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. 

 

The Green Shoots of 2020

By John Mauldin


Those who lived through the last financial crisis might may recall the Green Shoots episode. It drew laughs on March 15, 2009, shortly after the Federal Reserve fired its heaviest artillery and, we now know, launched the longest bull market in history.

Appearing on 60 Minutes, Fed Chair Ben Bernanke said the recession’s end was in sight because the Fed’s asset purchases were generating “green shoots.” They turned out to be slow-growing shoots. The US unemployment rate kept getting worse for seven more months (peaking in October), and needed five more years to get where it was when that recession began

Similarly, you can look around today’s economy and see green shoots here and there. As bad as things are—and make no mistake, they’re bad—we’ve regained some lost ground since the March/April depths. But the problem is in the “here and there” part Some parts of the economy are literally booming even as others are in a deep, dark depression.

That’s kind of where we are. If you are in the right spot, you see whole forests of green shoots. You might think they are growing everywhere. And in due course maybe they will, but for now, a significant number of people just have dirt.

Last June in A Recession Like No Other I described this recession’s disproportionately hard hit on the service sector. Most lost jobs came from industries built on personal contact, like restaurants and hotels. The outlook for those sectors remains grim. Sadly, the industry is overrepresented in the lower income brackets. But at the same time, some industries aren’t just surviving; they are thriving.

I want us to notice this because it’s important. The economy is dynamic. It is constantly moving in all directions. We once talked about “cyclical” stocks that outperform when the economy is expanding, and “non-cyclical” stocks that take the lead in recessions. Now the virus has redefined what the “cycle” looks like, so we have a new set of non-cyclical players. My last few letters were generally negative. Today I want to discuss why the economy will recover, how that will happen and what it will look like. It won’t look like 2019, but the recovery will have its own flavor as we fast-forward future industries I think that’s a good thing.

On Your Doorstep

As we all now know, respiratory viruses spread when people are in close proximity, sharing the same air. The best way to avoid infection is to avoid other people. 

Hence the urge, and in some places the requirement, to stay home as much as possible.

Yet even staying mostly home, people need supplies to sustain themselves. Furthermore, they continue wanting things that, while not strictly necessary, make life more comfortable. The problem is how to get those things without exposing yourself to crowds. The answer: have them delivered to you.

Sounds simple, but it’s economically profound. This year consumers suddenly and sharply increased their demand for home-delivered goods. For the most part, these aren’t new products. They are the same things people previously picked off store shelves. But now they want the goods brought to them. And, as it always does, the market is responding.

Amazon is the most obvious beneficiary. Its e-commerce platform and massive logistics network already dominated before the pandemic. Now they are in overdrive. So are the online arms of major bricks-and-mortar retailers. Even at the local level, stores are remodeling and reorganizing to provide curbside pickup.

All these changes come at a cost; smaller retailers often lack the scale or technology to provide what consumers now demand. That’s bad news for those business owners and their workers. But the same economic forces are creating new warehousing and shipping jobs to handle all this new demand. 

And it’s still not enough. From WSJ:

The primary reason for this year’s capacity shortage is that carriers already have been operating near maximum capacity for months as consumers stayed home, avoided stores and shopped online. The delivery surge has strained networks and led to longer processing and delivery times. Carriers can’t quickly boost capacity with new facilities as it often requires a multiyear planning process.

The carriers have imposed shipping limits on customers and added fees to offset the increased costs to staff up, secure protective equipment and other outlays during the pandemic. Pricing power has quickly shifted to the carriers, which are raising rates and being pickier about which shippers they want to do business with.


This is staggering to think about. In the middle of the deepest recession in generations, consumers are ordering so much stuff, shipping companies are raising prices and telling some retailers, “Sorry, we can’t do it.”

Yet, given where we are, it makes sense. Driving a truck around to drop off packages may seem like a simple job, and there are millions of workers available. But it’s also dangerous in a new way. Drivers have to come in contact with both packages and people. That limits the supply and raises its price. Plus, the companies don’t have an infinite number of vehicles, and they sometimes break.

The recession and recovery vary a lot. Some segments of the economy are in deep trouble. Others are booming at the same time. This confuses sentiment and adds to the uncertainty and apprehension so many feel.

