Queen of the colony

What Ant Group’s IPO says about the future of finance

The giant Chinese fintech upstart is expected to raise more than $30bn, eclipsing Saudi Aramco’s debut last year


In the staid world of Chinese banking, it is rare for executives to voice public criticism. 

So Jack Ma, the founder of e-commerce giant Alibaba, made headlines in 2008 when he bemoaned how hard it was for small businesses to get loans: “If the banks don’t change, we’ll change the banks.” 

He has not repeated his warning since then. He has not needed to.

Through Ant Group, which began life as a payments service on Alibaba, Mr Ma’s impact on the Chinese financial system has been profound. Ant has helped establish China as the world leader in digital transactions, given entrepreneurs and consumers far greater access to loans, and changed the way that people manage their money. 

It is now a giant in its own right. Over the past year it counted more than 1bn active users. Last year it handled 110trn yuan ($16trn) in payments, nearly 25 times more than PayPal, the biggest online payments platform outside China (see chart 1).


An initial public offering (ipo) in the coming weeks will bear testimony to Ant’s growth. It is expected to raise more than $30bn, eclipsing Saudi Aramco’s debut last year as the biggest ipo—a symbol of the world’s transition from a century in which oil was the most valuable resource to an era that prizes data. 

With a forward price-to-earnings multiple of 40, in line with big global payments companies, Ant could fetch a market capitalisation in excess of $300bn, more than any bank in the world.

A four-legged insect

More important than its size is what Ant represents. It matters globally in a way that no other Chinese financial institution does. China’s banks are huge but inefficient, burdened by state ownership. By contrast foreign financiers look at Ant with curiosity, envy and anxiety. 

Some hawks in the White House reportedly want to rein in the company or hobble its ipo. 

Ant is the most integrated fintech platform in the world: think of it as a combination of Apple Pay for offline pay, PayPal for online pay, Venmo for transfers, Mastercard for credit cards, JPMorgan Chase for consumer financing and iShares for investing, with an insurance brokerage thrown in for good measure, all in one mobile app.

Given the abundance of consumer data in China and the relatively lax safeguards around its use, Ant has more to work with than fintech peers elsewhere. 

More than 3,000 variables have gone into its credit-risk models, and its automated systems decide whether to grant loans within three minutes—a claim that may seem far-fetched but for Alibaba’s proven ability to handle 544,000 orders per second. 

Ant is, in short, the world’s purest example of the tremendous potential of digital finance. But as it advances further, it may also be an early warning of its limitations.

Start with a deceptively simple question: what is Ant? In its decade as an independent company it has changed names three times—from Alibaba e-Commerce to Ant Small and Micro Financial Services to Ant Group. 

The company once called itself a fintech leader. Then Mr Ma inverted the term to techfin, in order better to capture its priorities. Such are its efforts to distinguish itself from a purely financial firm that it has asked some brokerages to assign tech analysts to cover it. (Of course, it does not hurt that the valuations for tech stocks are much plumper than for bank stocks.)

Yet there is no doubt that Ant, at its heart, is about finance. The clearest way of understanding its business model is to look at the four sections into which it divides its revenues. The first is payments—how it started and still the foundation of the company. 

Ant began in 2004 as a solution to a problem. Shoppers and merchants were flocking to Alibaba but lacked a trusted payment option. Alipay was created as an escrow account, transferring money to sellers after buyers had received their products. 

With the launch of a mobile Alipay app, it moved into the offline world, super-charging its growth in 2011 with the introduction of qr codes for payments. A shop owner needed to show only a qr code print-out to accept money, a big advance for a country previously reliant on cash.

For China as a whole, digital transactions reached 201trn yuan in 2019, up from less than 1trn in 2010. Alipay’s market share has been whittled down by Tencent, which added a payments function to WeChat, China’s dominant messaging app. Both companies earn as little as 0.1% per transaction, less than banks do from debit-card swipes. Given the sheer volume, this still adds up to a lot. 

Ant generated nearly 52bn yuan of revenues from its payments business last year. But growth is slowing, dropping from 55% of Ant’s revenue in 2017 to 36% in the first half of this year. Instead, the crucial point is that payments are a gateway: how Ant attracts users, understands them and ultimately monitors them.

The biggest beneficiary of all this data is Ant’s lending arm, the second part of the company (which Ant, never one to shy away from jargon, calls CreditTech). Ant began consumer lending as recently as 2014, with the launch of Huabei, a revolving unsecured credit line for purchases—basically a virtual credit card. 

Alipay users can tap into Huabei to defer payments by a month or to break them into instalments. Credit cards had never taken off in China, so Huabei was lapped up. That led to Jiebei, an Alipay feature which allows users to borrow larger sums. Ant also offers loans, with a focus on very small businesses. Annualised interest rates hover between 7% and 14%, lower than the alternatives from small-loan companies.

Like many Ant clients, Zhu Yifan, owner of Rabbits Go Home, a convenience store in Dongyang, an eastern city, started small. Four years ago she and her husband wanted to open their store. 

With no property as collateral, they could not get a bank loan. Instead, they pulled together money from friends and relatives, and, on a whim, borrowed 10,000 yuan from Ant, the most they could obtain then. By repaying that initial loan and getting customers to use Alipay—giving Ant a look at her cash flow—Ms Zhu’s credit score improved. Now, she has a 100,000 yuan credit line from Ant, which lets her stock up before busy holidays.

