Despite the economic devastation inflicted by COVID-19, Rhode Island businesspeople remain optimistic that the worst is over and their businesses can only improve in the next year, according to responses to Providence Business News’ 2020 Summer Business Survey.
Nearly two-thirds of the business owners and executives who responded to the biannual survey – 63.3% – described their business outlook for a year from now as better than the current year, nearly identical to the level of optimism reported in the two prior surveys.
Indeed, a majority have started to see the beginnings of an economic comeback, with half reporting business activity and new orders greater than the prior quarter.
Even if the economy continues to improve, however, it won’t be enough to reverse the crushing blow to earnings, with just over one-quarter of those surveyed – 27% – expecting a higher net income this year compared with the prior year. That’s the second-lowest rate in the history of
PBN’s survey after the summer 2009 results, when expectations for higher year-over-year earnings dipped below 20%. At the same time, those expecting lower profits for the year stood at nearly 50%, roughly five times more than the 9.6% who predicted worse results a year ago.
And while their answers suggest a sense of hope, that optimism may be misguided, according to Edward M. Mazze, a University of Rhode Island distinguished professor of business administration who helped develop the PBN survey.
“I think we haven’t hit the peak in terms of the economic effect,” Mazze said. “The worst is yet to come.”
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ROAD TO RECOVERY? While many businesses see signs of recovery from the near shutdown of the state’s economy in March, almost as many are still struggling or stuck in neutral.[/caption]
‘FIGHTING HARDER’
The PBN survey, which has been conducted since 2008, is not scientific. PBN sent 22 questions to 4,055 businesses in the newspaper’s database, including two new questions specific to the pandemic. One hundred and eleven returned the surveys, representing a span of industries from banking and manufacturing to hospitality and health services. A few employ more than 1,000 people, but most are small and midsize companies.
Timing of the survey, which was completed shortly after the second quarter, proved crucial in respondents’ optimism and quarter-over-quarter improvements, according to Mazze. Many businesses saw some signs of relief in the second quarter thanks to federal aid, such as individual stimulus checks and forgivable loans through the Paycheck Protection Program.
But now that most businesses have exhausted their PPP money, and future federal aid to individuals and businesses has hit a snag in Washington, Mazze expects the economic impact of COVID-19 to hit with full force.
“For the next 12 months, businesses are going to be fighting harder and harder to stay the course,” he said, adding that he expected another 10% to 15% of Rhode Island businesses to shutter in the coming year.
Chris Hubbard, owner of Emergency Production LLC, fears his Cranston-based audio-visual services company could be one of the closures.
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PERENNIAL CONCERNS EASE A still-weak economy may have some businesses focusing less than usual on other perennial issues. All those listed below, including health care costs, are down from recent quarters.[/caption]
After the concerts, corporate meetings and sporting events that comprised the bulk of his business were canceled or postponed, he saw revenue drop to near zero. A PPP loan allowed him to keep his seven full-time employees on the books for eight weeks, but once the loan ran out, he laid off all but one person and stopped paying himself.
Even as state restrictions on gatherings have eased, the large-scale events for which his company and subcontractors provided high-end lighting and audio-visual services have not come back. He’s picked up a few gigs webcasting for virtual events, but those jobs bring in a fraction of the in-person gatherings.
He now spends most of his time, no longer occupied by business, wracked with worry over the future – of his employees, his company and his family.
“I feel like if the government doesn’t help me and my family out, a year from now we could be on the street,” he said.
And amid uncertainty over the economic and health ramifications of the virus, it’s hard for him to plan for what that new way of business will look like.
“We can’t pivot from something when we don’t know what the outcomes will be,” Hubbard said.
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PURSE STRINGS TIGHTENING Companies are hesitant to hire and fewer are planning big-ticket purchases than at any time in the history of PBN’s survey. Both signal uncertainty about the pandemic’s ongoing economic effects.[/caption]
PERMANENT CHANGE
There is one certainty: businesses will have to pivot.
