The rental of real estate and staff payrolls are two of the main fixed expenses of any business, to which other variables are added, such as electricity, water and gas supplies or suppliers, and taxes such as Economic Activities or that of Real Estate. Now that many businesses’ survival policy calls for cutting bills, what options are there?
Many companies negotiate monthly payments with their landlords and have launched temporary employment regulation (ERTE) files to freeze spending on personnel. The Government approved in April a royal decree on economic measures that, among other innovations, enabled a mechanism for the renegotiation and postponement of the rental of commercial premises for up to four months.
But what can be done with other expenses like supplies and suppliers? Experts agree that the margin is scarce in sectors such as hospitality, retail textiles, hotels and small local businesses, which account for just over a quarter of Spain’s Gross Domestic Product (GDP). But it is convenient to check, for example, that the energy tariffs are adjusted to the real needs and renegotiate the contracts with the suppliers, in addition to carrying out an exhaustive cash control, which eliminates everything superfluous. Only then will they be able to buy if they have sufficient liquidity to allow them to resume business.
This sector represents 6.2% of GDP and employs 1.7 million people in Spain. So the fall in activity from 9% in January to 5% in just two months is going to affect a large nucleus of the population, as reported by Pulso, Banco Sabadell’s tool that allows us to know the evolution of consumption and of commercial activity.
Pulse Charts comparing the sectors with the highest activity in January and March 2020. Source: Banco Sabadell.
According to Hostelería de Madrid, employers in the sector in the capital, an average cafeteria has a spending structure of 30% in raw materials, 25% in personnel and 20% in general fixed expenses, for a commercial margin of 25%. According to the report Impact of Covid-19 on Hospitality in Spain, prepared by the Bain & Company consultancy and EY (formerly Ernst & Young), bars, cafes and restaurants stand out for their very low liquidity: 50% of these businesses barely endure a month of fixed operating disbursements.
The rent payment has an important weight in the expenses. The owners of these premises are, for the most part, individual owners, so reducing the cost of leasing during the de-escalation phase will depend on whether the negotiation between the owner and the business is successful. The Government decree law enables natural or legal persons lessees “of a lease for use other than for industry or housing” can request a moratorium on payment, provided that it is a public company or a large holder (owner of 10 or more urban properties or one of more than 1,500 square meters, apart from garage spaces or storage rooms). In the case of a small owner, the deposit will be allowed as payment, although it will have to be replaced in one year.
In the personnel chapter, ERTEs will operate as a life table for certain establishments, although 70% of these businesses belong to self-employed workers and companies with fewer than three employees, already with strongly adjusted workforces.
Capacity restrictions during de-escalation will allow a cut in supplier spending due to the drastic reduction in consumption. Establishments that have invested in aspects such as savings in lighting and air conditioning, that have adequate tariffs in the supply of gas and electricity or that have incorporated efficient technology in energy consumption for cold stores and household appliances will be better prepared to face this situation. For this reason, it is advisable for the hoteliers to verify that the energy rates are adjusted to the needs of the activity and the proper functioning of the household appliances, in order to reduce the bill.
The fashion industry
Accompanying the exit of the ERTE with the curve of the influx of consumers is one of the solutions proposed by this business, which accounts for 3% of GDP and which has already been heard by the Government. The cut in personnel costs will be common in the coming months. Activity in the sector has gone from 6% of turnover in January to 2% in March, which is also a significant drop, according to Pulso data.
Also here the price of the rents supposes an important item of the expense. Despite the moratorium approved by the Executive in April, many companies assure that they have not been able to avail themselves of it. 103 commercial brands from various sectors, which bring together 9,000 commercial stores throughout Spain, have developed a joint initiative to explain their situation to the Government and to help them renegotiate their contracts.
Fashion firms have a great stock that they have not been able to sell during the closing of the stores at street level and in shopping centers. According to Javier Vello, partner in charge of Retail & Consumer Products at EY in Spain, “if the product is very trendy, they will hardly be able to move it towards the autumn season or the following spring / summer season. Hence, their goal now is to convert that product into money, even if that means sacrificing profitability in exchange for selling it quickly. In the last days almost all the chains are making strong discounts on the purchase on-line”.
According to Vello, other spending cuts are complicated in this sector because it has already been adjusted a lot in recent years. In the energy field there is little margin, since the establishments have been converting themselves towards efficient consumption. In the last decade, these businesses have sought to reduce this type of expense since the consumption of clothing and footwear by Spaniards has not recovered to the levels prior to the economic crisis. “2019 closed with a revenue volume of 16,000 million euros, 20% less than in 2007,” says Vello.