In barely half a decade Ant has reached 1.7trn yuan in outstanding consumer loans, or roughly a 15% share of China’s consumer-lending market. Its loans to small businesses total about 400bn yuan, about 5% of the micro-enterprise loan market. 

From a financial perspective, Ant’s biggest innovation is the way that it funds the credit. Initially, it made the loans and then packaged them as securities, sold to other financial institutions. 

But regulators feared parallels with the securitisation boom that preceded the financial crisis of 2007-09. They required that the originators of securities hold capital much like any bank—a rule that cut into Ant’s margins.


So Ant devised a new approach. It now identifies and assesses borrowers, but passes them on to banks which extend the loans. Ant collects a “technology service fee”. For borrowers it is seamless. 

With a few taps on their smartphones, their credit requests are approved or rejected. 

Ant ends up with a cash-rich, asset-light lending model. Fully 98% of the loans are held as assets by other firms. Credit has become Ant’s biggest single business segment, accounting for 39% of its revenues in the first half of this year (see chart 2).

The strength of Ant’s platform is what enables its third and fourth business segments: asset management and insurance (InvestmentTech and InsureTech, to use Ant’s nomenclature). Ant got started on asset management in 2013 with the launch of Yu’ebao, or “leftover treasure”. 

The idea was that merchants or shoppers with cash in Alipay could get a small return by parking it in a money-market fund. That attracted people interested in Yu’ebao purely for storing cash, since its yields (now roughly 1.7%) were higher than those available on current accounts at banks. By 2017 Yu’ebao had given rise to the world’s biggest money-market fund by size.

Ant broadened its offerings to become one of China’s most powerful distribution channels for investments. Today 170 companies sell more than 6,000 products such as stock and bond funds on Ant. Altogether these firms have roughly 4.1trn yuan in assets under management enabled by the app. 

As with its lending business, Ant screens prospective clients and directs them to products. It then collects a service fee. “Our growth on Ant has been faster than on any other digital platform,” says Li Li, deputy ceo of Invesco Great Wall Fund Management. Her group’s two money-market funds soared from 665m yuan in assets under management in early 2018, when it started selling them on Ant, to 114bn yuan in June.

Ant’s push into insurance happened more recently. For a decade it offered shipping insurance for purchases on Alibaba, letting dissatisfied customers return goods for no charge. But it is only in the past two years that it has applied its asset-management template to insurance. 

In partnership with big insurance firms, it has unveiled life, car and medical insurance—again collecting fees as a distribution platform. Asset management and insurance now make up nearly a quarter of revenues.

All the ants are marching

Simply looking at the numbers, Ant can appear unstoppable. It has chalked up dizzying growth rates in every market that it has targeted. 

It benefits from the network effects so familiar in the tech world: the more people use it, the stronger its attraction for yet more borrowers, lenders and investors. 

It is a virtuous cycle, especially for Ant’s shareholders. Nevertheless, there exist three kinds of risks that could slow it down: regulatory, competitive and those that are intrinsic to its own model.

The regulatory landscape in China is treacherous. Officials endlessly tweak rules for banks and investors, patching up holes as they emerge in the fast-growing but debt-laden economy. Many have long assumed that the government will give Ant, a private-sector firm, only so much leeway in the state-controlled system.

Indeed, regulators have already put numerous hurdles in Ant’s path. Its first attempt at launching a virtual credit card was blocked. The securitisation crackdown upended its lending model. 

A government plan to standardise qr codes could weaken it in payments, potentially reducing Ant’s market dominance. Another new rule, taking effect in November, will force Ant to hold more capital.

But if all these hurdles were meant to stop Ant, they have not succeeded. So there exists an alternative explanation. Regulators, wary of the pitfalls in financial innovation, continue to erect guardrails around Ant. 

In general, though, they like it. Not only has it steered credit towards small consumers and businesses, it has also given the government more information about money flows. 

Duncan Clark, author of a biography of Jack Ma, notes that regulators have long struggled to monitor all corners of China, referencing the old saying that the mountains are high and the emperor far away. 

“Ant has basically let Beijing tunnel through the mountains and fly drones over their summits,” he says.

Another threat to Ant is its competitors. Until 2013 mobile pay was, more or less, Ant’s exclusive domain. But Tencent has used its ubiquitous WeChat app to muscle in, taking nearly a 40% market share. Other firms also have financial ambitions. Meituan, an app known for food delivery, now also offers credit. 

The financial arm of jd.com, an e-commerce firm, and Lufax, an online wealth-management platform, are on track for ipos this year.

So far these competitors have a much smaller financial footprint than Ant’s. Partly this is because they do not have the same breadth. Shawn Yang of Blue Lotus, a boutique Chinese investment bank, says that Tencent, for instance, has high-frequency but low-value consumption data, less rich than the trove that Ant has thanks to Alibaba, which accounts for more than half of Chinese online retail sales.

But it is also a matter of business culture. The most controversial episode in Ant’s history came in 2011 when Mr Ma spun it out from Alibaba, without notifying SoftBank and Yahoo, which together held about 70% of Alibaba’s shares back then. 

Mr Ma explained that Chinese regulations forbade foreigners from owning domestic payments firms, though there may have been work-arounds. Some suspected that he wanted to bring in powerful investors closer to home. 

Ant’s earliest rounds of fundraising as an independent firm did indeed attract major state-owned enterprises. A stake was also sold to a private equity firm managed by the grandson of Jiang Zemin, China’s paramount leader during Alibaba’s early years.

