How the coronavirus could change work, industry and personal finance forever

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Personal finance and investing

Cash will flounder, e-transfers will flourish

by Patrick Brethour

The signs have popped up in stores across Canada: requests – sometimes demands – for customers to pay by credit or debit and to keep their cash in their wallets.

Canadians’ use of cash has been on the decline for years as e-commerce and tap-and-go payments displaced legal tender.

The novel coronavirus and the resulting restrictions on retailers has accelerated that decline, with health concerns about contaminated cash adding to long-standing technological pressures.

“It’s forcing a faster adaptation,” says Karl Littler, senior vice-president of public policy at the Retail Council of Canada.

Early indications suggest two trends are driving the move away from cash since the mid-March onset of the coronavirus crisis. The first is a surge in e-commerce as consumers turn to virtual retailers.

Equally as significant is a sharp rise in electronic transfers. Interac Corp. says the number of first-time e-transfer users has risen by 62 per cent since mid-March.

William Keliehor, Interac’s chief commercial officer, said his organization accelerated plans to accommodate increased electronic payments, such as wider use within apps. And Mr. Keliehor has had a first-hand taste of the shift away from cash: He’s started using e-transfers to give his 13- and 16-year-old children their allowances.

A survey of 1,504 people released this week by Payments Canada, which operates Canada’s payment clearing and settlement infrastructure, indicated that 31 per cent of respondents who used e-transfers weekly said they were now using them more frequently, with the use of PayPal and credit cards also increasing.

Tracey Black, president and chief executive officer of Payment Canada, said she believes those behavioural shifts will endure after the lockdowns. And she said that central banks are likely to accelerate plans to introduce digital currencies that could further displace cash. (China is already launching trials.)

But Ms. Black agrees that cash will remain in the picture, saying it is sometimes simply the most convenient option. “It’s really fast to hand someone a twenty.”

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Bank branches will lose their lustre

by James Bradshaw

Bank branches have been stubbornly resilient, giving ground slowly to a wave of digitization reshaping every industry. But the pressure of a pandemic has broken the dam, as customers of all ages flood to online banking.

Out of necessity, a cohort of customers accustomed to looking their local branch manager in the eye – some old enough to remember an era before online banking or even ATMs – have embraced banking on a laptop or phone.

“We’re seeing a generational shift,” Bank of Montreal CEO Darryl White said. “Many will say: ‘Why would I go back? I didn’t do this before because I really didn’t want the friction of learning. Now I’ve learned.’"

At the largest banks, only slightly more than half of all customers were using digital banking regularly before the pandemic. Now, they are seeing large surges in online registrations – up 39 per cent in the past two months – and digital banking sessions are up 10 per cent to 30 per cent. Banks have rushed to digitize the remaining paper-based processes – Toronto-Dominion bank launched more than 30 new digital forms in the early weeks of the crisis.

Branches won’t go away altogether, but many have already been revamped to focus more on giving advice and selling banking products at key moments for customers, such as when they buy a home or a car.

“We’ve taken the next three years and we’ve compressed it into three weeks,” said John Armstrong, national industry lead for financial services at KPMG Canada. “I don’t think we’re going back ... and the banks, they don’t want people to go back.”

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Say goodbye to fixed dividends

by David Berman

Investors anticipate regular dividends the way coffee addicts look forward to their morning espresso. But corporate profits are in a serious slump, which is putting pressure on the ability of many companies to meet their commitments.

The fixed payout may be doomed. In its wake, prepare yourself for the variable dividend – a version that will rise and fall, or disappear altogether, depending on a company’s financial performance.

James Covello and Steven Kron, analysts at Goldman Sachs, believe that the time for this approach has arrived. In a recent report, they argued that variable payouts tied to, say, a company’s free cash flow will align distributions with the ups and downs of a business cycle and remove the stigma of a reduced payout. When times are tough, companies can preserve their financial health rather than destroy their balance sheets to satisfy income-hungry investors.

“There are a lot of companies that are seriously considering it. And if one or two implement it, I think you’ll see the floodgates open up,” Mr. Covello, global co-head of single stock research at Goldman Sachs, said in an interview.