This expert believes that there will be “a great transformation, in which the digital conception of the business will gain more and more weight” and he predicts a significant closure of stores. Without a doubt, the most drastic of possible spending cuts.
ERTE is the most listened to acronym among hoteliers, and the workforce cuts will be accentuated in the future, predicts Jorge Marichal, president of the Spanish Confederation of Hotels and Tourist Accommodations (Cehat). The crisis will accelerate the arrival of more innovation in this sector, which is part of the tourism industry and accounts for more than 12% of GDP. Investment in technology will make certain tasks cheaper, “such as checking virtual ”, Marichal points out.
In Spain, according to Cehat data, 70% of hotel managers do not own the property. “In many cases they are renegotiating the rental contracts with the large owners. Some have reached agreements with a variable percentage, which is adapted to the times and conditions of the de-escalation ”. In the case of entrepreneurs who are managers and owners of the property, the alternative that Marichal is considering to alleviate spending is to ask for “a year of grace on the mortgage.”
The vast majority of the costs of a hotel are fixed, including fiscal expenses, such as the Economic Activity Tax or the Property Tax (IBI). “Until we recover air connectivity and people don’t start traveling, having certain hotels open is almost absurd,” says Marichal. “The income from the room that is not sold today can no longer be recovered, even if it is sold tomorrow.”
Graph that compares to May 8 the evolution of spending (%) of foreign citizens of all nationalities (dashed line) month to month 2020; the gray lines correspond to different nationalities of tourists. Click to enlarge. Source: Banco Sabadell.
To quantify the fall in foreign tourist activity, Pulso provides a comparison between the average expenditure of foreign citizens in Spain during the last 30 days and that of the same period in 2019, and the figures show the drastic change in the situation: it represents only the 8%. This translates into a 92% drop in revenue.
Small proximity business
The corner dry cleaner, the neighborhood hardware store and other similar businesses have experienced dramatic days. Neither digitization nor teleworking are effective remedies here to reduce trade spending, which accounts for 13% of GDP and contributes 17% of employment.
The ERTE is the figure that many establishments have embraced, which have reduced their personnel to a minimum, considers Pedro Campo, president of the Spanish Confederation of Commerce (CEC). To reduce spending, one of the claims of the CEC – which groups 450,000 merchants, most of whom are self-employed, with 1.3 million employees – is the moratorium on the payment of contributions to Social Security for six months. The ministerial order was published at the end of April and allows companies and freelancers in 12 economic sectors (such as agriculture, graphic arts, hairdressers and beauty centers or advertising agencies) to suspend for half a year without any interest social contributions. Pedro Campo regrets that a large part of the small business sector is excluded from this aid.
Regarding the payment of rents, “the vast majority of the premises are owned by former merchants who rent them as a complement to a low pension,” Campo explains. The Government’s moratorium on the payment of rents can alleviate the chapter of expenses for SMEs and the self-employed, which would extend during the state of alarm and its extensions and, at most, to the following four monthly installments.
For Pedro Campo, from CEC, it would be ideal “to adapt the rental price to the real circumstances of sales while the health crisis lasts”, beyond these first months, although he admits that “the responsibility of the current situation ”.
The City Councils are offering the delay of the payment or the bonus of other important fixed expenses such as the IBI, the terrace tax or the garbage tax. This can be a respite for many businesses that need liquidity.
Regarding variable operating expenses such as electricity and gas supplies, the Government enabled in March the possibility that companies, SMEs and the self-employed postpone the payment of these services.
Aside from these legally enabled options, merchants will need to have a thorough control of their finances as well as their accounts with suppliers to keep the business afloat until the situation is more favorable.
- Although the casuistry is infinite, some tips can be put into practice by all businesses.
- Bring accounting to detail with an exhaustive control of expenses through a software management that integrates everything from production and logistics to stocks, is decisive in times of crisis.
- The review of electricity, water, telephone and other bills can bring surprises. Perhaps there are lines that are not used or that the rate is not adapted to the needs of the business. It is also worth reviewing the energy efficiency of household appliances.
- The reduction of paper and all that it entails (printers, toner and others) optimizes the cost, as well as the digitalization, including here the telework, which allows to reduce the consumption of supplies in the headquarters.
- The use of social networks as a showcase for company activity can also contribute to savings.
- Reducing costs in customer meetings and planning work trips early is vital to minimize bills. By doing it right, you can save up to 50%.