Yet in retrospect the spin-off has a clear strategic rationale. As a standalone company Ant has had the motivation to explore distant corners of the banking system and act aggressively. 

An executive with another e-commerce company says that its financial unit worries about making mistakes that might taint the group’s core retail business. Ant, by contrast, has diversified, with less than 10% of its revenues now from Alibaba. 

For China’s other e-commerce dynamos, its success offers a template. They may be several years behind but the fintech race is far from over.

The final danger for Ant has the most global resonance: the nature of its model. 

Unsecured lending to small borrowers is risky, whichever way it is done. Indeed the coronavirus pandemic has offered a sharp test for Ant. 

Delinquent loans (more than 30 days past due) issued via its app nearly doubled from 1.5% of its outstanding total in 2019 to 2.9% in July. Yet that is better than most other banks in China. Is that because of Ant’s prowess? 

Some critics say that it reflects its market power. Given the centrality of Alipay and Alibaba to their operations, few dare to default on Ant loans, worried that a downgraded credit rating may damage other parts of their business.

Still, many bankers are persuaded that Ant truly does have an advantage in its analytics. “They don’t need quarterly statements. They see your daily flow of funds. They know who your customer is. 

They know who your customer’s customer is,” says one. Based on the address for e-commerce deliveries, Ant has more up-to-date information about where someone lives and works than a bank. Based on what that person buys, Ant can work out their income bracket and their habits, preferences and way of life.

But according to Hui Chen, a finance professor at Massachusetts Institute of Technology who has worked on research projects with Ant, individual and systemic risks are different. 

The machine learning that underpins Ant’s algorithms observes individual behaviour again and again, and is then able to detect patterns and anomalies. But if risks do not appear in the historical data—say, a big economic shock—the same machine learning may stumble.

There are also some limitations hard-wired into Ant’s strategy. By design, it aims for high-volume, small-scale borrowers and investors. “Their analytical advantage is most significant with this mass market, where traditional banking models are most inaccessible,” says Mr Chen. 

Most corporate lending—about 60% of all credit in China—will remain off limits. Ant also has an awkward relationship with banks. It relies on them to fund the loans on its platform, but as it grows it may become a competitor in their eyes. For now that is not much of a concern, given that it focuses on borrowers ignored by banks. But it means that Ant must befriend the very institutions that it once set out to disrupt.

Doubts exist about its investment and insurance platforms, too. Ant has excelled in selling money-market funds to a plethora of retail investors. Moving up the value chain could be harder. “They are great at selling penny products. But that’s not where you make the money in insurance,” says Sam Radwan of Enhance, a consultancy. 

To close a deal on a valuable, complex policy like a variable annuity, brokers typically speak with consumers several times. “No ordinary customer is going to trust an online broker for something that complicated,” says Mr Radwan.

Doing the jitterbug

Ant’s global ambitions are also running into problems beyond its control. It has stakes in around ten different fintech companies in Asia, such as Paytm in India. Boosters once imagined a world connected by Ant, its credit-to-investment architecture straddling borders. 

The first blow to that vision came in 2018 when America blocked Ant’s acquisition of MoneyGram, a money-transfer firm, which would have established Ant as a force in global remittances. Security concerns over Ant have increased as China’s foreign policy has become more aggressive. Little wonder that Ant plans to devote just a tenth of its ipo proceeds to cross-border expansion.

Despite all these limitations, one lesson from Ant’s decade in existence is that future possibilities remain vast. Ms Li of Invesco gushes about her fund-management firm’s mini-site within the Alipay app, one of the tens of thousands of separate sections that constitute the Ant ecosystem. 

In September Invesco hosted a live-stream on the mini-site to discuss its market outlook. More than 700,000 tuned in—just one example of how Ant has become the main doorway into the financial system for tens of millions of people. 

And for all those who have walked through it, many more have not. Ant will soon know where they live, how much they earn and what they want. It is coming for them. 

Democracy faces bigger threats than Vladimir Putin or Xi Jinping 

Western governments must counter autocrat aggression, but saving democracy starts at home

Philip Stephens 

© Pinn/Financial Times


The wisest words I have seen this year about the world’s advanced democracies came from a spook. 

Alex Younger, the departing head of the UK’s Secret Intelligence Service, warned against overreaction to the efforts of Russia and others to subvert western societies. Of course, agencies such as his must counter such operations. But the problems do not begin or end in Moscow.

Democracy’s retreat is a favoured narrative of our times. You can see why. Wherever one looks, self-styled “strongman” leaders are scorning liberal values. The forward march of democracy of the early post-cold war era has become a retreat. 

Unabashed authoritarians such as Russia’s Vladimir Putin and China’s Xi Jinping have been joined by illiberal nationalists in the mould of Turkey’s Recep Tayyip Erdogan and India’s Narendra Modi.

The EU has its own, albeit pocket-sized, autocrat in Hungary’s Viktor Orban. Poland’s ruling Law and Justice party has faced investigation by EU authorities for undermining the independence of judges. 

Populist parties have shaken establishment elites across Europe. Worst of all, the world’s most powerful democracy has, in President Donald Trump, an authoritarian manqué, unapologetic in his disdain for the rule of law.

Unsurprisingly, the efforts of Mr Putin’s regime to fuel division by spreading misinformation and backing extremists of the far-right and far-left provoke serious indignation. So too does Beijing’s apparent determination to combine brutal political repression at home with constant cyber attacks on western business and public institutions. 