Actually, some companies are already taking his approach.

Toronto-based Norbord Inc. began paying a variable dividend in 2013 because the price of its key material – oriented strand board, a plywood-like material used in home construction – is notoriously volatile. Since then, the company has raised its dividend four times, reduced it six times and returned a total of US$881-million to shareholders (along with share buybacks totalling US$169-million).

“In this environment of economic uncertainty from the COVID-19 pandemic, our current capital allocation priority is cash conservation,” Robin Lampard, Norbord’s chief financial officer, said in an e-mail.

Investors and analysts seem to be onside with this priority. Even though Norbord cut its dividend from 20 cents a share to 5 cents last week, the company’s share price is up nearly 60 per cent from its lows in early April.

“Norbord's variable dividend policy is one of the most intelligent capital allocation policies in the sector, allowing management to strategically deploy capital into the business or return it to shareholders,” Paul Quinn, an analyst at RBC Dominion Securities, said in a note.

Of course, if more companies turned to variable dividends, the shift would mark a radical departure from the current environment. Stephen Foerster, a finance professor at the Ivey Business School at Western University, argues that fixed dividends attract long-term investors and can support the price of a stock. “If dividends were variable, then companies would lose their ability to signal future prospects, and a stock price might not reflect its true intrinsic value,” Mr. Foerster said in an e-mail.

Still, these are unusual times. So far this year, 34 companies in the S&P 500 have suspended their dividends, according to S&P Dow Jones Indices – more than for 2008 and 2009 combined, during the depths of the financial crisis.

“Big dividend-paying stocks are significantly underperforming, even those that haven’t cut,” Mr. Covello said. “Given that the market is rightly and understandably taking that approach, why not have a variable dividend that comes down naturally as cash flow comes down?”

The oil patch

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National oil is coming

by Kelly Cryderman

Ted Cruz was blunt: “My message to the Saudis: TURN THE TANKERS THE HELL AROUND.”

The Texas senator’s tweet – which came last month when crude storage was rapidly filling and U.S. officials mulled a plan to slap tariffs on oil imports from overseas – is a sign of tensions to come.

The massive disruption to global oil markets could prompt previously unimaginable government participation in and protectionism for the domestic industry in the U.S., including the nationalization of certain assets. With a closely integrated energy market, any U.S. actions are sure to ripple toward Canada.

The reasons are both pragmatic and political. Shutdowns as a result of the pandemic mean oil consumption remains lower than normal. A market-share battle between Saudi Arabia and Russia earlier this year helped to devastate oil prices, and the same scenario could play out again in the future.

In North America, oil and gas workers are losing their jobs, companies are on the brink and activity has plummeted. The calls from the right of American politics for aid to the industry could get louder.

President Donald Trump’s administration is aware an industry bailout is a tough political sell, with every solution fraught in its own way. Options floated so far include tariffs on foreign overseas oil, the federal purchase of surplus oil for the Strategic Petroleum Reserve, paying companies not to produce oil, and Washington taking a stake in U.S. energy companies.

The outlook under president Joe Biden would be another matter, said Robert Johnston of the Eurasia Group. He said a Democratic administration is likely to focus on climate goals and finding new jobs for oil workers. “The U.S. government led by Mr. Biden might even follow Canada’s lead when it comes to financing the cleanup of old oil wells,” Mr. Johnston added.

Most of the world’s oil is produced by state-controlled entities, with Canada – responsible for 5 per cent of the global total – and the United States, which had become the world’s largest producer pre-pandemic, as privately run exceptions. But given the dramatic change in circumstances, Art Berman, a Houston-based energy analyst, says the U.S. government might be the “owner of last resort” for still-productive oil wells.

Many energy watchers believe that as some independent producers close their doors, the best assets will be snapped up by larger players. But Mr. Berman said shareholders will not tolerate purchases while the prospect of near-term revenues are dim. A lack of transactions could lead to a long line of insolvencies.

Mr. Berman believes that might leave the U.S. government with two unpalatable choices: Finance the shutting down of ownerless but still-productive oil wells, or nationalize some assets for when demand returns.

