• World Biz Magazine

HALF OF US COMPANIES ARE UNDER FINANCIAL OR OPERATIONAL STRESS AND 14% ARE IN DISTRESS



New Research by BCG Shows Scope of Crisis and Pinpoints Trouble Spots by Region and Sector.


More than seven months into the novel coronavirus pandemic, a disturbingly large number of US companies are at risk, according to new research from Boston Consulting Group (BCG) confirming that economic distress is deeply entrenched and shows no sign of letting up.


More than 60% of US companies analyzed are under financial or operational stress as of the end of the second quarter of 2020, a 49% increase from the end of the second quarter of 2019, according to BCG analysis. And 14% are in distress—either challenged to meet their financial obligations or under operational pressure that requires significant restructuring. That represents a 43% increase over the previous year. The lack of additional government stimulus puts many of these companies at risk.


Those are among the most significant findings from the BCG TURN Radar index. The index, developed by BCG TURN, BCG's special transformation, turnaround, and restructuring unit, tracks a company's distress based on over 20 key performance indicators in three categories: financial, market, and qualitative. The Radar index reports on over 25,000 publicly-traded companies, with more than $100 million in revenue, across 80 countries and 20 industry sectors. There were 721 US companies tracked for distress. A company is measured against its peers, its industry, and the overall sample, and its score places it in one of three groups—either stable, stressed (underperforming in its industry or under internal or external pressure), or distressed.


The US picture is bleak, but not the worst on a global basis—in Central Europe, the Middle East, and Africa, the number of companies in distress has gone up 83%. Overall, the BCG TURN Radar index portrays the US and global economy struggling as the pandemic maintains its grip.


The US Is Hard-Hit, and Key Sectors Suffer, but Others, Boosted by Pandemic Demand, Outperform

  • Some US sectors have been particularly hard-hit—notably, those directly affected by the pandemic and those already challenged before the pandemic's economic downdraft took hold.

  • Among the US industries suffering the most are automotive and mobility (52% stressed, 16% distressed), travel and tourism (61% stressed, 16% distressed), and retail (67% stressed, 18% distressed).

  • Health care providers, biopharma, the technology industry, and transportation and logistics have been the least impacted. All of these sectors have been boosted by pandemic-related demand. Health care providers and biopharma are showing significantly less stress than in the same period last year. Both have benefited from pandemic-related activity and investment. In 2019, almost 42% of biopharma companies were in distress. In 2020, that figure fell to 25%. In multiple sectors, there are big gaps between winners and losers, and research shows that large companies may achieve a stronger recovery.


"BCG TURN Radar confirms the impression created by stories of business failures and layoffs—the COVID-19 pandemic is causing deep, structural changes that are likely to be long-lasting," says Luke Pototschnik, BCG senior partner, and head of the firm's Transformation practice and BCG TURN in North America. "The impact may be most severe on companies that were challenged to begin with. But the good news is that there are actions companies can take—such as generating short-term cash to fund long-term investment—that can mitigate the worst of the downturn and help set them on the path to recovery."


Some Subsectors Stand Out Even in Stressed Industries, and the Gap Between Winners and Losers Grows

While the Radar index raises alarms about several major sectors of the US economy, it also finds winners even in underperforming sectors. Many of the sectors faring worst are those that faced pre-pandemic structural challenges.


"The automobile industry is struggling more than others," says Pototschnik. "Even before the pandemic, it was dealing with significant changes such as the shift to electric vehicles, which requires investment. But in the pandemic economy, investment may be hard to come by."


Similarly, the bankruptcy rate has been high in the already-challenged oil and gas sector, and Radar suggests that bankruptcies are likely to continue, with over 57% of the sector under stress and over 10% in distress.

Of more note is the widening gap between winners and losers in several sectors as some industries suffer while other outperform. "In most cases, outperformance is driven by pandemic-related consumer and business spending," Pototschnik says.

  • Most of the retail sector has moved from "stable" to "stressed," with over 52% of restaurants in distress—but large groceries are doing well, with over 43% in stable territory.