Working from Home

If circumstances cause you to spend most of your time at home, you naturally want “home” to be safe and comfortable. That may be difficult to achieve if you live in a crowded city, where simply taking kids to the park is now an ordeal. But staying locked inside with them probably isn’t much better. Particularly if you also fear domestic violence.

Those simple realities are sparking a major migration. City dwellers (at least those who can afford it) are looking for suburban homes with yards, pools, garages and other conveniences. Some are moving further out, to rural areas. Corporations are enabling this with more flexible work-from-home arrangements, making it possible to live far from the office. In fact, many people are moving to new states because they can now work from anywhere.

Like the e-commerce boom, this demand surge is overwhelming supply. Real estate agents like to say “location is everything.” Now it’s “everything” in a new way no one expected. An easy commute is less important than being far enough out to be safe, but close enough to get your groceries delivered.

Existing homes in the right places with the right amenities are selling at high prices because their supply is so limited. Real estate tells us the supply of homes for sale is down to the lowest level since 1999. But never fear; entrepreneurs are responding as they always do. From CNBC:

US single-family homebuilding surged in September, cementing the housing market’s status as the star of the economic recovery, thanks to record-low interest rates and a migration to the suburbs and low-density areas as Americans seek more room for home offices and schooling.

The report from the Commerce Department on Tuesday reinforced expectations that the economy rebounded sharply in the third quarter after suffering its deepest contraction in at least 73 years in the second quarter. But the recovery from the Covid-19 recession has entered a period of uncertainty, with fiscal stimulus, which spurred the burst in activity last quarter, depleted.

Single-family homebuilding, the largest share of the housing market, jumped 8.5% to a rate of 1.108 million units last month. But starts for the volatile multi-family housing segment fell 16.3% to a pace of 307,000 units.

The drop in multi-family (apartments, condominiums) reflects both the move away from urban areas and this recession’s inequality. The lower-income and middle-income workers who tend to live in those places are taking the brunt of the pain. Many are behind on their rent already and in no position to move. Developers have little incentive to build more such properties.

That’s creating an odd dynamic, visible in this chart.


Chart: RSM


In the last two recessions, building permits and housing starts peaked before the economy turned down. And in the Great Recession they kept falling for years. 

This time, though, the prior uptrend seems to have resumed after a brief interruption, even though we are now 8 months into a confirmed recession.

This wouldn’t be happening in a normal recession. Job losses would be affecting the people who buy single-family homes and builders would be pulling back. Note also, the commercial construction business is in deep trouble even as housing booms, and for some of the same reasons. 

People want houses that let them work from home, but that also reduces demand for office space. New mall and hotel construction is pretty scarce, too. But it’s a boom time for skilled workers in the building trades. They are worth their weight in gold right now, and being paid accordingly.

I talked with demography guru Neil Howe this morning, to get his take on things. One thing that is changing is families are moving back together. He believes this is good as it gets families more involved with each other. 

I would note that moving to the suburbs allows you to have more room to work from home and maybe have an extra family member. That is partly why we are seeing a remarkable boom in home remodeling, too.

Healthy Robots

The items Amazon is shipping, and the materials used to build all those houses, don’t appear out of thin air. Someone, somewhere makes them. Yet the pandemic is affecting factory production, too.

It started back in January when China’s massive shutdowns made much of the world’s manufacturing capacity grind to a halt. Then the same happened elsewhere. Even if not ordered closed, companies found the new health precautions and staff shortages both raised costs and reduced output.

The answer to that dilemma is technology. Automation was already growing simply because paying human workers often costs more than machines that can do the same work. The pandemic made human workers not just more expensive but bigger liabilities, too. This increased the incentive to automate.

Meanwhile, new tasks have emerged that are uniquely suited to automation. You can send in a robot to disinfect a room without fear it will get infected itself. But first you need to have the robot, so demand for them is off the charts. 

From the Financial Times:

The pandemic is driving a shift in companies’ use of technology, both official statistics and business surveys suggest, making the automation and digitalisation industry one of the few winners from this year’s economic turbulence.

The spread of the virus “has accelerated the use of robotics and other technologies to take on tasks that are more fraught during the pandemic”, said Elisabeth Reynolds, executive director of the Massachusetts Institute of Technology’s task force on the work of the future. “It is fair to assume that some firms have learnt how to maintain their productivity with fewer workers and they will not unlearn what they have learnt.”


Note that last sentence. If a manufacturer can produce the same number of products with similar speed and quality but fewer human workers, then of course it will do so. 

