More than seven months into the novel coronavirus pandemic, a disturbingly large number of U.S. companies are at risk, according to new research from Boston Consulting Group (BCG) confirming that economic distress is deeply entrenched and shows no sign of letting up.
More than 60% of US companies analyzed are under financial or operational stress as of the end of the second quarter of 2020, a 49% increase from the end of the second quarter of 2019, according to BCG analysis. And 14% are in distress – either challenged to meet their financial obligations or under operational pressure that requires significant restructuring.
That represents a 43% increase over the previous year. The lack of additional government stimulus puts many of these companies at risk.
Those are among the most significant findings from the BCG TURN Radar index, the firm said in a release. The index, developed by BCG TURN, BCG's special transformation, turnaround, and restructuring unit, tracks a company's distress based on over 20 key performance indicators in three categories: financial, market, and qualitative.
The Radar index reports on over 25,000 publicly traded companies, with more than US$100 million in revenue, across 80 countries and 20 industry sectors. There were 721 US companies tracked for distress. A company is measured against its peers, its industry, and the overall sample, and its score places it in one of three groups – either stable, stressed (underperforming in its industry or under internal or external pressure), or distressed.
The U.S. picture is bleak, but not the worst on a global basis. As an example, in Central Europe, the Middle East, and Africa, the number of companies in distress has gone up 83%.
Overall, the BCG TURN Radar index portrays the U.S. and global economy struggling as the pandemic maintains its grip.
“BCG TURN Radar confirms the impression created by stories of business failures and layoffs – the COVID-19 pandemic is causing deep, structural changes that are likely to be long-lasting,” said BCG senior partner Luke Pototschnik, head of the firm's transformation practice and BCG TURN in North America.
“The impact may be most severe on companies that were challenged to begin with. But the good news is that there are actions companies can take—such as generating short-term cash to fund long-term investment—that can mitigate the worst of the downturn and help set them on the path to recovery.”
While the Radar index raises alarms about several major sectors of the U.S. economy, it also finds winners even in underperforming sectors.
Many of the sectors faring worst are those that faced pre-pandemic structural challenges.
“The automobile industry is struggling more than others," said Pototschnik. “Even before the pandemic, it was dealing with significant changes such as the shift to electric vehicles, which requires investment. But in the pandemic economy, investment may be hard to come by.”
Similarly, the bankruptcy rate has been high in the already-challenged oil and gas sector, and Radar suggests that bankruptcies are likely to continue, with over 57% of the sector under stress and over 10% in distress.
Of more note is the widening gap between winners and losers in several sectors as some industries suffer while other outperform. "In most cases, outperformance is driven by pandemic-related consumer and business spending," Pototschnik said.
Most of the retail sector has moved from "stable" to "stressed," with over 52% of restaurants in distress, but large groceries are doing well, with over 43% in stable territory.
Similarly, IT services are suffering, with over 50% in distress, but digital devices and services are thriving, with over 42% stable. The numbers reflect the sudden and massive shift from office work to remote work.
Shipping companies are performing strongly thanks to the upsurge in e-commerce, with 32% stable, while 47% of logistics companies are stressed as the result of an overall slowdown in global trade.
“In several sectors, the gap between winners and losers is widening,” Pototschnik said. “Some of this may be the result of pandemic-related behavior patterns that will normalize over time. But some of these patterns, such as the shift to remote work, may be long-lasting, and some industry sectors may be permanently reshaped.”