Des Moines businesses seek survival strategies in unprecedented service-sector recession
Exile Brewing Co. owner R.J. Tursi parked his Toyota Tundra in a Beaverdale driveway one afternoon last week, manifesting a business model for the age of the pandemic.
A blue buff pulled over his mouth, Tursi lifted a case of Ruthie, his brewery's signature lager, from the back seat. He knocked on the glass door of the brick home on Raymond Drive.
"Can I see an ID?" he asked from the stoop.
Laura Rempfer, a seventh-grade language arts teacher at Callanan Middle School, cracked the door. Her black lab mix, Django, barged forward and tried to scamper through. Rempfer clutched his collar with her right hand and swept a leg in front of him, socially distancing her dog.
With her gloved left hand, Rempfer poked her driver's license through the crack. Tursi examined it and set the case of beer down in front of the door.
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He thanked her and drove away. It was the second of the day's three deliveries, a service he began when the governor ordered all bars closed two weeks ago because of the spread of coronavirus.
"A drop in the bucket," he said of the money he's making from the prepaid beer deliveries.
The United States is in a unique financial downturn, Gabriel Mathy, a professor of economic history at American University, told the Des Moines Register. Governors are trying to limit the spread of COVID-19, and businesses such as Tursi's are absorbing the first blows.
Downturns in the economy have typically started with complicated economic problems. A housing price bubble bursts, a tech bubble implodes, oil prices spike; inflation grows too fast and regulators run up interest rates to bring it back under control, cutting off borrowing in the process.
But food and services businesses usually weather downturns relatively well, Mathy said. Although consumer spending dropped halfway through the Great Recession, it remained flat or actually grew in the seven most recent prior economic downturns.
Families might not buy a home or a new car during tough times, but they still go out to eat. Working stiffs still unwind at the bar. Hair still grows.
Mathy said it's factories that generally suffer in these periods, as stock prices drop and executives stop investing in expanded production.
But a moment like this, with government-ordered shutdowns and Main Street businesses losing almost all of their revenues overnight, presents a new challenge for policymakers, Mathy said — one that inspired the quip by President Donald Trump that "We can't let the cure be worse than the disease."
The first problem in this rare moment, Mathy said, is that service-sector businesses can't store a product for later like a goods producer can. A vehicle manufacturer can set aside new cars, knowing families will eventually purchase them when the economy recovers. A waiter won't get last week's lost tips back.
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The services sector also employs a lot more workers than manufacturing. In Iowa, about 80% of nonfarm jobs are in services, according to the Bureau of Labor Statistics.
Already, this sector is seeing the most damage. Of the 99,000 Iowans who filed unemployment claims in the past two weeks, by far the most in state history, about 25% came from the accommodations and food services industries alone, according to Iowa Workforce Development.
"One could imagine how devastating job losses could get," Mathy wrote in a paper last month, predicting a widespread recession.
Time is money. Time is lost.
At Exile, the highest profit margin is on a glass of beer sold at the bar. That option is off the table now.
Another problem? The brewery released a new double hazy IPA with samba hops in its pub on March 13, four days before the governor's order to close all bars. The beer will keep its intended flavor for only two months, Tursi said. Eventually, the hops shift from a citrus taste to something resembling green tea.
Tursi has retained the managers for Exile's restaurant and pub. But he couldn't afford to keep other employees. Rent, utilities and loan payments are still due.
And even when Reynolds eventually lifts her order — last week, she extended the shutdown of bars and dining rooms through April — Tursi does not think business will return to normal. Either because of fear or a government edict, he does not expect to host as many as 250 people inside the restaurant like he used to.
He also does not expect a spike in consumer spending to make up for lost time.
"People eat, generally, three times a day," he said. "It's not like, when this is over, people are going to come out and eat more than they were. They're not going to eat five times a day. This is all sales that are just being lost."
The beer deliveries are a way to recover at least a small fraction of those sales, he said. Other businesses also are trying new approaches.
Horizon Line Coffee is delivering cold brews to customers' homes in the mornings. The Bartender's Handshake; Hello, Marjorie; and El Guapo's Tequila + Tacos are selling cocktails for curbside pickup. Bubba, the downtown Southern restaurant, is offering an extra $10 in value for every $50 gift card.
Jordan Peterson, the owner of Paramount Barbering Co. in the East Village, began screen printing T-shirts, hoodies and hats last week. He may start charging for online haircutting classes.
"I've always considered myself safe from the economy," Peterson said. "People will always need a haircut. This never crossed my mind. And it's the only thing that could affect our business."
Last fall, when Jamie Nicolino opened The Collective, a sustainable goods store on Southwest Fifth Street in Des Moines, she expected to slowly build relationships as shoppers trickled in, creating a loyal customer base from face-to-face interactions.
