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Empty Café Terrace in Paris during COVID pandemic

Family business

The lost generation?

Published 10 March 2021 in Family business

Family businesses traditionally pull together to survive a crisis, but the dramatic impact of the pandemic has brought even the strongest to their knees. They will have to develop new skills to adapt and survive, write Peter Vogel, Patrick Reinmoeller and Karl Schmedders.

As you lower your body into the hot springs by Hoshi ryokan about four hours west of Tokyo by train, you may not be thinking much about this traditional inn’s ownership. But in a year that has brought the hospitality industry to its knees, it may be this particular detail – that the eponymous inn is run by the 46th generation of the Hoshi family – that will play a key role in its survival.

From LEGO to Walmart to LVMH Moet Hennessy, family businesses account for as many as two thirds of all companies worldwide with some, like Hoshi (which was founded in 718), dating back well over a thousand years. These businesses have weathered pandemics, financial crises and waves of industrialization.

However, 2020 was different. The COVID-19 pandemic has hit most companies hard. While many family enterprises – by which we mean a business that is dominantly controlled by a family with the intention to sustain family control across generations – have honed and developed the capability to survive shocks, the current crisis has been unique in its complexity and has challenged even the most resilient and adaptable firms.

At the end of March 2021, after 60 years of providing four-star accommodation in Zurich, the Glärnischhof will close due to the effects of the pandemic. A 95% drop in revenues was more than the hotel could bear. Its owners have spent recent weeks trying to find jobs for their employees and a new business for themselves. In fact, since the crisis began, notably the worst peacetime global contraction since the Great Depression, half of Switzerland’s restaurants and hotels have been threatened with ruin.

Of course, Covid’s impact has not been confined to Switzerland. The shutdown of tourist attractions such as the Louvre, London theaters and Disney World, has had a serious impact on the small hospitality businesses which depend on them. The closure of ski lifts and restaurants in resorts in Italy and France, as well as the shutting down of café culture in cities such as Paris has also been devastating. This year a majority of the world’s economies is forecast to register per capita incomes below 2019 levels, and this outlook is expected to only slightly improve next year. This will have a disproportionately high impact on family firms, which own a high percentage of hospitality businesses.

Governments have stepped in with financial injections to help stave off immediate bankruptcy and mass unemployment. However, this might not be enough. Estimates of the number of “zombie firms” in the Eurozone ran as high as 13,000 a year ago. Many are propped up by governments, loans, and suspended bankruptcies. These support measures had a surprising side-effect: a decline in the number of bankruptcies, at least in the short-run. In this environment, firms with the means to pursue acquisitions will find a rich choice of good assets at bargain prices.

A survey by the Canadian Federation of Independent Business forecasts that a third of independent hospitality businesses there will close due to the COVID-19 lockdown. A worst-case scenario by the consultancy McKinsey for the US hospitality sector suggests revenue in 2023 might be 20% below 2019, however Bloomberg’s Bankruptcy tracker racks up an ever higher incidence of hotels that cannot be saved. Only those that survive may end up content with a fifth less.

In Japan, the number of hotel bankruptcies jumped by more than 50% to 118 in 2020. In the UK, job losses in the hotel sector exceed 600,000. From the 240’000 small businesses in New York, up to one-third are estimated not to reopen ever again. Many of these small businesses are family-owned restaurants, cafes or niche corner shops.

The situation is dire and could mean the end of many long-established family-controlled hotels and restaurants, unless there is an orchestrated effort to protect the sector and a willingness by owners to adapt to change.

What has happened to the resilience of family businesses?

The foundation stones of a successful business include taking a longterm perspective, being financially prudent, sticking to core values, and having an entrepreneurial spirit. Family-controlled businesses have been shown to be more focused on the long-term than others. Senior executives tend to stay longer than in publicly traded companies and this protects unique institutional knowledge that can be beneficial in a crisis.

Family concerns usually spend and invest carefully and are less likely to pick up debt capital, leaving them with resources to use as a buffer in difficult periods. They tend to use entrepreneurial means to spark renewal during generational transitions.