It is not always obvious that the democratic centre will hold.

After a lifetime fighting such incursions, Sir Alex is attuned to the dangers. But, as he said in a valedictory interview with the Financial Times, we should not conflate domestic problems with external threats. 

Take Mr Putin: “I think it is really important that we avoid two mistakes here: the first is to do Russia’s job for them by bigging it up; I haven’t seen in the UK any occasion where this stuff has made a strategic difference. 

Second, and related, I think we should keep this stuff in proportion. The Russians did not create the things that divide us — we did that.”

“We did that” is a thought to hold on to in any discussion of how democracies can recover the confidence of their citizens. The world, it is often said, is passing through a Thucydidean moment, with power flowing from the US to a rising China, increasing tensions such as those between Athens and Sparta in the fifth century BC.

This unsettling shift has given autocrats such as Mr Putin an opportunity to disrupt and defy post-cold war assumptions about liberal politics and open markets. All this is true. But, as Sir Alex suggests, those looking for the root cause of democracy’s ills should begin the search closer to home.

The financial crash of 2008 is the place to start. To my mind, historians will record the collapse of the banking system and subsequent recession as the most important geopolitical event of the opening decades of the century. On one level, it stripped the west of much of its standing among the world’s rising states. 

More important was the damage done at home. The inequalities and grievances since exploited by Mr Trump and fellow demagogues did not appear overnight. But the crash crystallised accumulated unfairnesses thrown up by laissez-faire capitalism, technological upheaval and globalisation. 

The political stability of the postwar era rested on a bargain. In the US, it was called the American dream; in Europe, the social market system. The market economy would deliver a broad spread of rising living standards and opportunity. 

The system was breaking down before the crash. Political and business elites delivered the final blow with post-crash austerity programmes that made the victims pick up the bill for the bankers. Along the way, they destroyed the aura of inevitability once bestowed on the free-market economics of the Washington consensus.

Rebuilding trust requires a politics that values the public realm and rebalances government policies on spending, tax, competition, education and welfare to widen opportunity. This will be the measure by which disenchanted citizens assess the medium-term economic responses to the pandemic. 

To the extent that Covid-19 has discriminated against its victims beyond the obvious divide of young and old, the costs have fallen on the less prosperous and most insecure. 

The strange thing is that, for all their bravado, the autocrats and despots are acutely conscious of the inherent strength of democracy. They also appreciate the brittleness of authoritarian regimes. 

If the west is condemned as decadent, the strongmen do not see westerners waving placards calling for fewer freedoms. Mr Putin lives in fear of “colour revolutions”. Mr Xi insists that all rising party officials are taught that if they give an inch to democracy they will invite an irresistible clamour for liberty.

Of course it is vital that the west acts to stop Mr Putin and, more important still, that it shows resolve in countering Mr Xi’s strategies of repression and coercion. But saving democracy? 

The way to do that is to fix the economic and social policies that have been stripping liberal societies of legitimacy in the eyes of their citizens.

Controlling the pandemic

Should covid be left to spread among the young and healthy?

Two petitions by scientists clash on the matter


As new waves of covid-19 sweep the world, lockdowns are back in fashion. This time, though, they are a harder sell. They certainly save lives. But it is now clear that the lost jobs, the disruption to education and medical services, and the harm to mental health that they cause all exact tolls of their own—and these are paid not just in misery, but in deaths. 

Systems of “test and trace”, intended to stop those exposed to the virus from passing it on, seem to have worked in some places, but not in others.

In the absence of a vaccine, or of effective drug treatments, the question of how much longer this can go on for is thus being asked more insistently. And on October 4th a trio of public-health experts from Harvard, Oxford and Stanford universities put out a petition calling on governments to change course in a radical way.

The Great Barrington Declaration, named after the town in Massachusetts where it was signed, proposes that the contagion be allowed to spread freely among younger and healthier people while measures are taken to protect the most vulnerable from infection. 

This approach rests on the concept of “herd immunity”, whereby the disease would stop spreading when a sufficient share of the population had become immune as a result of infection.

Thesis

That is a controversial idea. And on October 14th another group of health experts published a rebuttal in the Lancet, calling the declaration “a dangerous fallacy unsupported by scientific evidence”. Their letter has a grand title, too: the John Snow Memorandum, named after an Englishman who established the principles of epidemiology in the 1850s. 

It urges governments to do whatever it takes to suppress the spread of sars-cov-2, the coronavirus that causes the illness. In particular, it calls for continuing restrictions until governments fix their systems to test, trace and isolate infected people. 

Online, the duelling petitions have each gathered thousands of signatures from scientists around the world.

The Great Barrington proposal is a risky one. Any judgment about whether natural infection can create herd immunity to sars-cov-2 is premature. It has not yet been established whether infected people develop durable immunity against reinfection—and if so, how common that immunity might be. 

Few cases of reinfection have yet been confirmed conclusively. (This is done by establishing that the genomes of the virus particles found the first and second times around are indeed different, meaning the second infection cannot be a continuation of the first.) Lots of reinfections could, though, be happening undetected. 

About 80% of those infected with sars-cov-2 have mild symptoms, or none at all. 

The vast majority of these mild cases are not getting tested, even in countries with ample testing capacity.

The ideal study to settle this uncertainty would involve retesting frequently a large cohort of people known to have been infected in the past, to see how many become infected again. But identifying those who have had mild or symptom-free infection is hard. 