  • Similarly, IT services are suffering, with over 50% in distress, but digital devices and services are thriving, with over 42% stable. The numbers reflect the sudden and massive shift from office work to remote work.

  • Shipping companies are performing strongly thanks to the upsurge in e-commerce, with 32% stable, while 47% of logistics companies are stressed as the result of an overall slowdown in global trade.


"In several sectors, the gap between winners and losers is widening," Pototschnik says. "Some of this may be the result of pandemic-related behavior patterns that will normalize over time. But some of these patterns, such as the shift to remote work, may be long-lasting, and some industry sectors may be permanently reshaped."


Bankruptcy Rates Will Increase, Data Providers May Thrive, and Large Companies Have an Advantage

The Radar index does not predict future performance, and, as Pototschnik notes, "Prediction is made difficult by the complex dynamics of the pandemic. But the index, combined with our observation of certain macro trends, does suggest some outcomes." Among BCG's projections:

  • Bankruptcy rates will increase, partly as a result of the robust and trustworthy bankruptcy process in the US and North America.

  • Bankruptcy is already underway in retail and in oil and gas. Telecom is in distress, in part due to its high investment requirements. Restructuring will come to manufacturing as supply chain networks are revisited, but instead of bankruptcy, transformation may take the form of changes in market structures.

  • Severe uncertainty is driving an appetite for data; industries and companies that provide data and analytics are likely to be strong performers. Technology will perform well in the long-term, even if the nature of office work is fundamentally changed. Travel and tourism will rebound once a vaccine Is developed, trusted, and distributed at scale. Sectors such as retail that have deeper business model problems apart from the pandemic are likely to lag.

  • Size may also be a predictor of survival. Radar shows that large companies, even in distressed industries, have more upside potential. "There are reasons why this makes sense," Pototschnik says. "Large companies typically have healthier balance sheets. They have greater access to capital markets. They have more diversified product lines and portfolios. And they are less vulnerable than smaller companies to private-equity and activist intervention. All of these factors seem to add up to a greater margin of safety."


Companies Can Take Action to Improve Their Odds

Finally, individual companies can act to improve their odds for recovery. Separate BCG TURN research identifies the steps that leading companies take in times of crisis that lead to superior performance. Leading companies act proactively, investing in projects that generate short-term cash in order to fund long-term investments. They increase the pace of innovation, streamline the organization to maximize efficiency and capitalize on digital, and build crisis management and scenario planning capabilities to increase their resilience. "Companies that took these steps during the 2008–2009 financial crisis recovered faster and performed better than their peers," Pototschnik says.


"The COVID-19 pandemic is a massive historic event—it is stressing companies, industries, and national and global economies to the limit," Pototschnik says. "BCG TURN Radar indicates that that the stress is severe, and many organizations will be forced to restructure. But those that take a strategic view of restructuring and look at it as an opportunity to rethink their business stand a better chance of leading when the recovery ultimately arrives."


About BCG TURN

BCG TURN is a special unit of BCG that helps CEOs and business leaders deliver rapid, visible, and sustainable step-change improvement in business performance while strengthening their organizations and positioning them to win in the years ahead. BCG TURN helps organizations change their trajectories by turning their upside potential into radical performance gains. The BCG TURN team consists of transformation practitioners and battle-tested experts with a proven track record in large-scale transformation. BCG TURN is invested in the sustainable success of clients, with a focus on performance acceleration and a commitment to value delivered.


About Boston Consulting Group

Boston Consulting Group partners with leaders in business and society to tackle their most important challenges and capture their greatest opportunities. BCG was the pioneer in business strategy when it was founded in 1963. Today, we help clients with total transformation—inspiring complex change, enabling organizations to grow, building competitive advantage, and driving bottom-line impact.

To succeed, organizations must blend digital and human capabilities. Our diverse, global teams bring deep industry and functional expertise and a range of perspectives to spark change. BCG delivers solutions through leading-edge management consulting along with technology and design, corporate and digital ventures—and business purpose. We work in a uniquely collaborative model across the firm and throughout all levels of the client organization, generating results that allow our clients to thrive.


www.bcg.com