And having made that shift, it will never go back. That’s why automation is booming and is likely to continue to grow in the future. Not just robots, but artificial intelligence, virtual reality, and a host of related areas. And that is reflected in stock prices.

This may be bad news for employment longer term. Employers who install automation will reduce hiring and eventually reduce headcount as well. This will come just as we have millions of unemployed human workers. 

And that is not even counting the coming automation of trucks and transportation. It was always going to be a problem but might have developed gradually enough to let everyone adapt. Now the process has accelerated and businesses are more willing to put technology to work.

But for the moment, recession or not, the robotics and industrial automation industries are booming. Together with e-commerce and homebuilding, they are “green shoots” in an otherwise wilted economy.

Another green shoot that is not obvious but will make a very big difference: 

We are seeing an increase for the first time in a long time of new business startups. I keep trying to emphasize over the last few months that the very entrepreneurs whose 100,000+ businesses had to be closed (with thousands more coming) won’t just sit on the porch. 

They have an entrepreneurial gene in their DNA that almost forces them to launch new businesses. They can’t help it. And we are seeing it in the data.

Below I’ll talk about a new business I’m launching. We’ve been working on it for a very long time. It will start with about a dozen jobs. And hopefully grow. 

My experience tells me that it will grow slower than I would like, although I always dream about someday planning a business that would be like Uber or Airbnb or Amazon, you know, where growth just seems to be exponential.

Most small businesses start small and grow slow. But some succeed, and they will create jobs that power the recovery.

Another interesting development: People are switching jobs and careers at an unprecedented level. USA Today has a fascinating story on people switching careers. When you realize your job will probably not come back, you adapt. We are finally seeing more people being willing to move outside their local areas to where the jobs are.


Source: USA Today


Are We There Yet? A Timeline for the Recovery

The Conference Board offers us three different recovery forecasts: upside, downside, and the base forecast. Note that in the base case forecast we would be back to January 2020 by October 2021. Color me skeptical. I do think, however, that what they call their “downside forecast” is more realistic. 

In that scenario we end 2021 almost back to January 2020.



Source: The Conference Board


Their methodology uses past performance to project future results, and I don’t think the past is relevant to this crisis. That being said, I think it would be completely unreasonable not to expect a recovery. This model gives us some idea of what we can expect. I think it will be a little slower as we really do have to completely rearrange much of our economy. That takes time.

In my conversation with Neil Howe, he said the trend is more people are doing things for each other and spending less money. If that continues, we will see less GDP growth. Simple illustration: If you find out that your friend can help you with your hair color and you can help her, you don’t visit the hair salon as much. Or neighbors helping each other with home repairs. Since no one is paid, it doesn’t add to GDP, even though the work was done.

This is critical to understand: Consumer behavior has changed more this year than any time since the Great Depression. That’s why we are not going back to 2019. So much has changed that we will be entering literally a new world.

The point is we will recover. The airline and hospitality industries will not look the same in 2022 as they did in 2019, but they will be there in a transformed state. Commercial real estate will be repriced as we continue to work more from home. It seems so ancient, but just three years ago we bought more food in restaurants than we made and ate in our homes. That certainly changed and will continue. Entrepreneurs will adjust.

Will we travel again? Will we eat out again? Will we go to mass sports events and concerts? Of course. It’ll just take a while (and a vaccine) to make people feel safe. And it will look different than it did in 2019. But that’s okay. The world has gone through numerous changes over the last few centuries and millennia and been better for the adaptations.

I sincerely hope that Congress can figure out how to pass a “recovery package” to help those individuals that still don’t have jobs and businesses that are barely hanging on. My base case becomes more pessimistic without that. That being said, my good friend Renè Aninao, who is truly wired into the relief package negotiations, believes it will happen this next week if not this weekend. 

Essentially, he tells me, the last disagreements being worked out are that Nancy Pelosi wants more money for New York and California and Trump wants bigger stimulus checks ($1,500 per person, $1,000 per child) than Pelosi would like to see. Much of the legislation has been written already. McConnell has most of the votes he needs to be comfortable (certainly not his majority) and as many as 50 House Republicans may vote in favor. If this bill passes, it would be fertilizer for the green shoots all over the economy. Let’s hope so.

Where Then Should I Invest?