Permanent changes to the way companies operate was named as the top long-term effect of COVID-19 by more than three-quarters of survey takers, followed by higher health care costs (36.8%), a higher cost of doing business due to new regulations (35.8%) and increased costs to attract and retain customers (31.1%).
Despite the high unemployment rates, which skyrocketed in March, and as of July remained more than triple the state’s unemployment rate a year ago, just over one-quarter (27.4%) of respondents named fewer employees as a long-term impact of COVID-19.
Quarter-over-quarter hiring has slowed, with 23% of businesses reporting a higher level of employment in the second quarter of this year compared with the prior quarter. At the same time, 92.7% said they did not plan on cutting jobs in the next quarter, a higher percentage than the 87.1% who gave the same answer in the summer of 2019.
Mazze was skeptical of respondents’ answers to planned layoffs, noting that survey takers may have given the “socially acceptable answer” rather than acknowledging the true possibility of future reductions.
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THRIFTY THINKING: Daniel Shedd, president of Taylor Box Co. in Warren, says while the manufacturer has begun to see marginal improvements in business activity and revenue, he remains in “cash preservation mode.” That means no hiring, except for one long-standing open position, and no major investments. / PBN PHOTO/RUPERT WHITELEY[/caption]
Daniel Shedd, president of Taylor Box Co., is hoping to avoid layoffs, but couldn’t rule them out entirely. Thus far, he has averted letting go of any of the employees at the Warren-based manufacturer, thanks to a combination of PPP money, participation in the R.I. Department of Labor and Training’s WorkShare program and a number of employees who opted to leave of their own accord to care for aging parents or supervise young children during distance learning.
Unlike manufacturers tied to consumer products, health care innovations or defense projects, many of which reported surges in demand amid the pandemic, Taylor Box was hit hard. The retail and business marketing clients that order the paper packaging his company manufactures largely canceled or postponed most of their orders when COVID-19 arrived, while other brick-and-mortar clients such as Brooks Brothers filed for bankruptcy.
While Shedd said his company has begun to see marginal improvements in business activity and revenue, he remains in “cash preservation mode” – no hiring, except for one long-standing open position, and no major investments.
ON HOLD
According to the PBN survey, many businesspeople are thinking like Shedd.
Just over 15% of survey takers anticipated purchasing big-ticket items in the next quarter – the lowest in the history of PBN’s survey, and half of the 30% who planned big purchases a year ago.
While BankNewport has fared well thanks to mortgage activity and PPP loans, the bank has backed off major expenses and investments, taking what Mary Leach, executive vice president and director of consumer relationships, described as a “must-have” approach rather than a wish list of spending items for the coming fiscal year.
That said, the bank is also looking to strategically grow the lines of business that have done well, including its new offshoots, OceanPoint Investments and OceanPoint Marine Lending. Purchases of boats and recreational vehicles soared as families looked for new ways to spend time together outside, benefiting the marine-lending arm beyond what the bank could have imagined when it unveiled the division a year ago.
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HELP WANTED In times of crisis, many businesses look for even more help from government than usual. Tax benefits and workforce development are among the growing needs during the pandemic.[/caption]
Another area of continued investment will be technology, as more customers turn to online and mobile banking tools to avoid in-person services and transactions.
Near-zero percent interest rates make it an ideal time to purchase capital equipment in some sense, but for many, “decision paralysis” has taken hold thanks to continued economic uncertainty. That’s not only a function of the new coronavirus but the upcoming presidential election, said Mazze.
The November election is a “make-or-break moment,” said Christine West, a principal at KITE Architects Inc. in Providence. West said she would be significantly more confident if Democratic nominee Joseph Biden wins the presidency, adding that she was impressed by his green infrastructure plan.
Business leaders’ confidence in politicians in Washington, D.C., is all the more crucial amid volatility in her industry. The seemingly overnight sidelining of most of her company’s major projects meant a dip in income, forcing quick thinking about how to strategically adapt.
