The Reopening Process is an Opportunity for Attentive Investors

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I had a boss who was an expert in the garment industry and had spent the early part of his career immersed in the business of clothes.

He used to drop into clothing stores in New York City for fun, just to observe how well they were managed. Were customers greeted promptly at the door? Were the clothes folded and organized properly? Did each item have a price tag? Was the inventory priced appropriately based on the season and how much inventory was in stock?

He would process this information and then–being that he was also a financial advisor–take this information back to the office and look for investment opportunities.

Many of these stores were part of national brands that had publicly traded stocks. The stores at which my former boss had a bad experience are where he took particular joy in assessing for short opportunities against the associated stock. He claimed his experience in store was the single best indicator of the future of a company more broadly. Quite often he claimed to smell “the stench of death” on a store and would immediately race back to his computer to put in short orders, which he held with high conviction over the long-term.

I don’t have the data to prove whether my former boss’ approach had any particular merit. What I do know, however, is that management is a key aspect to a company’s broader success.

In fact, assessing management teams is a key part of the Akre Focus Fund’s three part investment process that has led the fund to enormous success over the past decade.

While most of us Robinhood investors do not have the same access to observe board meetings at company headquarters, many public-facing businesses are continuously giving displays of their overall management strength through the customer experience they provide and how their frontline staff interact with customers.

As states begin to reopen and we enter a new reality of living with the virus, those of us who venture outside to patronize the services and experiences we have craved while on lockdown also have a great opportunity to observe the future winners, losers, survivors and casualties of the coronavirus era.

How a store or restaurant opens up will tell you everything about how likely they are to survive long-term, whether it’s a mom and pop cafe or an internationally known restaurant chain.

Which establishments will crumple under the pressure of social distancing? Which places will prioritize safety while still creating an enjoyable customer experience? Are the employees miserable because their health is being jeopardized for low pay and benefits? Or are the employees genuinely happy to see you and bending over backwards to provide a great (even if altered) customer experience?

Let’s look at how this could play out and the signs to watch for over the coming weeks and months.

Reopening: Casualties

It’s inevitable that almost every possible customer experience from simple retail establishments to fine dining experiences will be altered, perhaps permanently, by the new reality of social distancing and a hyper focus on hygiene best practices.

As I venture out, I’ll be looking to observe which experiences seem altered beyond recognition such that the value proposition isn’t there anymore. One example that comes to mind is fine dining. How luxurious will it feel to be served by waitstaff wearing gloves and masks? Would I rather have a romantic date in that setting or at home where I can control the variables, after ordering delivery from Whole Foods or Uber Eats?

Likewise, as a customer, I will be hyper-vigilant of any perceived lapses in hygiene and safety at the retail stores and restaurants I visit. While many places that reopen will likely be extremely cautious at first, how long before lower level managers and employees become fatigued and allow their safety standards to slip? How has management factored in sick leave and policies to prevent the spread of disease? How often are their employees tested?

Recall past food safety lapses at Chipotle to see how such negative experiences can lead to a drastic decline in foot traffic at locations and a corresponding decline in the stock over a long period of time.

Other questions: How many store locations will maintain their curbside pickup capacities after three months? After six? Which stores will use the new reality as an excuse to raise prices, while offering a lower quality customer experience? Places that do that will be gone in a matter of months as disruptors will sense an opportunity to deliver a better service, cheaper.

These are all aspects of the customer experience to watch over time as people perceive the immediate threat of COVID-19 diminishing and an understandable focus on padding the bottom line comes to the forefront. This focus on profits over safety could lead to the ultimate undoing of both small and large enterprises over time, particularly if the brand becomes associated with spreading the coronavirus.

One only needs to observe the behavior of certain airlines as they attempt to make up for lost time to see potential future public health (not to mention public relations) disasters ahead.

Reopening: Survivors

While some experiences as a whole will not successfully make the transition, in most cases there will be clear winners and losers within each sector. The winners will likely be marked by a willingness to experiment, have the financial capacity to offer a better customer experience at a lower cost for at least some period of time, and pivot to meet their customers where they are.

One example, again from the dining sector, is the move to “al fresco” seating. It seems to now be generally accepted that the coronavirus spreads less well outdoors than inside. The restaurants with the space and ability to put tables outdoors on sidewalks or even parking lots may have a distinct advantage in welcoming back larger number of wary customers. Those farsighted establishments in northern climes may even be ordering heat lamps to extend their outdoor seating season deep into this autumn.

Social distancing is going to be difficult on any restaurant or dining establishment. These places were not designed to be profitable at 50% capacity. It’s possible that through a combination of a brisk delivery business, innovations like “al fresco” dining and a service experience that goes the extra mile to create a welcoming environment, that some of these establishments can at least survive until a treatment or vaccine is more widely available and normalcy returns.

The ones that do survive will face remarkably less competition than they did just three months ago, while also obtaining a great deal of knowledge about how to operate safely and efficiently in this new environment. Proven survivors make for potentially good investments.

Reopening: Winners

It’s difficult to imagine now, but there will be companies that actually benefit and thrive during this crisis period. Beer delivery services are booming. Cannabis is considered an essential service in states where it is legal. Drive-in movie theaters are having a revival. There will be more: keep your eyes open.

Perhaps more importantly, there are plenty of traditional establishments that will need an immense amount of support in running their brick and mortar establishments in compliance with new safety regulations. Imagine all of the products and services these locations might need. Observe the stores and restaurants you patronize now. What’s different about them? What new products are all of the stuff using? Look beyond the obvious like masks and hand sanitizer and you may uncover a new investment opportunity.

There is a huge variance of potential outcomes in how establishments reopen. Some will get lucky based on their location and not have to change too much. Others will have to pivot to completely different business models just to survive. You will learn a lot about how well a company is managed simply by observing your own customer experiences at these establishments over the coming months and this may inform a new perception of where to invest (or not) over the coming months and years.


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