Tests that look for antibodies against sars-cov-2 in big surveillance studies often fail to detect those antibodies in mild cases. Some studies have found that antibodies in these patients wane over time. But whether that equates to waning immunity is still unknown.

If the immune response to sars-cov-2 is anything like that to the other six coronaviruses which infect human beings, letting it spread would eventually slow transmission down—for a period. The question is how long that period would be. Four of the six cause symptoms described as “the common cold” (though other types of viruses cause colds as well). Infection with these confers protection that typically lasts for less than a year. 

The other two human coronaviruses, sars and mers, cause serious illness. Immunity to these is estimated to last for several years. 

If protection in the case of sars-cov-2 is short-lived or not particularly strong, the virus will keep surging in recurrent epidemic waves, much as happens each winter with other respiratory bugs. 

If it is longer-lived, the Great Barrington argument is more plausible.

Antithesis

The authors of the John Snow memorandum argue, though, that deaths and disability under the Great Barrington plan would be huge, even if the herd-immunity gamble is on the money. The share of the population which would need to be infected depends on how easily sars-cov-2 spreads. 

In its simplest form, the herd immunity threshold as a fraction of the population is 1-(1/r), where r is the average number of people who catch the virus from an infected person. With no social distancing, the r values for Europe are in the range of 3-4, meaning that herd immunity would kick in when two-thirds to three-quarters of people have been infected (see chart 1). 

This formula, though, assumes everyone has the same chance of infection, which is not the case in reality. If chances of infection vary, then the threshold is lower than the formula suggests. And this may matter. 

Young people, for example, have more contacts than oldsters, and are thus more likely to pick the virus up. Some models which assume plausible variety in contact rates have concluded that the herd-immunity threshold in western Europe could therefore be as low as 43%.


It is also possible that this threshold has been lowered by pre-existing immunity conferred by past infections with cold-causing coronaviruses. That sort of protection would come from memory t-cells, another part of the immune system’s armamentarium. 

Unlike antibodies, which are custom-made to attack a given pathogen, t-cells are less picky in recognising and going after a harmful invader. 

Several studies of blood samples taken before sars-cov-2 emerged have found t-cells that put up a robust reaction to that virus in 20-50% of cases. This is an exciting result. 

But it is not yet known whether people with such t-cells will have less severe covid-19 disease, or none at all, if they are exposed to sars-cov-2 in real life. An outbreak of covid-19 on a French aircraft-carrier did not come to a halt until 70% of the crew had become infected, which suggests that cross-protection from common-cold infections may just be a nice theory.

All this means that if sars-cov-2 is left on the loose perhaps half or more of people will become infected over the course of six months. The Great Barrington proposal is that, as this happens, countries must double down on protecting the most vulnerable. 

Identifying who these vulnerable people are is not a foolproof task, but knowledge about the worst combinations of risk factors is getting better. A paper published in the BMJ on October 20th describes a covid-19 risk calculator that predicts an individual’s probability of hospitalisation and death, using data on 6m people in Britain. 

Validation of this algorithm on 2m others showed that the 5% of people predicted to be at greatest risk by the calculator accounted for 75% of the covid-19 deaths.

But awareness of such risk scores or simpler markers of high risk (old age, obesity and diabetes in particular) is all too often of little use in practice. Most people cannot change their lives in ways that eliminate their risk of infection, particularly when there are lots of infections all around. 

Those who care for them, or live in the same home, would get infected at some point—and unwittingly pass the virus on. Though most deaths from covid-19 are among the elderly, many adults in younger age groups are at high risk. 

At the peak of the covid-19 epidemic in England and Wales deaths among people aged 45 to 64 years were 80% higher than usual (see chart 2) despite a lockdown and official advice to the most vulnerable to “shield” from the virus by not leaving their homes at all.

Although the vast majority of people do not get seriously ill if covid strikes, as many as 5% of those who develop symptoms may remain unwell for at least eight weeks (a condition known as “long covid”). Some of them have not recovered after six months, and there are fears that they may never get back to normal. 

Even if less than 1% of the infected end up in this unlucky group, for a country the size of Britain that would be hundreds of thousands of people with lifelong disability. 

Another big unknown is whether there are any hidden health consequences of the virus that may show up in the future. 

Some studies have found subtle heart changes following mild covid-19. 

It may not be clear for years whether these lead to serious heart problems for some people, or do not matter at all.

Synthesis?

The Great Barrington plan, then, is a high-risk, high-reward proposition. The John Snow one, by contrast, would minimise covid deaths in the short term, but lives lost in the long-term, because of lockdowns and other disruptions, might end up being more numerous. 

Over time, as governments fix the test and trace systems that are needed to replace the broader restrictions, the motivation for the Great Barrington course of action will become less potent.

With luck, this whole debate will be rendered irrelevant by the invention of a vaccine or the development of suitable drugs to treat covid. The results of several efficacy trials of vaccines, and tests on promising pharmaceuticals, are expected in the coming weeks. 

If covid-19 is less deadly and some herd immunity comes from a vaccine, the paths charted by the two petitions will, eventually, come together. 

McDonald’s, Chipotle and Domino’s Are Booming During Coronavirus While Your Neighborhood Restaurant Struggles

A health crisis is creating a divide in the restaurant world. Big, well-capitalized chains are thriving while small independents struggle to keep their kitchens open.