Certain types of work, including projects for the high-end residential market, which has surged amid continued low interest rates, grew enough to offset declines in other areas. The company also shifted its focus away from project design to research – looking at how elements of design impact productivity, learning and well-being – to keep its workers busy. In the meantime, KITE used PPP money and the DLT’s WorkShare program to avoid layoffs, West said.
“That made all the difference,” she said of the payroll-relief funding. “Without it, we would be having a very different conversation.”
Yet, West worried about lack of future projects, particularly by colleges and universities that have traditionally comprised a substantial part of the company’s workload but may no longer need design work because campuses are relying more on online courses for now. Municipal and state government projects, too, have dried up while question marks hang over possible federal aid.
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ON THE OFFENSIVE: Bill Ostendorf, right, founder and president of website design and advertising company Creative Circle Media Solutions Inc. in East Providence, speaks with lead developer Tim Benson. Ostendorf says his company recently experienced its best quarter in its 16-year history, which he credited to a strategic and aggressive advertising approach. / PBN PHOTO/RUPERT WHITELEY[/caption]
AGGRESSIVE APPROACH
In the midst of such unpredictability, one expense is unwavering: the rapidly rising cost of health insurance. Health insurance topped the list of expenses that have increased the most in the last five years, according to just over half of survey takers in this survey and the two surveys prior. And over one-third expected those costs to continue to increase because of the pandemic.
The rate increases have been a significant source of financial stress for Creative Circle Media Solutions Inc., according to founder and President Bill Ostendorf.
“You have no insight or control over how much it goes up, but you just know every year, you’re going to pay more,” Ostendorf said.
Raising deductibles to offset the higher cost was “only an option if you don’t give a damn about your employees,” Ostendorf said.
So he has found ways around it, committed to keeping level costs and coverage for the workers of the East Providence-based website design and advertising company. And this year, covering that cost may be less of a challenge, with Ostendorf reporting his best quarter ever in the business’s 16-year history.
He credited the company’s success despite the pandemic to a strategic and aggressive advertising approach, based in part on lessons learned from the 2008 recession, which nearly forced him out of business. Determined not to repeat the mistakes of the past, Ostendorf ratcheted up his company’s promotional advertising and launched a series of new web applications designed to help the newspapers his company serves find new revenue streams amid the pandemic.
That most of his competitors had cut their advertising budgets worked to his advantage.
“One of the biggest factors in advertising is share of voice,” Ostendorf explained. “If there are 100 other ads, your share of voice is 1%. Because everyone else stopped advertising, it was a great time to grow our market share.”
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STILL HOPEFUL Despite this year’s significant health and economic challenges, most owners see better times ahead for their businesses.[/caption]
CHALLENGES REMAIN
Even in this topsy-turvy world, some aspects of business remain the same.
Reducing the cost of doing business in the state once again topped the list of actions survey takers said the state government could take to support their business, with nearly three-quarters of respondents saying it was important. Providing tax incentives came in second, with support from 56.6%, followed by reducing red tape, 43.4%, a switch from the two prior surveys when eliminating red tape trumped tax incentives as a priority.
Taxes and health care again ranked highly among the greatest challenges facing Rhode Island – each named by more than 40% of those surveyed, though those percentages are down from recent quarters.
But after ranking low on the lists of challenges in recent PBN surveys, a weak economy soared to the top, identified as a challenge by 61.5% of businesses. By comparison, just under 19% said the economy was a challenge for their business in the summer 2019 survey.
How long the economic recession continues will largely shape the tone of answers in the next survey, Mazze said. When and whether a proven vaccine is made available will also influence optimism among small-business owners, and with it, their willingness to stick out what could be a long road to recovery.
“We’re in a state of small and family businesses,” Mazze said. “We don’t have many Fortune 500 companies, so if the owner of a business feels optimistic, that’s key. If they don’t, they might just close their doors.”
Nancy Lavin is a PBN staff writer. Contact her at Gavin@PBN.com.
