Surviving amid uncertainty

Surviving amid uncertainty

– Edición 482

Three businesspersons tell how they have overcome the economic crisis that the pandemic brought. Photos: Lalis Jiménez

Although the economic data from the first quarter of 2021 begin to suggest a light at the end of the tunnel, we are still in the midst of a full-blown crisis that has not stopped generating social impacts, such as high unemployment and inequality, while small and medium-sized enterprises (SMEs) are reinventing themselves as they try to recover

The economic crisis triggered by the sars-cov-2 pandemic has generated a series of social impacts that recall the worst hardships of previous recessions. Increases in unemployment, company shutdowns by the thousands, and steep drops in workers’ income quickly raised alarms of a potential new epidemic of unpayable debt, as occurred after the 2009 recession. The most recent indicators confirm a rise in defaults on bank loans, but at a moderate rate, while also pointing to incipient economic recovery. But concerns remain regarding the scope of the social effects of the latest recession, such as a rise in poverty and inequality, and this is the uncertain horizon that many small business owners are facing as they try to reinvent their activities to immunize themselves against the crisis.

More than a year after the official start of the pandemic (March 2020), doubts persist about the economic crisis that it sparked, and the lingering effects. How long will they last? What should we expect will be the biggest problems? How steeply will the economy fall, and how fast will it bounce back? Even if we can find clues in the past, the answers to these questions are not easy to determine, to a large extent because this time recovery depends on a public health factor: the pace of vaccination against COVID-19 and getting the pandemic under control.

Working in the catering kitchen that Juan Pablo set up.

“I believe there will be more and better opportunities, because I don’t think, unfortunately, that we’ve seen the last of the businesses going under. My estimate is that we still have about eight months to go before we touch bottom.” From this perspective, Mane Castillo looks into the future. Mane is an entrepreneur in one of the sectors that have been hit the hardest by the pandemic: gyms. In spite of the impact he’s endured, he asserts that “now there are more opportunities than ever, primarily because many industries are going to start reinventing themselves. As an industry, we’re also reinventing ourselves, integrating specific online services for our users, in order to attract more of them.”

Juan Pablo Franco, a partner in a small event caterer that had to transform itself in 2020 and now offers delivery for office workers, agrees that “the situation is still complicated; we’re not seeing the cash flow we’d like, but the important thing is that we still have customers. Screwed is when you have no customers at all. Being really bankrupt, I mean down and out, is when you have no customers and nobody is looking for you.” It’s something he’s already gone through, during the 2009 crisis when he had to close a restaurant. “But this time, you’ve still got customers. One crisis is very different from another.”

The testimonies from Castillo, Franco and Mónica Patricia Fernández, the owner of a small learning center that also had to downsize due to the crisis, offer insights into the way micro and small businesses are trying to ride out the new recession. Academics and researchers also offer clues for determining the real impacts of the economic storm that was unleashed by the pandemic.

After the anger passes, analyze opportunities

Mane Castillo, franchisee AnyTime Fitness gyms

I still have the good fortune to own a gym. However, my business used to be bigger, and now it’s been cut back by half. Before the pandemic I had a single franchise, and I had the opportunity, during the pandemic, to buy another one, so from August to September of last year I had two. But then the restricted hours came back, the shutdowns, the two or three emergency buttons we had, and that’s when I had to make the decision to close one of the two franchises. I was actually working on building another one—it would have been number three—but seeing the drop in users, in sales, in income, instead of opening a third gym I decided the close the second one, in order to rethink that third one I was planning to open, and concentrate on opening the second one back up again.

Right now I’ve got one franchise going, and the other one I plan to reopen at the end of May. For me, under the circumstances, it was the most sensible decision: drop that ambition of having three franchises, settle for two, regroup, lick my wounds, and aim for having three sometime in 2021, hopefully by the end of the year. I think I went through three or four stages on that roller coaster of emotions in 2020: first I felt anger; then came acceptance and something like introspection, when you’re thinking about what you’re going to do, and how you’re going to do it, and you start having ideas and creating something new. But the most important thing—and everyone knows this—is that where there’s a crisis, there are opportunities.

At a personal level, I decided to take all the opportunities that came my way, so much so that when the chance came along to buy a gym, I took it, and I don’t regret the decision. As an industry we’ve been reinventing ourselves, including new online services for our users, in order to attract more of them. My recommendation is that once you pass through the two stages of frustration and anger, start having ideas: analyze the opportunities that come along. In the end I always think: when it comes to making a decision, like a good Mexican, my strategy is to say, “What the hell, let’s dive in.”