The Canadian government has also allowed itself this option, in the broadest sense. The introduction of a pandemic loan program for large corporations, the Large Employer Emergency Financing Facility (LEEFF), quietly included a provision that allows Ottawa to seek warrants from publicly traded companies that are convertible to equity, or cash equivalents.

Energy economist Peter Tertzakian said North America has achieved a large degree of energy independence. But Russian and Saudi Arabian production could quickly come roaring back next year, overtaking this continent.

That could inflame some segments of American politics, including those who believe supply chains need protection in a de-globalizing world. The calls for tariffs in the next year or two could be strong, Mr. Tertzakian believes. And if the U.S. were to impose tariffs, Canada could effectively become part of a continental system.

But much will depend on the politics, and whether governments choose to prioritize domestic oil production, or greenhouse-gas emission reductions, Mr. Tertzakian added.

“The impetus pre-pandemic was environment and climate change. I don’t think that’s going away,” he said. “But I do think that there’s going to be a rise of energy security as an issue…no one now wants to be dependent upon other countries for commodities.”

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In Alberta, sales tax will no longer be off-limits

by James Keller

The idea of a provincial sales tax has long been politically dangerous in Alberta.

But the economic fallout from the COVID-19 pandemic, which followed five years of pain related to low oil prices, has become a case study in the risks of relying on volatile resource royalties. And it has revived calls within the province to finally implement the tax.

Premier Jason Kenney has repeatedly rejected the idea, although he has also said that every option is on the table as the province looks ahead toward the long-term recovery.

Groups such as the Business Council of Alberta have advocated for a sales tax, although proponents say such a policy would need to wait until the province is through the current downturn.

University of Calgary economist Trevor Tombe, himself in the pro-sales-tax camp, said the current turmoil means that Albertans may be ready to seriously talk about the idea.

“This is, I think, a time where people might be willing to entertain policy choices they wouldn’t in normal times,” Dr. Tombe said.

The United Conservative government tabled a budget in February that depended on a significant recovery of resource revenue in the coming years to achieve balance; Mr. Kenney recently said this year’s deficit could hit $20-billion.

Dr. Tombe said every percentage point of a sales tax would add about $1-billion in revenue.

Jack Mintz, an economist who favours a sales tax, was appointed by Mr. Kenney earlier this year to lead a panel to guide the province’s recovery. Dr. Mintz – who declined to offer details about the panel’s work – said a tax would provide a stable source while also bringing in more money from tourist and out-of-province workers who don’t pay Alberta income tax. The province could adopt a harmonized sales tax and offset the revenue with tax cuts elsewhere, he added. “Even though there is a strong argument to using them, I think unless people see a tax cut there, they’re not going to support it,” he said.

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Calgary’s office towers will stand empty

by Jeffrey Jones

For Calgary’s economy, it’s been a lost half-decade as the city plodded through the energy-industry downturn. COVID-19 has complicated already difficult questions about the future of its downtown core.

Just like New York, Toronto or London, a major concern is what will become of the city’s commercial real estate market as companies rethink how to go about everyday business after operating with employees at home. But Calgary’s problems make the calculus trickier. Even optimistic advocates say it will be more than a decade before its many empty offices could be filled again.

Calgary’s downtown office vacancy has hovered around a cavernous 30 per cent, and at least four buildings are empty after some energy companies left Canada and others moved to more desirable digs to take advantage of falling rents. The opening of new office towers in recent years, such as Brookfield Place East Tower, Eau Claire Tower and Telus Sky, pulled tenants away from older, lower-quality buildings.

The city has been working for years to attract new industries to fill the void left by a shrinking energy sector. It has focused on wooing the high-tech sector with the promise of low operating costs and a young, well-educated work force.

“We know well enough now that even if we get the energy industry to its healthy estate, it will not be the mega-job-creator that it once was,” says Mary Moran, chief executive of Calgary Economic Development. “And so what else are we going to do with that office space? Well, we’ve got to go attract other companies.”

But the take-up has been slow for a city that has more office space square footage per capita than any other in North America; efforts were hampered by a move last year by the provincial government to cancel a tax credit for the tech sector. Ms. Moran sees it as a 15-year project.