She quit her previous full-time job as a fundraiser at EveryStep Care & Support Services in February to spend more time focusing on the shop. Two weeks ago, with customer traffic dead, she finally was able to open The Collective's online store. She hopes to keep the business above water until Des Moines opens up again.
"It's like survival of the fittest," she said.
Small businesses often already unstable
Many Americans aren't in a position to weather a natural disaster or pandemic on their own. About 40% don't have enough money to cover an unexpected $400 expense, according to the Federal Reserve.
Most small businesses are similarly unstable. About 70% have debt, according to the Fed. A JPMorgan Chase & Co. analysis found that 50% have just enough funds to cover one month of typical expenses, such as rent, utilities and payroll.
Nick Tillinghast, a partner at the company behind the East Village's Bellhop and downtown's Hello, Marjorie, said his landlords and bankers have been "understanding" when he asked for extensions on payments. He is also trying to take advantage of small business grants available through the Iowa Economic Development Authority, as well as forgivable loans established by Congress in its $2 trillion stimulus package at the end of March.
"We've applied for everything," he said. "Now, it's just a waiting game."
Iowa State University economist Peter Orazem said regulators and politicians can't follow a familiar playbook during a recession like this. Typically, the Fed tries to spin the country out of a downturn by enticing investors and corporations to spend more money. It cuts interest rates, making loans cheaper. It buys government bonds from banks, giving those banks more cash to lend quickly.
It took those familiar measures last month. But Congress has also stepped in more aggressively than it did during the housing crisis, pumping money straight into the pockets of consumers and small business owners.
As part of the stimulus package, the federal government is sending $1,200 to each taxpaying (or Social Security-receiving) adult — plus another $500 for each child.
The federal government also is boosting unemployment insurance, paying almost every recipient an extra $600 a week. In some cases, workers will make more money than they did when they had jobs.
"The workers will probably do better than their employers," Orazem said. "They have access to unemployment insurance. The owners don't. The workers may be able to switch to jobs in other sectors."
The federal government is offering forgivable loans for small businesses, designed to help owners make payroll for about 2½ months. (Although the Small Business Administration said banks could start issuing loans last Friday, several banks have said the federal government had not offered enough guidance on how to administer them.)
Orazem said the funding is supposed to keep consumers and businesses afloat as they wait until it's safe to leave their homes again. But in the midst of an unprecedented event, he said, economists don't know whether the idea will actually work.
Narayana Kocherlakota, a former president of the Federal Reserve Bank of Minneapolis, told the University of Rochester in an interview last week that he believes Congress' bailout was "too limited." He said he thinks households need more money, as do state and local governments.
"The package has been written with the idea that we’re going to be largely out of the woods by the end of June," he said. "My own forecast of the economy is less optimistic. Congress will have to come back to do more. We will have to go higher than $2 trillion."
Does pain 'trickle up'?
In a typical recession, the working class and small businesses are gradually affected, said Mathy, the American University professor. As investments dry up, factories produce fewer products. Eventually, a company lays off employees.
Now, economists wonder if the opposite could happen. Shops have closed on a massive scale, and the people who worked there have lost their jobs. At some point, as they run out of money to buy manufactured goods and other products, will the downturn spread to businesses not directly affected?
More economists are beginning to take a pessimistic outlook. The Congressional Budget Office, the research arm of Congress, released a forecast last week that the country's unemployment rate will crest above 10% this spring. The researchers expect the unemployment rate to still be 9% at the end of 2021.
In a letter to investors published Monday, JPMorgan Chase CEO Jamie Dimon predicted a "bad recession" with "stress similar to the global financial crisis of 2008."
Thomas Root, an associate professor of finance at Drake University, worries the downturn could last several months after the social distancing measures end. Even if workers quickly find new jobs, their paychecks will go toward rent and months-old utility bills.
And like Exile's Tursi, he thinks some people, still scared of the virus, will resist returning to restaurants and shops.
"The question is whether or not demand for the services and goods supplied returns to its old level," Root said.
Michael Hicks, a Ball State University economist, is more optimistic. Although a record 6.6 million Americans filed for unemployment insurance two weeks ago, Hicks said workers can find other jobs, even now. Companies such as Hy-Vee, Walmart and Amazon are hiring.
Factories, meanwhile, have shifted production to make personal protective equipment such as disposable gloves and face shields.
More important to an economic recovery, Hicks said, are the higher-income Americans who can work from home. When it's safe to leave, he believes they will return to old habits, such as dining out and buying beer by the glass at microbreweries such as Exile.
A restaurant down the block may not survive. But another restaurant — filled with waiters, hosts and chefs — will take its place.
"I can see us having a pretty big party when we come out of this," Hicks said.
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