By Heather Haddon


The coronavirus pandemic is splitting the restaurant industry in two. Big, well capitalized chains like Chipotle Mexican Grill Inc. and Domino’s Pizza Inc. are gaining customers and adding stores while tens of thousands of local eateries go bust.

Larger operators generally have the advantages of more capital, more leverage on lease terms, more physical space, more geographic flexibility and prior expertise with drive-throughs, carryout and delivery. 

A similarly uneven recovery is unfolding across the business world as big firms have tended to fare far better during the pandemic than small rivals, thinning the ranks of entrepreneurs who could eventually become major U.S. employers. In the retail world, bigger chains like Walmart Inc. and Target Corp. are posting strong sales while many small shops struggle to stay open.

Robert St. John owns multiple restaurants and bars in Hattiesburg, Miss. He had to close two of them during the pandemic. PHOTO: DAYMON GARDNER FOR THE WALL STREET JOURNAL

Tabbassum Mumtaz operates 400 KFCs, Long John Silvers, Pizza Huts and Taco Bells in nine states. Most of his restaurants are thriving. PHOTO: RAHIM FORTUNE FOR THE WALL STREET JOURNAL


The divide between large and small restaurants surfaced in the summer. Chipotle more than tripled its online business sales in the second quarter while Domino’s, Papa John’s International Inc. and Wingstop Inc. all reported double-digit same-store sales increases in the third quarter compared with the year-earlier period. 

McDonald’s also said U.S. same-store sales rose 4.6% in the third quarter. That included a rise in the low double digits during September, its best monthly performance in nearly a decade. It credited faster drive-throughs and promotions.


Many other big restaurant companies took additional steps to take advantage of the shift to takeout. Brinker International Inc.’s Chili’s division pushed up the summer debut of a delivery-only brand, Just Wings, that it expects to generate more than $150 million in sales in its first year.

“The silver lining in this pandemic is we are going to emerge stronger,” said Bernard Acoca , chief executive of El Pollo Loco Holdings Inc., a chain of 475 Tex-Mex restaurants across the Southwest. El Pollo has opened three restaurants in 2020 and aims to add more in years ahead, he said.

The prospects for many independent restaurants, meanwhile, are getting dimmer. 

Three-quarters of the nearly 22,000 restaurants that closed across the U.S. between March 1 and Sept. 10 were businesses with fewer than five locations, according to listing site Yelp.com.


The Midtowner is one of several restaurants that Mr. St. John kept open in Hattiesburg. / PHOTO: DAYMON GARDNER FOR THE WALL STREET JOURNAL


Frequent closings have always been a facet of the restaurant business. Restaurants typically run on slim margins. Some 60,000 restaurants open in an average year, according to the National Restaurant Association, and 50,000 close.

But this upheaval is the most profound in decades. The association predicts 100,000 restaurants will close this year. The sudden loss of many independent restaurants could permanently alter the landscape of American cities. Some chefs and restaurant operators fear the recent revival of downtowns across the country will slip into reverse.

Fewer Cooks in the Kitchen

Independent restaurants have shed more of their workers this year than chains as the industry takes a bigger hit than it did during the last recession. Many more restaurants are projected to close for good this time around.


Employment at restaurants and bars has dropped by 2.3 million jobs from a total of more than 12 million before the pandemic, according to the Labor Department. In fact, the broader leisure and hospitality sector experienced the largest total drop in employment since February in a major industry.

The pandemic will wipe out $240 billion in sales this year, according to a projection from the National Restaurant Association, a trade group. Last year, the industry brought in more than the agriculture, airline and rail-transportation industries combined, according to Bureau of Economic Analysis figures.


Smaller restaurants like The Midtowner didn’t have the same advantages of capital, negotiating leverage and geographic flexibility once the pandemic hit. PHOTO: DAYMON GARDNER FOR THE WALL STREET JOURNAL

Restaurants that are part of a larger chain like this KFC were able to lean on corporate support and prior expertise with carryout and delivery. PHOTO: RAHIM FORTUNE FOR THE WALL STREET JOURNAL

Getting Bolder

The pandemic hasn’t spared all big chains.

Many casual-dining companies have posted double-digit sales declines. More than a dozen companies have filed for bankruptcy protection, including Ruby Tuesday Inc. and California Pizza Kitchen. Shake Shack Inc. and Ruth’s Hospitality Group Inc. returned millions of dollars of federal aid meant for smaller businesses hurt by the coronavirus pandemic. Starbucks Corp. , Dunkin Brands Inc. and Pizza Hut said they are planning to close 1,500 stores between them in the next 18 months.



Yet many other chains say now is a time to get more aggressive. Olive Garden’s parent, Darden Restaurants Inc., is looking into expanding in urban areas including Manhattan where rents were previously too expensive to justify growth. 

Plenty of space is opening up: 87% of 450 restaurant bars, and clubs in New York said in a recent survey that they couldn’t pay their full rent for August, according to the NYC Hospitality Alliance.

Starbucks, while closing some locations, plans to spend $1.5 billion during its current fiscal year partly to add 800 stores in its American and Chinese markets, speeding a shift to restaurants that emphasize drive-throughs and pick-up counters. Darden plans to spend $300 million by mid-next year, a chunk of it to add 40 new restaurants. Papa John’s franchisee HB Restaurant Group LLC plans to open dozens of shops and Wingstop said it added 43 restaurants in the quarter ended in September.