As restrictions on movement in response to the pandemic are lifted, “The need to have everybody working out one centralized location probably won’t be the same,” says Todd Throndson, managing director and principal at Avison Young (Canada) Inc.

This would mean a big shift for the concentrated downtown, whose busy network of second-floor walkways connecting buildings, known as the Plus-15 system, figures large in the business culture for impromptu meetings and quick meals. It was closed until further notice in early April.

Bricks and mortar

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Every business will be an online business

by Sean Silcoff

Sanagan’s Meat Locker, a butcher shop with two locations in downtown Toronto, has been in business for more than a decade. But only in the past 18-months had its owner, Peter Sanagan, begun thinking about an online store. His reluctance to embrace e-commerce had partly to do with his products. Chicken breasts and steaks sourced from local farmers can vary in availability and size, making it harder to figure out pricing than if you’re selling, say, t-shirts. But there was another issue. “It took some convincing for me to believe that the customer experience would be the same,” Mr. Sanagan says. “It needs to be a delightful experience whether you’re in the shop or on the website.”

With the pandemic’s arrival, Mr. Sanagan’s slow and careful hike toward e-commerce turned into a sprint. His company took a few weeks to hone their system, but on May 2, the butcher started selling whole chickens, pork butt and duck liver mousse online for delivery.

The pandemic has shown most local businesses they can no longer rely on their bricks-and-mortar storefront as their sole channel for business. If the front door has to stay closed or nobody is walking in, how can you survive?

More sales will happen online by necessity, benefiting businesses such as Toronto’s Ritual Technologies Inc., which enables customers to order ahead for restaurant takeout using their smartphones. “We think this behaviour change is going to be permanent [and] the scale at which local businesses are going to adopt digital will be unlike anything we’ve seen before,” Ritual chief executive Ray Reddy said.

Twenty-five years after the popularization of online commerce, the belated embrace of “omnichannel” selling has other implications. Shopify Inc., the online commerce platform, surpassed RBC to become Canada’s most valuable company for the first time on May 6. “All retail businesses need to be digital by default and treat different sales channels as tactics, not strategy,” CEO Tobi Lutke tweeted the next day.

Small merchants without the staff or wherewithal to make the change will likely get a boost: A new city of Toronto program will help local independent businesses build online stores; the city has also partnered with Ritual to provide free services to restaurants. Expect to see similar moves elsewhere.

For many businesses, the pandemic-induced shift to digital selling was abrupt. Kitchener, Ont.-based brew pub Arabella Park built an online store to enable curb side pick up of food and alcohol orders in less than a week. “I honestly felt like I was opening an entirely new business,” says Natalie Schnurr, the company’s co-owner. What the pub’s digital future looks like will depend on several factors, including whether Ontario allows restaurants to sell alcohol-to-go in a postcoronavirus world. In the meanwhile, Ms. Schnurr says: “I never thought I’d add coding to my resume, but here we are.”

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Supply chains will become redundant

In early March, a survey found 54 per cent of U.S. manufacturers were contemplating moving some of their overseas production back to North America as a result of the novel coronavirus outbreak. That number had climbed by 10 percentage points when Thomas, a business intelligence firm, conducted the same poll in April. As the pandemic disrupted the global supply chain, executives increasingly thought about moving production closer to home.

“There will at the very least be an extensive re-examination of supply chains, and the possible shortening of such – to the benefit of manufacturing activity in North America,” Douglas Porter, BMO’s chief economist, wrote in an April report.

That is not the only way that companies’ supply chains will likely shift in the wake of COVID-19, according to Mr. Porter. “While we are not here to ring the death knell on just-in-time inventories, many firms may look at maintaining greater stockpiles of raw and intermediate materials in the future, giving at least a temporary boost to inventory accumulation.”

Changes in logistics were already underway when the pandemic occurred, spurred by the U.S.-China trade war. American imports from China fell 17 per cent in 2019 compared with the previous year. But the beneficiaries from China’s decline weren’t American workers but other Asian countries, particularly Vietnam, along with Mexico, according to an analysis conducted by Kearney, a consulting firm. The end result of the coming changes to our global supply chain – whether it’s more local suppliers, more supply on hand or more countries as suppliers – is to build a bit more redundancy into a system that has spent decades dispensing with it.

