More thoughts and predictions during the coronavirus era

Lockdown 3.0: The case of Moral Hazard

So, the lockdown has extended for another two weeks and a lot has been, is being and will be written about its good and bad. I have been thinking about the implications of principal-agent relationship between the central and various state governments and how the latest guidelines open a doorway for Moral Hazard. Here's why:

The central government has designated districts as Red, Orange and Green Zones based on active cases present in any district.

However, this information is provided to the central government by various state governments as health care is a state subject.

Each state has formulated its own testing strategy. Some states are going for aggressive testing, some states are sticking to necessary (read minimal) contract tracing testing. There is bound to be a skew in the number of red zone districts in states that test more vs states that do not.

Now, for states whose economies are hurting because of the lockdown would want to reopen ASAP to mitigate collateral damage. For that to happen, they would like to show more districts in the green zone vs red zone. Hence, these states will be incentivised to test even fewer people.

Restaurants vs food delivery

I predict that the food business is going to have an evident bifurcation between dine-in experiences and home delivery with little overlap between the two.

Dine In:
* It will be at least more than a few weeks from today until restaurants will be allowed to start operating for dine-in. Whenever this starts, there will be hard social distancing norms that will have to be enforced by the restaurants, which will see their capacities reduce anywhere by 40% to 75%.
* It will at least be more than a couple of months until restaurants will be allowed to operate at their previous capacities (i.e. without mandatory social distancing).

Let's say if the "new normal" takes 6 months from today. There will be two foreseeable second order effects by then -
1. Many restaurants will perish
2. As a consequence of impact on economy and jobs, patrons will have less disposable income

A typical restaurant business, which had become a high fixed cost and low margin business (thanks to their dependence on online food aggregators for sales) will therefore have to take a call - either cut off their fixed costs and move to a cloud kitchen model by only offering food deliveries through aggregators; or stick to being a dine-in experience by charging higher margins.

I anticipate the big shift for dine-in restaurants will be on selling "experiences" instead of food. Expect fancier interiors, more privacy, dedicated wait staff, customized preparations, complimentary drinks / desserts etc. Also expect to pay Rs. 5000 for a meal that would have previously cost you Rs 2000.

Most existing loyalty programs could be scrapped. Anything that does not generate unit profitable cash flows will be punctured

Travel and hospitality

Expect a similar shift in the Travel and Hospitality space as well.

Cost of air travel will rise significantly

High end hotels, just like restaurants, will stop competing with BNBs and homestays, instead focusing on delivering further luxurious experiences

Tourism will eventually bounce back for sure. But after how long is a critical uncertainty. As an industry, tourism has vertically and horizontally integrated with a lot of other industries, all of which will have a cumulative damage.

For example: Tourism = Travel + Hospitality. Travel is an extremely low margin business so it can only sustain on scaled economies, which won't be possible at least for foreseeable future (till late 2020). Hospitality is a high fixed cost business. This means less runway for current players to stay alive.

You can only revive a business if it's not dead already. So, the longer things take to normalize, the higher will be collateral damage. If the new normal comes after 8-9 months, it would have already wiped out many airlines, many small hotel chains, too many jobs.

Why Cure.fit will survive

I posted the following tweets on March 12, just when things were starting to turn serious in India -


On 20th March, cure.fit introduced cult.live
With cult.live classes, our goal is to bring fun group workouts created by our world-class trainers and athletes straight to your home! You can choose and attend classes from a variety of formats like dance, strength & conditioning, Yoga, cardio and HRX.



Probably too ostentatious of me to assume they read my tweet, because in all probability, they did not :-)

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