“There is no better time than now to get bold,” Wyman Roberts , Brinker’s chief executive, said in an interview.

Some customers have already moved more spending to chain restaurants in ways they say they expect to last beyond the pandemic.

Joyce Hill, a 52-year-old professor at the University of Akron in Ohio, said she has been ordering more from Cracker Barrel Old Country Store Inc. and Bloomin’ Brands Inc.’s Bonefish Grill and Carrabba’s Italian Grill divisions. She said she intends to stick with chains because it is easier and she doesn’t feel safe eating inside restaurants.

“With a few clicks, I can order a whole meal, pay for it, and not have to leave my car to pick it up,” said Ms. Hill. She said she recently stopped by a local Mexican restaurant for shrimp tacos after not visiting for months. It was closed.

One restaurateur benefiting from this shift is Tabbassum Mumtaz, the operator of 400 KFC, Long John Silver’s, Pizza Hut and Taco Bell restaurants in nine states. Things didn’t look good at first. He shut all of his dining rooms after the pandemic intensified in the spring, and his sales, typically about $500 million a year, fell by an average of 25%.

But he said he shifted many of his 10,000 employees to cleaning and staffing drive-throughs—which he said became the core of his business.

“Everyone was of one rhythm,” said Mr. Mumtaz, owner of Richardson, Texas-based restaurant operator Ampex Brands LLC.

Mr. Mumtaz said his cash balance improved around April after parent company Yum Brands Inc. deferred the 5% royalty payments he owed for several months. Yum introduced promotions for bigger family deals, such as $30 buckets of KFC chicken, to help boost sales as customer counts remained low.

Some landlords provided rent breaks and his three banks agreed to let him pay only interest on loans, suspending principal payments. Mr. Mumtaz also received a Paycheck Protection Program loan valued at more than $5 million in April to help retain 500 jobs, according to federal figures. He said he used the money to avoid layoffs.

At the same time, Mr. Mumtaz said, he started drawing new customers, including those who used to frequent nearby independent restaurants and bars that still remained closed. Mr. Mumtaz said that his Pizza Hut same-store sales were up 18% over last year by the summer, and that business at KFC, Taco Bell and Long John Silver’s also rebounded. He has since paid back some of his deferred royalties.

Mr. Mumtaz said he is feeling optimistic: “I’m taking every step carefully.”

No Levers to Pull

Turmoil among independent restaurants is cascading down to a swath of suppliers, including many seafood companies and small farmers that mainly serve diners rather than supermarket customers. Every 100 restaurant jobs support 50 more at suppliers such as wholesalers and farmers, according to the left-leaning Economic Policy Institute.

Kate McClendon, co-owner of McClendon’s Select organic farms in Arizona, said 95% of her restaurant orders vanished when the state shut down dine-in restaurant service in March. The family-run farm threw together a boxed-produce program to stay afloat, but a lot of the specialty greens they grow for chefs didn’t translate into demand from home cooks. She said the farm has recouped fewer than 60 of its 90 regular restaurant customers, and that orders are being placed roughly half as often.

“Independent farms rely on independent restaurants. Big chains don’t buy from local farms,” Ms. McClendon said.

Many independent restaurants are suffering partly because they tend to have smaller physical footprints, especially in higher-cost big cities. Camilla Marcus closed West-bourne cafe in Manhattan’s SoHo neighborhood in September after her landlord declined to offer a break on her rent. West-bourne had no patio, and Ms. Marcus said the return of indoor dining at 25% capacity wouldn’t work at the communal tables in her 1,000-square-foot dining room.


“With just one location, there are just no levers to pull,” said Ms. Marcus, a co-founder of the Independent Restaurant Coalition, which is lobbying Congress to pass a stimulus package backed by House Democrats that would allot $120 billion for the sector.

Nick Kokonas, co-owner of the Chicago-based Alinea Group of four high-end restaurants, has relied on a rotating to-go menu to keep his operations afloat. Two of his restaurants made money last month, one broke even and one lost $100,000, he said. He is considering closing some of them for the winter to preserve cash.

“We’ll be open through December. Then we don’t know,” Mr. Kokonas said.

Robert St. John, an owner of restaurants and bars in Hattiesburg, Miss., closed his restaurants in March when the state ended dine-in service, and filed a mass unemployment claim for his 300 employees.

Banks restructured some of his loans, Mr. St. John said, and he received a PPP loan of roughly $600,000. But with sales down about 70% across the six restaurants, he said, he couldn’t justify bringing back many employees. An attempt at socially distanced dining at his Italian restaurant ended due to insufficient demand.

“There was no real excitement or fever about us reopening,” Mr. St. John said.

By the summer, Mr. St. John decided to close his flagship Purple Parrot Café, a destination eatery for the area that boasted 4,000 bottles of wine, after 32 years. He said he knows couples that celebrated prom together at Purple Parrot and now have been together for decades.

He has also since closed a cocktail bar and a high-end doughnut shop, as business from Hattiesburg’s University of Southern Mississippi dried up with the school’s shift to virtual learning. 

Mr. St. John, who described himself as an optimist to a fault, is applying for a $500,000 small-business loan to build a new restaurant with a big patio where he can serve people outdoors.

“It’s scary, I’ll tell you,” he said. “I would refuse to think that I would have to shut down more.”

What Should Corporations Do?

For all the excitement about corporate "stakeholders" and "purpose-driven" firms, the new mode of capitalism is simply a repackaging of the old. Successful companies will continue to focus on the value of their shares over the long term, while avoiding the risks of wading into areas where they don't belong.