Food and delivery

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Grocers will (finally) embrace online

by Susan Krashinsky Robertson

Paying staff to push shopping carts around a store is not an efficient way to fill e-commerce orders. So, as a test, Loblaw Cos. Ltd. built a store within a store – a blocked-off area exclusively for order packing – at a handful of its locations. It’s just one example of how grocers are racing to meet surging online demand as a result of the pandemic.

“There are testing plans that we need to accelerate,” said Sharon Lansing, vice-president of online grocery for Loblaw Digital. Last year, the company constructed an automated mini-warehouse inside a Toronto store, and is now speeding up plans for it to serve online pickup orders at nearby stores.

Retailers are expecting online shopping to abate somewhat as things return to normal, but some changes will be permanent.

“It will accelerate us three to four years ahead of where it would have been otherwise,” said Michael Medline, CEO of Sobeys parent company Empire Company Ltd. The company has sped up testing of its soon-to-launch e-commerce service, Voilà, in the Greater Toronto Area, and doubled its number of delivery vans to meet higher anticipated demand.

Grocers still expect the vast majority of purchases to happen in stores, but they say e-commerce is essential to building loyalty. Customers who have a positive online experience may be likelier to visit that retailer in person. “Customers are going to be more and more demanding of how e-commerce is delivered to them,” Mr. Medline said.

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Delicious home delivery is here to stay

by Chris Nuttall-Smith

One Saturday in April, I got a strange text from a craft cider maker named Tariq Ahmed. It was a picture of my front door, with a large white box waiting conspicuously on the mat. Mr. Ahmed’s company, called Revel Cider, makes some of the most sought-after fruit ciders in North America; in a typical month, he ships his small-batch, naturally fermented, hand-everythinged bottlings from Guelph, Ont., where Revel is based, to Mexico City, Germany, Australia and beyond. But since the pandemic, Revel’s focus has shifted to smaller sales and local retail deliveries.

Mr. Ahmed was doing the delivering himself – and sending me a photo to confirm my bottles had arrived. Revel’s online orders have quadrupled in the past two months, he said. Since that weekend in April, he’s hired two staff drivers to service Guelph, Hamilton, Toronto and Kitchener-Waterloo. They’ve been working 11½ hour days. And because of COVID-19, Mr. Ahmed has learned a lasting truth, one that’s resonating with small-scale food and drink producers across the country: Canadians love having delicious things delivered to their doors.

Butchers, bakers, fishmongers and booze-makers have been scrambling to find enough vans and drivers. In Vancouver, the high-end bakery and grain mill called Flourist began offering free local deliveries of its baked goods, a move intended to save the business. The company, co-founder Shira McDermott said, has hired two drivers so far; although it’s had to shift some roles around (no need these days for barista services) the bakery has the same number of workers today – 25 – as it did going in.

In Toronto, the neighbourhood butcher shop Chantecler Boucherie even offers a 10-per-cent discount to customers who opt for same-day free delivery. The benefit to the shop, owner Jacob Wharton-Shukster said, is bigger average orders and less chance of walk-in customers making his floor staff sick. The downside: Products such as cheese and meat that sell by weight are harder to manage through standardized online e-commerce platforms; Mr. Wharton-Shukster and his staff still take orders the old way, over the phone.

As for the economics of that to-your-door service, they’re not as bad as you’d think. Delivering Revel’s cider now costs a quarter of what the company used to pay for couriers, Mr. Ahmed said, and he’s able to pay his drivers a good salary, too. For many producers – not to mention the consumers – the switch to delivery service has been such a silver lining they can’t imagine it ever going away.

The nature of work

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Co-working will feel a squeeze

by Rachelle Younglai

Co-working spaces blossomed after the Great Recession a decade ago, when businesses could not afford to sign long-term leases and wanted flexibility to quickly expand or downsize.

WeWork soon dominated the sector. With a multibillion-dollar valuation, the firm spurred competitors offering open offices, shared desks and people working elbow to elbow.