Given all the volatility and uncertainty, successful investing is harder today than ever. I have been rethinking and actually reworking the ways that I can help you get from where we are today to the other side of The Great Reset. I am happy to announce I have found a simple way to access my best ideas and my network of relationships.

I have long worked with Steve Blumenthal of CMG Capital Management Group (CMG). In the last few years I closed my own investment advisory firm and moved to CMG, where I am chief economist and co-portfolio manager of the Mauldin portfolios platform. 

In addition, through my broker/dealer firm, Mauldin Securities, LLC, I’ve selected a broker/dealer, Amera Securities, LLC, (member FINRA/SIPC) to which I can refer you. 

The Amera representatives can show you various offerings like private fixed income and equity and other alternative investments. Steve Blumenthal and his CMG financial professionals are also registered with Amera Securities and will, if appropriate, introduce select ideas to you. So, while you are technically dealing with two firms, you are dealing with one professional who has access to both.

We have built what we call a “kitchen” where the ingredients are the numerous strategies and managers representing a wide variety of styles and opportunities, which we can blend into a portfolio to help you get a personalized portfolio tailored to your needs. 

That means we need to get to know you and your objectives. I am very comfortable with this team and their ability to help you. To find out more about what is in the Mauldin kitchen click here and find out how my network can help you achieve your goals. Do it now. (In this regard, I am president and a registered representative of Mauldin Securities, LLC, member FINRA and SIPC.)

Needing a Neurologist in Tulsa

The letter is already running on, but before I hit the send button, a personal request. My youngest son Trey has moved to Tulsa for a new job and to live closer to his sisters. He began to experience serious pain in his left arm and the local doctors were not really helping. I put Trey on the phone with Dr. Mike Roizen at the Cleveland Clinic, who upon hearing the symptoms said Trey should see a neurologist. The problem is his insurance company is in Texas and can’t or won’t cover it. Even paying cash, we can’t seem to find a neurologist available. So, we got him Oklahoma insurance but he can’t see even a primary care physician, and get a neurologist referral until December. He is in severe pain today. If you know a neurologist in Tulsa please write me at business@2000wave.com. Thanks.

Have a great week!

Your hoping your personal green shoot is growing well analyst,



John Mauldin
Co-Founder, Mauldin Economics

A big splash

In a world mired in recession, China manages a V-shaped recovery

Its rebound is also starting to look more sustainable


One scene more than any other from China’s coronavirus recovery has caught the world’s attention: a giant pool party in August in Wuhan, the city where the pandemic began. Nearly four months after their 11-week lockdown, revellers were crammed together in waist-high water, jumping and shouting in exhilaration as a dj spun bass-heavy beats. 

The video went viral. It was a moment of pure release and a sign of how China is far ahead of most other countries in returning to normality (of a sort). Economic data are rarely as exciting as pool parties, but China’s latest gdp figures, released on October 19th, were, roughly speaking, the statistical equivalent of Wuhan’s aquatic festivities.

Officials reported that the economy expanded by 4.9% in the third quarter compared with a year earlier, just shy of its pre-pandemic pace. Whereas most other countries are mired in recession and grappling with a new wave of covid-19 cases, China has just about completed the upward leg of a v-shaped rebound. Analytically, its success is easy to explain. 

China got one crucial thing right. By almost stamping out the virus it was able to allow activity to resume with few restrictions. Schools are fully open, factories are humming and restaurants are buzzing. China is also lucky in one crucial way. It is better insulated from weak global demand than smaller peers such as New Zealand that have done a good job of containing the pandemic, too. 

Until vaccines are rolled out, others will struggle to match China’s feat.

Yet China’s headline resilience has masked an unbalanced recovery. Back in February, when the government began cautiously to relax its lockdown, it focused on reopening factories and launching infrastructure projects. It correctly reasoned that maintaining strict health protocols in factories and on construction sites, which can be managed as semi-closed environments, would be easier than in shopping malls or schools. 

On top of that, China’s meagre provisions for unemployment insurance meant that the millions of people who found themselves out of work had to cut back on spending. 

Early in its recovery, China’s economy was thus fuelled by factory production and investment. Capital formation—the category in gdp accounting that encompasses these endeavours—contributed five percentage points to growth in the second quarter, whereas consumption subtracted more than two percentage points. Back then that left China with a 3.2% year-on-year growth rate.