Raghuram G. Rajan


CHICAGO – With the COVID-19 pandemic reinforcing concerns about economic inequality, left-behind communities, discrimination, and climate change, there is increasing pressure on corporations to do more than sell a good widget at an affordable price. 

Responding to the changing public mood, the US Business Roundtable declared last year that, “Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities, and our country.

But this way of framing the issue is unhelpful. A corporation’s stated objectives should help guide its choices. If all stakeholders are essential, then none are. In an attempt to please everyone, the Business Roundtable will probably end up pleasing no one. 

Recent evidence even suggests that the corporations that signed on to the group’s “stakeholder capitalism” statement have been more likely to lay off workers in response to the pandemic, and less likely to donate to relief efforts.

Nevertheless, is the shareholder-centric view propounded by Nobel laureate economist Milton Friedman wrong? Friedman’s rationale was that because managers are employed by shareholders, their duty is to maximize profits – and thus the share price – over time. 

While this approach was widely embraced by corporate executives in the United States and the United Kingdom over the past 50 years, its basic logic was misunderstood. To many observers, the idea that businesses should favor millionaire investors at the expense of long-term workers is appalling.3

Yet there is a deeper argument for Friedman’s view, based on the recognition that managers will not necessarily squeeze everyone else to favor shareholders. Because shareholders get whatever is left over after debt holders are paid their interest and workers their wages, management can maximize shareholders’ “residual claim” only if it expands the size of the corporate pie relative to these prior fixed claims on it. To the extent that management must satisfy everyone else before looking to shareholder interests, it already does maximize value for all those who contribute to the firm.

True, some would counter that the imperative to boost quarterly profits leads to cost cutting in areas like worker training. But if companies want to maximize their shares’ value over the long term, they will train workers where needed, encourage sustainable practices from their suppliers when it reduces costs, and foster lasting relationships with customers instead of ripping them off. 

Put another way, even if CEOs do focus primarily on share prices, that doesn’t mean the stock market only rewards actions that boost this quarter’s earnings. Amazon showed little profit for years, but is thriving now precisely because it invested so much in its business.1

Moreover, when quarterly results do affect share prices, it is often because the short term has been interpreted as a credible reflection of the long term. By the same token, instead of trying to boost short-term profits by sacrificing the long term, corporate managers would do better to explain their strategy and encourage investor patience. 

And if market analysts do not buy their argument, perhaps they have a point, and new management may be in order. 

It is up to good corporate boards to decide, without being swayed by meaningless short-term results. They can certainly encourage managers to take a longer-term view. 

Vacuous statements about serving all stakeholders need never be issued.

To be sure, corporate managers have misused Friedman’s original formulation to justify ever-increasing pay denominated in stock, which they claim “aligns” their interests with shareholders’. But this reflects a failure of corporate governance, not fundamental objectives. 

The real problem with Friedman’s formulation is that no matter how correct it is technically, the fact that it is misunderstood makes a difference: Today’s idealistic workers and customers refuse to accept it. 

The ironic implication of this attitudinal shift is that corporations that announce a commitment only to maximizing shareholder value risk driving away key constituencies, which will be reflected adversely in their share price.

This is why, as a recent McKinsey & Company report shows, more corporations are becoming “purpose-driven.” Among the benefits they claim are stronger revenue growth (by attracting socially conscious customers), greater cost reduction (such as through energy or water efficiency), and better worker recruitment and motivation (making “doing good” an employment perk).

Of course, none of these targets is at odds with the objective of maximizing shareholder value. Corporate purpose is useful only insofar as it enthuses critical constituencies. If purpose is meant to please everyone, however, it will introduce an impossible standard and backfire. The key is for management to make clear how it will choose between different constituencies when trade-offs must be made.

For example, when Google withdrew from a US government program to develop artificial intelligence for military purposes, it signaled that its employees’ objections were more important than the interests of a large, lucrative client. As a result, Google employees and customers all have a better sense of how the company weighs their interests, and that clarity will be beneficial in the long run, including to its share price.

Some corporations have taken things even further, such as by developing sustainability guidelines for themselves and their suppliers in the absence of state regulations. 

Collective acts of corporate noblesse oblige are worrisome: guidelines that large players can easily meet may keep out smaller market entrants, and nobly intentioned buyers may form “cartels” to squeeze suppliers. As such, it would be better if corporations pressed elected governments to regulate, rather than acting on their own.

Finally, there is the growing issue of corporate political influence and speech. Many stakeholders now want companies to weigh in on issues such as the restrictions on LGTBQ rights in some US states.

These are often the same stakeholders who object to corporate money influencing elections. Generally speaking, interventions outside a company’s business interests raise profound questions of legitimacy: Whose views are being represented? Management? But managers were appointed for their competence to run the firm, not for their political views. Stakeholders? Which set and on what basis?

Corporations should be careful here. While we have political processes to reward or penalize government actions, and corporate processes to hold managers accountable, we lack robust mechanisms for monitoring and checking businesses that take on traditional government roles. Until we do, corporations that assume public responsibilities risk crossing the limits of public acceptance. Better to let sleeping dogs lie.


Raghuram G. Rajan, former Governor of the Reserve Bank of India, is Professor of Finance at the University of Chicago Booth School of Business and the author, most recently, of The Third Pillar: How Markets and the State Leave the Community Behind.