Today, the coronavirus pandemic is forcing companies to reverse the trend of open, crowded offices. Yet, as the global economy craters, more companies may seek the flexible, short-term office leases that co-workers provide. The big question: Which of the big players will survive to take advantage of the opportunity?

Co-working companies don’t have a strong track record of surviving recessions.

IWG’s Regus brand filed for bankruptcy protection in the United States after the dot-com bubble burst. WeWork, which was born out of the Great Recession, was trying to dig itself out from financial trouble before the pandemic hit.

The biggest players, WeWork and IWG, mostly operate a rent arbitrage business. The company takes out a long-term lease in a building, renovates and divides up the space. They then charge a premium to sublease the same space and pocket the difference. But flexible office space also means that in a downturn, when businesses are looking for ways to conserve cash, co-working customers can then end their short-term lease. Add in the physical-distancing requirements and the co-working operators will accommodate fewer people.

“The model of co-working is going to pose a challenge to many of them in terms of how they survive. If they are going to have to space people out by six feet or two meters, then that is 50 per cent of their revenue,” said Lisa Fulford-Roy, who leads commercial realtor CBRE’s workplace strategy group. “Some of them that don’t have strong financial backing will be very challenged. Co-working organizations are going to be slower to return to full capacity.”

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Stores will re-embrace great customer service

by Gayle MacDonald

Toronto’s Type Books was one of the first small businesses in the city to start offering curbside delivery and pickup when it became clear in early March that COVID-19 was a dire threat to both its staff and customers.

With no system in place for online sales, Type Books co-owner Joanne Saul knew she needed to do it to survive. But she saw that phone calls from customers interested in placing orders were an opportunity too, so she and her staff launched a new initiative called Mystery Bags. Customers call in, specify a literary genre, and explain their likes and dislikes. Staff then personally curate a “mystery bag" – which costs $100 – containing four paperbacks.

“It’s our way of flexing our bookselling muscle," Ms. Saul says. “We get requests everyday, but we do special orders for children’s birthdays (for $50), for Mother’s Day and we are planning a Father’s Day one. Our customers love the surprise and it’s our way of continuing what we’re known for – a highly personalized service."

“We’ve always believed highly personalized customer service was going to set us apart," Ms. Saul says. “In this time of crisis, it has, quite literally, saved us.”

Thinking ahead to a postpandemic world, retail consultant Doug Stephens says highly personalized, hands-on customer service is going to be the competitive edge that keeps small businesses afloat.

“[When stores gradually begin to re-open], they will be dealing with customers who are feeling insecure about their finances, insecure about their employment and insecure about their future in general,” says Mr. Stephens, founder of Toronto-based retail consulting firm Retail Prophet.

"It is going to force every consumer to ask the question, ‘Do I really need to go to a store to buy this?’ To survive, retailers are going to have to become far more competitive, far more rigorous in terms of delivering customer experiences that are valued and that make the customer feel the effort they’re making to come to a store has been worth it.”

And, he adds, they’ll need to be flexible and adapt quickly to deliver a remarkable guest experience. At fashion retailer Dior, for example, staff are serving personalized customer service by appointment only. "This makes sense from several standpoints. It keeps customers safer. It allows for a more personalized level of selling and it’s aimed at a brand’s highest value customers. Most of all, it allows a brand like Dior to deliver an experience more in keeping with its brand position. "

Annabel Hawksworth, a principal in the company that owns Nightingale Restaurant, Hawksworth, and Bel Café in Vancouver, says her business is working to deepen relationships with customers by giving back to their communities. “Social distancing didn’t drive a wedge between us and our customers, in fact, we feel closer to them than we did before.

On Mother’s Day, her restaurant chained reached out to other small businesses in Vancouver and asked them to collaborate on a $75 gift bag (it included freshly baked croissants, jam, a dish towel, and tulips) that Ms. Hawksworth and some of her staff delivered to moms in Vancouver. They sold 120 (online) in half a day. All proceeds went to support the Cause We Care Foundation, a charity that supports single moms.

Ms. Hawksworth says the pandemic has brought a shift in the way people value their favourite brands and stores. “COVID brought us closer to both our customers and to other independent, like-minded businesses. Going forward, relationships in retail are going to be more important than ever before.”

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