Pandemic Proofing - the new business strategy

If there is one thing that 2020 taught us, and that is that nothing is forever or safe. The travel and entertainment industries were hit hard by the COVID-19 pandemic, wiping substantial revenues from large established corporates, including those that have been performing exceptionally well of the past decade. It is therefore understandable that these companies would seek to mitigate their risk, as many may not recover, should a pandemic happen again.

From airlines to hotels and short-term holiday rentals, the industry collectively is down around $200 billion USD from 2019 ( karryon.com.au/industry-news/covid-19-has-cost-the-tourism-industry-195-billion-in-revenue-worldwide) and is set to deepen even further.

Countries which have lost the highest per cent of GDP due to loss of tourism (table):

Diversification is a means where companies can spread their perceived risk and enter new markets/industries. However, treading into unknown territory can bring new risks, expanding into terrain that is not a core business function is not a typical business strategy. But do companies, post-2020, have an option to not diversify anymore? Is there now a requirement for companies to be multi-channel, perhaps multi-industry?

If you look at the likes of Qantas, optically, they have been doing this for a while. Most companies since the GFC have tested diversification, such as venturing into new financial opportunities, Qantas Health Insurance, Qantas Wines, Qantas Credit Card. Woolworths, an Australian grocer, now has life insurance, telecommunication services, pet insurance, car insurance. But are these really diversification? No, they are not. They are onselling white labelled services from leaders within that specific industry.

Image: QANTAS's 2016 diversification strategy (qantas2016.reportonline.com.au).

True diversification is when Qantas funds the East Australian rail network from Brisbane to Melbourne, or when AirBnB acquires a real estate franchise group and enters the long-term rental market. It sounds unlikely, as unlikely as a 100-year pandemic hitting the world's economy and upturning the lives of every living person on Earth.

AirBnB's valuation in 2019 was $38 billion, in 2020, it was $18 billion. In one quarter, the company experienced a 67% loss from the previous quarter's revenues; $842 million USD down to $335 million USD. The revenue fall is directly associated with the number of listings that have been removed from the platform and the lack of travellers.

Yet, Airbnb proceeded with its IPO, hitting $100 billion USD in December 2020, more than doubling its previous years' valuation.

Graph: NY Times, www.nytimes.com/2020/12/11/business/dealbook/airbnb-ipo-chesky.html

Clearly, the market is anticipating the end of this pandemic and the short term rental market to rebound. But what about the next pandemic, the second wave, something else? What happens if COVID-19 becomes COVID-21? What is the risk mitigation strategy to sure-up such a large IPO?

Now that Airbnb has the stock market to adhere and respond to, the company has to think laterally. This is where long term rentals enter the Airbnb ecosystem. It is not that far of a stretch to assume that Airbnb can use its infrastructure and hosting platform to completely disrupt the real estate rental sector. It did it to the hotel and holidays short stay industry, why is it such a stretch to expect Airbnb to move into real estate, specifically property management?

Image: Airbnb's property management system.

Technically and from an operations perspective, long-term rental market (property management) is almost the same as the short-term rental market. Albeit, less associated costs to manage the listing, given tenants remain for 6 months or more, and less physical time to attend, clean and maintain for the next guest.

Time will tell. Just like 2020 taught us a very valuable lesson, one that we will all forget until it happens again, you can never say never. Watch closely for the diversification, it will be interesting to see what new markets companies enter, beyond 2021.