If a person dies with COVID-19 present, it’s convenient to blame it all on COVID-19. Not just human deaths, but companies, too.
It’s been widely and reliably reported that many of the deaths attributed to COVID-19, sad as each one may be, were of patients who already had one or more morbid conditions. For these patients, medical professionals say COVID-19 merely brought the day of reckoning forward a few years or months; the “real” killer had done most of the damage already.
The same is true for business. Seeing many companies scale down or close down, it’s easy to point the finger at the current whipping boy, the so-called pandemic. Although it might well be true that the last straw for most closures was the lockdown effect, it would be inaccurate to apportion all the blame to this one factor.
A good example of this is Hertz in USA, which filed for bankruptcy in May. The proximal cause of failure appears to be the decimation of travel and related car hire volumes, but the rot started years earlier. (Hertz SA says local operations are not affected. (fin24, 25 May 2020))
After buying out Hertz USA in 2005, the new owners sucked out a $1b dividend payment, loading its debt obligations in the process. They also invested heavily in sedans when the American rental market was clearly favouring SUVs.
Among many similar strategic errors, this set up Hertz USA with a weakened “immune system” – marginal free cash flow from operations (coupled with high debt repayments) – that had it crumble under the COVID-19-induced lockdown shock.
In the triage to save the company, Hertz has laid off thousands of workers. It’s also offloading assets like smaller business holdings and 180,000 of its over-500,000 rental car fleet. Except, “volumes in the new and used passenger market have dropped by 71% year-on-year from Q2 2019.” (BusinessTech, 1 Aug. 2020) So, flooding the market pushed down prices further, making it even harder to satisfy creditors and stay the executioner’s blade.
Blaming the economic downturn and not examining internal factors implies an external locus of control by management. When success depends on only external causes, there can be no collective learning by management. Those same leaders are destined to repeat their mistakes.
The biggest mistake at Hertz was to prioritise wealth extraction for shareholders when the business couldn’t afford it. Don’t pay dividends if it increases your debt burden. Not all debt is a problem – “good” debt is debt that grows the business and generates wealth. Increasing debt to pay dividends is clearly not a good type of debt.
Pulling value from your business might be due to greed, vanity or, in the current trying times, desperation. Whatever the reason, if it doesn’t support your overall strategy, expect problems down the line.