works perfectly in a postCovid world,” he says.
Although the number of menus each restaurant is ordering had declined because of capacity limits, more outlets are turning to its product, Ewing says. As a result, he says he’s buying a highvolume $ 500,000 printer to keep up with the increased orders.
Blue Planet Surf Gear of Honolulu is also benefiting from the effects of the pandemic. The company – which makes paddleboards and sells those and other beach products at a surf shop and online – has notched a 65% sales increase this year, says CEO Robert Stehlik.
“People aren’t going traveling and they’ve got extra money to spend,” Stehlik says, noting they’re embracing activities such as standup paddle- boarding. He recently purchased a new $ 3,000 point- of- sale terminal that can process credit card transactions about twice as quickly as his previous model.
Capital investment will likely run out of steam in the coming months as the pandemic continues to rage and Congress remains deadlocked over a new stimulus, curbing consumer demand and the need for businesses to buy more equipment, economist Oren Klachkin of Oxford Economics believes.
At the same time, the election of Democrat Joe Biden as president may have resolved some policy uncertainty, and developments last week raised hopes for a vaccine, Millar says.
He’s forecasting another healthy 10% jump in equipment spending in the fourth quarter before a more modest 3% gain next year.