The debt dilemma

When I proposed this report to magis, in mid-2020, the effect of the pandemic-driven economic shutdown could be felt strongly, both in the unemployment rate (which shot up from 2.9 percent of the economically active population in March 2020 to 5.1 percent in September) and in the loss of income: roughly 4 in 10 Mexicans saw their household income from work fall by 10 percent or more in just six months, while the higher-income population suffered a much smaller drop in their work-derived income (Nexos, November 19, 2020).

This combination of high unemployment, business shutdowns (over one million micro-businesses shut their doors in 2020, according to the inegi[1]) and the limited support from banks and the formal financing system, which at best offered their indebted users a deferment in monthly payments ranging from four to six months, led some of us to fear another default-driven crisis, like the one that affected thousands of Mexicans in the great recession of 2009, when the Mexican economy was also battered by the influenza epidemic.

Mane at the site of the new gym, under construction.

But the National Banking and Securities Commission (cnbv, in its initials in Spanish) reported that at the close of February 2021, the Default Rate of the loan portfolio of the banking industry and financial sector was just 2.68 percent, which represents 0.44 percentage points (pp) more than the level observed in February 2020, but less than the 2.7 percent registered in January; the Adjusted Default Rate, in the meantime, registered an annual growth of 0.73 pp, reaching 5.33 percent.

These data seem to align with certain indicators that point to the possible start of an economic recovery: for example, the unemployment rate dropped to 4.4 percent in March 2021, and almost 10 million of the 12 million jobs lost in 2020 have been recovered, according to inegi statistics. Forecasts of economic growth have also improved: the Treasury Ministry now excepts the Gross Domestic Product (GDP) to grow by 5.4 percent after it plunged by 8.5 percent in 2020.

“The COVID crisis has not triggered a debt crisis among Mexican families that is even remotely close to the crisis we saw in 2008-2009,” observes Dr. José de Jesús de la Cerda, director of ITESO’s Business School. “I don’t see that this crisis has cut as deep, nothing like what happened in 2008-2009, which was a worldwide crisis that hit Mexico hard. I don’t see insane levels of debt either, like the ones we had back then. I don’t see them in the United States, or in Canada, or in Mexico. But I do see the possibility of a debt crisis if income and unemployment are slow to recover.”

De la Cerda explains that “all catastrophic, pandemic-related events, from a social, public health, or economic viewpoint, have a similar impact on the big indicators, for example, on the employment picture, or on company shutdowns; but each one has different causes, which means that it impacts different variables. For example, I don’t think it makes sense to compare the economic effect of COVID-19 with the economic effect of the 2008 US debt crisis, driven by derivatives and financial debt in the real estate sector. I would say that the present crisis is nowhere near as deep in economic terms; in social terms, of course, there’s no comparison: the loss of human lives is an unmitigated tragedy. But in economic terms, the economies’ capacity to rebound – and I’m not talking just about Mexico, but about the T-MEC region in general—the responses are very different from what happened in 2008 and 2009.”

On this poster, hung on one of the walls at Colibrí, the teachers who once collaborated at the school and could not keep their jobs due to the fall in enrollment during the pandemic, wrote messages expressing their gratitude. Some of them had worked at the school for 17 years. Mónica says letting them go was one of the toughest things she had to deal with.

The specialist clarifies that “the 2008-09 crisis was a debt crisis caused by people taking out loans when they didn’t have credit capacity; that’s basically what happened: a bunch of people borrowed cheap money; it was being offered to them on easy terms, all they had to do was to show their voter’s card or their ID and they could borrow money. That could happen here, but I see a big difference: banks have grown much more cautious. The truth is that they only lend to clients who have financial solvency; banks don’t expose themselves to big risks, which makes it unlikely that we’ll be seeing a structural crisis, unless this situation is so drawn out that it drags the economy down.” However, he continues, “I don’t see that happening, because we hear about a certain number of jobs lost—some say it was 2 million, others say 2.5 million, different figures—but a few months later you hear that a million jobs were recovered. This means that economic activity bounced back quickly. The same thing applies to the creation of new businesses: almost 600 thousand in the last quarter. This shows that it’s not the economic conditions that the business sector is afraid of; it’s the public health conditions—they seem to have hope that vaccination will bring the situation under control. That’s my impression regarding the difference between the two crises: it doesn’t seem to me that the economic difficulties will last long enough to provoke an economic free fall.”

