Brooks Brothers bankruptcy offers lessons on corporate resilience in the face of Covid-19

WHEN I meet business acquaintances these days, they often ask why I am dressed "so formally" in office wear. In the work-from-home era, it seems that we are expected to dress casually even when we are not actually at home.

Amid this shift in sartorial sensibilities, it is perhaps no surprise that the venerable American menswear brand Brooks Brothers sought bankruptcy protection two weeks ago. Founded in 1818, the brand has a long history of being worn by US presidents, and has come to be synonymous with classic business suits.

Brooks Brothers had been under pressure for some time though. Apart from the growing popularity of e-commerce, which has weighed on the brick-and-mortar sales channels of many old-line retailers, corporate dress codes have become much less formal over the last few decades.

Consider how the top executives at the largest companies in the S&P 500 dress these days. It is not that Tim Cook of Apple, or Satya Nadella of Microsoft, or Mark Zuckerberg of Facebook never wear business suits, but they clearly do not regard such attire to be necessary every workday. As a result, their employees and business associates are dressing down too.

With many companies now preparing for a future in which a large swathe of their employees will continue to work from home, Brooks Brothers might have to shrink itself considerably and rethink its whole image in order to survive.

Covid-19 is similarly hastening other slow-burning trends that many companies might not have thought were immediate concerns.

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For instance, video conferencing has long been possible but it was thought to be a poor substitute for engaging clients and co-workers face-to-face. And while more people were turning to online shopping, many retailers still thought it important to invest heavily in physical shops.

Are companies in the travel, hospitality, retailing and commercial property sectors prepared for the disruption that might continue even after Covid-19 passes? Or, are they just trying to survive the next year?

Capacity to change

Lou Gerstner, who was chairman and CEO of IBM from 1993 to 2002, insightfully summed up the key to corporate resilience and longevity in a dialogue with McKinsey & Co in 2014. "In anything other than a protected industry, longevity is the capacity to change, not to stay with what you've got. Too many companies build up an internal commitment to their existing businesses," he said.

"Rather than changing, they find it easier to just keep doing the same things that brought them success. They codify why they're successful. They write guidebooks. They create teaching manuals. They create whole cultures around sustaining the model. That's great until the model gets threatened by external change."

Mr Gerstner, who was also once chairman and CEO of RJR Nabisco and held executive positions at American Express, offered examples of companies that did not respond well to innovation in their respective fields.

For instance, US consumer electronics firm RCA Corp famously ended up being overtaken by Japan's Sony Corp with the advent of the transistor. Eastman Kodak did not capitalise on digital cameras even though it invented the technology.

"For a long time, American Express wouldn't go into credit cards, because it thought that would cannibalise its travellers cheques business," Mr Gerstner added.

Tech disruption

Even before Covid-19 came along, there was a growing consensus that the pace of technological change was accelerating - with negative consequences for many business sectors.

The likes of Facebook, Amazon, Apple, Netflix and Google owner Alphabet were upending the industries of retailing, telecommunications and media. Moreover, the composition of the S&P 500 index was shifting at an ever faster rate, suggesting some creative destruction was at play.

According to a 2018 report by consulting firm Innosight, the average lifespan of companies as components of the S&P 500 was 33 years back in 1964. By 2016, the average tenure had narrowed to 24 years. By 2027, Innosight predicted the tenure will shrink to 12 years.

The composition of the S&P500 has not changed at a steady pace though. It has happened in waves, amid economic shocks, mergers and acquisitions, as well as policy decisions by the index's manager.

Nevertheless, the displacement of companies such as General Electric, ExxonMobil, Pfizer, Citigroup and Cisco from the very top ranks of the S&P 500 over the last two decades, and the emergence of Microsoft, Amazon, Apple, Alphabet and Facebook in their place, hews to the technological disruption and creative destruction narrative.

Digital danger

A 2016 study by Dartmouth professors Vijay Govindarajan and Anup Srivastava sheds a different light on what has been happening though.

Examining all 29,688 companies that listed in the US from 1960 to 2009, they found that companies that had listed before 1970 had a 92 per cent chance of surviving the next five years. Those that listed from 2000 to 2009 had only a 63 per cent chance, even after controlling for the dot-com bust and the global financial crisis. Corporate mortality was rising because newer companies were more susceptible to failure.

"The pre-1970 firms tended to be heavily invested in physical infrastructure, such as factories and inventories. Later cohorts have relied increasingly on intangible assets, such as databases, proprietary algorithms and expert workers," the professors explained.

"The good news is that newer firms are more nimble. The bad news for these firms is that their days are numbered. That is, unless they continuously innovate," they added.

Applying past lessons

So, what does all this mean for investors? While sifting through potential "value" stocks, it might be a good idea to take account of the resilience and longevity of the underlying businesses.

In the local market, for instance, the three local banks - DBS, OCBC and UOB - seem a safer long-term bet to me than, say, a real estate property trust such as CapitaLand Mall Trust. While banks as well as Reits face immediate business risks, the operating landscape of the banks is less likely to be reshaped in unexpected ways by the Covid-19 fallout because of tight regulation.

On the other hand, I would be wary of chasing some stocks deemed to be beneficiaries of the pandemic, such as Zoom Video Communications, which has seen its stock rocket 262 per cent this year. Zoom may well eventually cement its position as the leading video conferencing platform, but it does not currently have the field to itself and will be under intense pressure to keep innovating.

It might also be a good idea to be cautious about the long-term outlook for seemingly invincible technology heavyweights. Amazon and Facebook may be just as susceptible to becoming blindly committed to their business models as RCA or Eastman Kodak were a few decades ago.

One way to mitigate this risk is to diversify exposure to these stocks with up-and-comers in the same field.

For instance, Pinterest is a much smaller social media platform than Facebook, but its revenues have been growing fast. It might even be a beneficiary of the advertising boycott Facebook is suffering from hundreds of companies, including Coca-Cola, Adidas and Ford, over concerns that it has continued to allow its platform to harbour and spread harmful content. Shares in Pinterest have climbed 34 per cent this year.

On the other hand, a suitable foil to Amazon could be Shopify, the Canada-based company that enables anyone to easily set up an online store. While Amazon is set up to serve shoppers, Shopify's goal is to serve the small businesses reaching out to shoppers. Shares in Shopify are up 133 per cent this year.