The latest data reflect a slightly more balanced recovery (see chart). The contribution to third-quarter growth from capital formation fell to less than three percentage points, in line with the pre-pandemic norm, as infrastructure spending tailed off. 

Consumption added nearly two percentage points, which was below its pre-pandemic heights but a big improvement—easily noticeable in the crowds that have returned to tourist sites, restaurants and shops. 

Trade was the cream on top. China’s share of global merchandise exports has risen to a record high during the pandemic. It received a boost by being the first manufacturing power to resume operations, in addition to being the world’s biggest producer of protective equipment, from masks to surgical gowns.

Whenever Chinese data look so rosy, it is natural to ask whether they are believable. In this case a range of non-gdp indicators, including other countries’ exports to China, lend credence to the picture of a robust rebound. The bigger worry is whether the recovery has been at the expense of efforts to rein in debt. 

The initial sharp economic slowdown followed by a government-directed boom in bank lending will push China’s debt-to-gdp ratio to about 275% this year, up by 25 percentage points. It will be the biggest annual increase since 2009 during the global financial crisis.

Yet China is far from alone. Governments around the world have run up huge tabs to lessen the economic fallout from the pandemic. With its growth back on track, China has a chance to tighten the spigots again. s&p, a credit-rating agency, notes that the country’s real lending rates (ie, adjusted for inflation) have recently climbed to a five-year high, a dampener on investment. 

If successful, China will confine irrational exuberance to pools. 

Can Amazon upend the luxury sector?

Ecommerce giant’s long-awaited foray will need to convince brands and consumers

Leila Abboud in Paris

    Amazon’s Luxury Stores is only available by invitation to Prime customers in the US


When Amazon expanded into US groceries and healthcare, the established players in the sector feared the arrival of a rich, tech-savvy disrupter. But when the ecommerce giant unveiled its long-awaited foray into luxury goods last month, the response was a collective shrug. 

Amazon opened its Luxury Stores as a separate space on its mobile app, which is available only in the US “by invitation” to subscribers to its Prime loyalty scheme. Instead of its usual utilitarian look, the app tries to conjure up a luxury ethos with a gold logo against a cream-coloured background. It was launched with an ad featuring British actress Cara Delevingne. 

But while industry executives were publicly polite, privately many mocked the launch for being late to the game and going live with only a single brand: dressmaker Oscar de la Renta.

Frederic Court, whose venture capital fund Felix Capital was an early backer of online fashion marketplace Farfetch, said Amazon would struggle to break into luxury’s exclusive club. 

“If they decide to have a real go, they may get somewhere given they have so much talent, capital, and logistics and delivery expertise,” said Mr Court. “But if you don’t have Gucci, Saint Laurent, Prada and Dior, then it’s hard to be a real destination for luxury shoppers. You need the brands you can find on Avenue Montaigne in Paris.” 

Luxury’s biggest groups LVMH, Kering and Hermès remain prominent refuseniks. Referring to online-only players, LVMH’s Bernard Arnault said at its annual results conference in January: “We’ve been asked several times to participate in these businesses, and I’ve always said no.” He said that his reservations are partly because of concerns counterfeiters use sites such as Amazon to sell fakes.

‘If you don’t have Gucci, Saint Laurent, Prada and Dior, then it’s hard to be a real destination for luxury shoppers,’ said Frederic Court of Felix Capital, an early backer of online fashion marketplace Farfetch © Bloomberg


Bruno Pavlovsky, the president of Chanel’s fashion division, told the Financial Times this week that the French luxury group “will not sell any fashion products” on Amazon, but did not rule out using it to sell beauty products as it does in China with Alibaba.

Since last month’s launch, Amazon has added more brands, including Joseph Altuzarra, a New York-based ready-to-wear designer, lingerie from La Perla, designer clothing from London’s Roland Mouret, and high-end beauty products from Clé de Peau. A spokesperson said more were on the way.

The question now is whether high-spending luxury customers will follow. Globally, Amazon has 150m Prime customers, who are accustomed to fast delivery of everything from cat food to shoes. Luxury Stores may get traction if it can attract even some of them.

Amazon’s move into luxury comes at an opportune moment: the Covid-19 pandemic has accelerated the transition to online shopping, even for €10,000 handbags.

With luxury sales expected to take three years to recover to pre-pandemic levels, big brands are more open than ever to selling online and many are seeking new ways to woo clients via messaging apps or email. While the lavish in-store experience will always be central to luxury, a period of online experimentation is afoot.