Dr. Ignacio Román, researcher in ITESO’s Department of Economics, Administration and Marketing (deam), warns that it’s not just the default rate that we should be keeping an eye on, but also the drop in income: “On the one hand, there’s evidence indicating that we’re not on the verge of a collapse, of a disaster that would make the debt situation implode, basically because interest rates are tending downward. In other words, what happened in the 90s with the FOBAPROA[2] crisis, or in 2008 with the worldwide crisis triggered by Lehman Brothers, was that interest rates rose, making the debt unpayable. Now we’re seeing basically the opposite: in general terms, interest rates are dropping, fundamentally because there’s no demand for credit, and also to ward off inflation. Nevertheless, there are also reasons to think that the problem could get worse, due essentially to the fall in household and business income.” Román warns that the payment deferral programs that banks have offered their customers “don’t mean that the debt is canceled; the big problem is that this [the crisis] is stretching out into the medium term, i.e., in the short term there’s no improvement in sight; in fact, there are more and more people who are earning less, as little as two minimum wages. This complicates things.”

While today “we’re in a better spot than in previous crises in terms of interest rates,” there’s also risk with regard to debtors, due to the financial reform passed in 2014 during the Enrique Peña Nieto administration: “It consisted of the banks offering lower interest rates and longer payment periods in exchange for being able to foreclose more easily on collateral, in other words, in exchange for making it easier for the financial system to go after your assets when you can’t make payment. This is extremely sensitive, because precisely the people hit hardest within the formal sector, the salary-earners who qualify for a credit card and used it to ride out the crisis, now find that their assets are on the line.”

The important thing is to keep having customers

Juan Pablo Franco, partner in a food-service business and insurance agent

I was part of a catering business that I’d started up. Another person who was part of the team was running things, and I began to work on another activity in a completely different line of business— as an insurance agent for personal health care and life insurance.

For many years we had contracts with businesses where we offered them catering and institutional food service. Then the pandemic started and the businesses cancelled all the services for their employees and for the people who rented office space. At the beginning of March, we were looking at zero income. The first thing was to take a deep breath and look objectively at our situation.

Obviously, the expenses were still there. In early April we decided to start up a take-out service and offered it to all the customers we already had; we also started to fill grocery orders, and offer a week’s worth of meals, that kind of service. Maybe it wasn’t so much about surviving as letting people know that we were still in business, that we were still out there. We also started putting together meal packages for ten people or so, including drinks, food and even dessert, delivered right to your doorstep.

In May we had to take out a bank loan to be able to hold on to our location; otherwise we would have had to shut down everything and go home and cook in our own kitchens. But we have a semi-industrial kitchen, fully equipped, and that wasn’t easy to give up. In August things started moving again, but of the money that came in, we didn’t see a penny: there was nothing left over between the administrator and myself to keep as profit—everything went to paying off the loan, plus rent and wages for five employees.

What really hit us the hardest was that last emergency button, when the new year was just getting started, because at that point a number of businesses could no longer afford our services, so we lost some income. We had to shut down the kitchen we had in the Santa Tere neighborhood; we’ve set up operations provisionally out by the Benito Juárez auditorium, and we’re still in business. Some of the companies that hired us to provide institutional food service no longer offer that service to their employees, but the workers themselves continue to order their food from us.

It’s still a complicated situation. We don’t have the cash flow we’d like, but the important thing is that we still have customers. On the bright side, 2020 was a good year for insurance.

More poverty and inequality

The “basic basket” of 121 basic necessities is the object of study for Dr. Héctor Iván del Toro Chávez at the University Center for Economic-Administrative Science of the University of Guadalajara. In April 2021, the basket cost 6,441 pesos a month, enough to feed an average 4-member family. But this family requires another 11,791 pesos on average to pay for other essential services; this means it requires almost 4.28 minimum wages. In 2019, 28.5 percent of the working population in Jalisco earned on average between one and two minimum wages, but now the figure is 38.3 percent of Jalisco’s population. “We’re looking at a larger portion of the population living in precarity because these households bring in less than 8,000 pesos a month.”

Del Toro contends that “families’ private consumption is associated in practical terms with the fact that starting in 2020 we are seeing a potential increase in our country’s situation of poverty, a fall in people’s purchasing power.” He adds that the impact of poverty and debt on people’s household economy could begin to make itself felt in April of this year.

Christian Domínguez, a research professor in deam at ITESO argues that we must pay attention to the rise in economic inequality, which will be “the most important consequence of this crisis,” and that it can already be seen in the cnbv’s own data: “If we compare February 2020 with February 2021, the commission itself affirms that the performing loan portfolio has fallen 1.98 percent annually: the fall is actually quite small. We could say that among the items that fall the most is the business loan portfolio, by roughly 4 percent, a drop in the performing portfolio for business or commercial activity, and in consumption it’s almost twice as much—8 percent.”