But while these traits may have encouraged longevity in the past, the fallout from the current crisis has left family firms under great stress. They need to revive their entrepreneurial spirit and look to examples of success set by innovative industry start-ups.

Agility, business model innovation and entrepreneurialism

Within the hardest-hit sectors, the crisis has widened the gap between those able – or not – to invest in digitalization and a fundamental reimagination of their business model. Many family-controlled businesses risk of falling behind on digitalization. “COVID-19 has wiped out 10 years of hotel job growth,” observed Chip Rogers, President and CEO of The American Hotel and Lodgings Association. The sector needs rethinking if a wave of bankruptcies is to be avoided. To combat such seismic change, businesses must adapt.

Even disrupters such as Airbnb have been hit by the slow down. They are facing demands for, as Booking.com puts it, “higher transparency, flexibility and value for less”. There is much to learn from these online giants. For example, Airbnb reoriented its offering with great speed and refocused on helping people escape the pandemic in cities by offering countryside getaways. Thanks to this ability to change quickly, the company enjoyed a successful IPO late last year.

Clearly, there are limits to transforming a small, local business; a family-owned hotel may be compelled to stay local. Even so, learning how to make decisions that enhance customer value requires entrepreneurship and adaptability. Remaining too traditional and cautious could put the company in peril.

Fortunately, research has shown that family-controlled businesses outperform rivals in innovation and efficiency. Like small speed boats, they have far greater flexibility than the giant chains which are more like super tankers. Superior customer loyalty is also a huge advantage.

Empty ski lift during Winter 2021Small hotels, shops and restaurants have been devastated by the closure of ski lifts in France and Italy. Many owners rely solely on their winter trade

Where are the opportunities?

The era of confinement offered both short- and long-term chances for a business model shift. For example, some hotels struck deals with the healthcare sector to provide rooms for workers on late shifts, while others offered shelter for the homeless and refugees. Focusing on the needs of the customer is vital, as is excellent service. This can be done by, for example, offering take-away meals, home deliveries, or catering for virtual parties. Efficiency has always been key, but the pandemic has required a different type of speed. Businesses have had to quickly adjust to the ever changing regulatory environment (for instance, how many people can sit at a table). Flexibility is needed in reallocating resources as well as agility in reconfiguring business models.

The pandemic has served as an accelerator of long-term trends and digitalization. Business meetings, conversations, negotiations and contract signing all went virtual. Consequently, digital transformation was essential, and this has posed a challenge for family-owned businesses which had failed to make the needed financial investment.

Many companies and organizations have tried to leverage the crisis to rethink the core of their business. Consider the ways in which hotels are selling what was never before sellable: while before COVID-19, customers bought a bed for the night, now many more have been making money by selling quiet space during the day. However, many will be forced into bankruptcy, offering those with the acumen, an entrepreneurial mindset and sufficient cash the opportunity to buy and turn around distressed businesses.

The Israeli hotelier Leon Avigad, founder of Brown hotels, has identified a new opportunity in the hotel sector: extended stays. He plans to open more than 20 hotels over the coming 18 months, an investment work more than 100 million euros ($120m). Focusing on niches and efficiency, he and his staff see the opportunity to rally and raise their own bar for doing more with less. He sees his company emerging from the pandemic stronger and more united.

Family-controlled companies may traditionally be resilient, but now only those that show sufficient entrepreneurial drive and the ability to adapt quickly to an ever-changing business landscape will emerge from this extraordinary period.

Authors

Peter Voegel - IMD Professor

Peter Vogel

Professor of Family Business and Entrepreneurship at IMD

Peter Vogel is Professor of Family Business and Entrepreneurship and holds the Debiopharm Chair for Family Philanthropy at IMD. He is also the Director of IMD’s Global Family Business Center.

Patrick Reinmoeller - IMD Professor

Patrick Reinmoeller

Professor of Strategy and Innovation at IMD

His teaching, research and consulting focus on strategic thinking for senior executives.

Karl Schmedders - IMD Professor

Karl Schmedders

Professor of Finance at IMD

Karl Schmedders is Professor of Finance at IMD. In his research, he applies numerical solution techniques to complex economic and financial models, shedding light on relevant market issues and industry problems.

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