Meanwhile, after years of declining sales, the fallout from the coronavirus pandemic has finally killed off several US-based department stores, such as Lord & Taylor and Neiman Marcus. This has deprived independent fashion brands of their main distribution channel and some are scrambling for alternatives, including selling more via their own websites and online stores. Critics said Amazon’s Luxury Stores may face a reverse selection bias, where it is most likely to attract accessibly priced or struggling brands.

Ecommerce has momentum: by 2025, consultancy Bain & Company estimates that roughly one-third of luxury’s annual sales will be made online, up from 12 per cent of total sales of €281bn in 2019. The shift is being driven by millennials and customers in China — both the world’s most advanced ecommerce market and the fastest-growing market for luxury goods.

Amazon is entering luxury after years of expanding in mid-market fashion via acquisitions of online shoe seller Zappos and clothing outlet Shopbop. 

So far, it has given few details on its ambitions for Luxury Stores and declined an interview request. “Fashion is a priority for our customers and therefore a priority for us worldwide,” it said in an emailed statement. “We’re just at the beginning of what we expect to accomplish.”

Amazon’s pitch to brands is that it can help them create “innovative, content-driven tools” to engage with shoppers, such as its View in 360 button that allows people to visualise how a garment will look on various body types. 



In an attempt to allay fears about eroding the exclusivity of the online experience, the store will be walled off from the broader website. And most importantly, participating brands will control the design of their shop within the app, as well as being able to select what items are sold on there and at what price. 

This is known in the industry as a concession or marketplace model, and was adopted by Farfetch and Alibaba’s Tmall Luxury Pavilion.

It contrasts with the so-called wholesale model used by online retailers, department stores, and rival online seller Yoox Net-a- Porter. Those companies buy inventory from fashion brands, store it in their warehouses, and then can offer discounts if it does not sell at full price.

Luxury brands tend to prefer the concession model because it offers more control, less discounting, and ability to move inventory. But their ideal model is to sell directly on their own-branded websites where they do not have to give away any commission and do not dilute their brand equity, industry executives said. Customers can be drawn in by Instagram or TikTok posts from brands, or with well-placed links on Google searches for products. 


          Net-a-Porter’s ‘The Sporty Jacket’ campaign © AP


As one sector executive put it: “For fashion brands, wholesale is heroin and Farfetch is methadone. Everyone wants to get clean and sell directly.” 

Amazon may be betting that it can replicate the success that Alibaba’s Tmall has had in China. Initially, luxury brands mistrusted Alibaba as down-market and rife with counterfeits. But once it moved to a concession model with a separate safe space for luxury brands, many were won over. They now see Tmall as a key online gateway to Chinese customers. 

Amazon’s Luxury Store is entering a crowded field of multi-brand online retailers, and will compete with established companies such as Farfetch, Yoox Net-a-Porter, MatchesFashion and MyTheresa. Such sites have supplanted the roles once played by department stores and fashion magazines — namely discovering new designers, tracking what is in style, and giving inspiration about what to wear. 

Few of them have cracked profitability despite growing user bases, so they may eventually be forced to consolidate, said Claudia D’Arpizio, a consultant to the luxury industry at Bain. “Amazon can pose a real challenge to these etailers, as well as take share from physical department stores, which are already struggling,” she said.



José Neves, the founder and chief executive of Farfetch, said his company had a “strong competitive moat” against Amazon, namely its relationships with the biggest luxury brands honed over more than a decade. Farfetch sells some 3,500 brands on its site and 500 of them operate on the concession model to sell directly to customers.

“Luxury is an industry of relationships. Most true luxury brands are European and family run. For them the protection of brand equity is paramount,” said Mr Neves. 

“From the conversations we’ve had with them about Amazon, having another multi-brand store is not of strategic importance, and it could even be a losing proposition if it cannibalises existing channels.” 

For Amazon, the plan is that more brands follow Oscar de la Renta, which sees its partnership with the ecommerce giant as a good way to reach more customers and glean additional insights into their desires. 

“It’s a super challenging time right now with the pandemic,” said Alex Bolen, the chief executive of Oscar de la Renta. 

“It is all about learning. Amazon is going to help us become a better merchant.”


Additional reporting by Lauren Indvik in London