The teachers at Colibrí have been creative in adapting their courses for distance delivery. All of them, for example, teach their classes from the school so that they have all the materials they need, and during the class they can also count on the support of a co-worker who handles the platform while they concentrate on teaching the class and engaging the children’s attention.

“We take as our starting point the fact that the number of loans has fallen, both business loans and consumer loans—which include personal loans, payroll loans, car loans. However, if you take a close look at housing loans, you’ll be surprised because they grew by 16.6 percent annually, from February 2020 to February 2021. So you ask, ‘What’s going on here, considering that we’re in the middle of a public health crisis that has sparked an economic crisis and unemployment? How can the housing loan portfolio be growing?’ Well, as it turns out, what has grown is mid-level and residential housing loans, in other words, properties that cost more than 400,000 pesos; this category of loans grew by about 19 percent, and what dropped is loans for low-cost government-subsidized housing— by 10 percent, to be precise. This means that people who work, say, for the government or companies, and who managed to hold on to their jobs, have been able to increase their savings and thus, by keeping their job, they have access to loans of this type.”

The specialist makes a point of emphasizing the severity of the situation: at least 647,000 of the jobs lost in 2020 have not been recovered. “These are people who work primarily in the service sector, such as restaurants, hotels, movie theaters. Their salary is not large, and in this sense, it’s the lower-income brackets that have been hit the hardest. They lose their job, and since they’re already in a vulnerable situation, they scramble to get by in the informal sector, where they end up losing labor rights over the course of the crisis,” which will affect them in the long term.

Domínguez asks us not to forget “the people who unfortunately fell ill [with COVID-19], who were forced to take out loans and have had to sell their house, their car, meaning the crisis has taken a bite out of their assets. Another thing that we can’t see clearly in these cnbv numbers is that many of these people who lost their job or who are working in the informal sector and who fell ill, most likely had to resort to informal sources of financing, and that’s not easy to detect. These informal loans charge interest at probably twice the rate of the formal financial sector. That’s another problem.”

Let’s invent something new!

Mónica Patricia Fernández, director of the Centro Pedagógico Colibrí

Colibrí is a kindergarten that opened its doors in 1989; I’ve been directing it for the last 15 years. It has always operated as a pre-school with an extension offering nursery school and child care services. In recent years it grew considerably and we opened a second location. Then COVID-19 showed up.

In March 2020 we closed our doors and went home, figuring the situation would last two weeks, a month at most. As it stretched out, parents started telling us that they were struggling with unemployment, and they began to withdraw their children, in the hopes of being able to return when their circumstances improved. It was like dominos falling: I had 107 students on March 13, 2020, and by August, when the next school year began, I was down to 47.

All of us teachers took a 20 percent pay cut when we saw the trend, and when even more kids left, we had to go to 40 percent. I got a federal subsidy of 25,000 pesos to make Social Security payments, and then a state subsidy of 10,000 pesos for each employee registered with Social Security. That gave me some breathing room, but only for a month.

What do I have in my favor, compared to other schools that only offer pre-school? For one thing, I have a child care license, and child care facilities were authorized to operate. Given the possibility of opening, what did we have to do? Research the best protocols, and then speak with the parents who had decided to pull out their children. We sent them the protocol, and they agreed to it. One decision I did have to make during that time was to shut down one of my two locations and carry on with just the one.

Some parents had to close their businesses, and others had to reinvent themselves: the same thing that we’ve all tried to do—change our product line. That’s a common denominator in teachers—because I’ve seen it in most of my colleagues—this willingness to adapt, because that’s the way teachers are: they create, they reinvent, and that’s what I’m seeing now in my teachers. They’re doing amazing things online. It’s like we’ve managed to change our mindset, and say, “OK, enough whining, this is never going back to the way it was.” We’ve changed our chip, and we’re excited to say, “Let’s invent something new!”

SMEs that have survived

In this scenario of uncertainty, thousands of micro, small and mid-sized business (MSMEs) are trying to survive. Some of these entrepreneurs have experience from previous crises, which gives them an advantage when it comes to analyzing the current situation. One of them is Juan Pablo Franco, who suffered the impact of the pandemic because his business, an event-catering service, is in one of the sectors hit hardest by the shutdowns. His business emerged from the rubble of the 2009 recession, when he had just opened a new restaurant, and “influenza came and knocked the whole thing down,” he recalls. “But that was completely different, nothing like the current crisis: that was a week or two when things got complicated. That restaurant was not successful and I closed it after a year, but people who came to eat hired me to cater events. I told them, ‘Look, my commitment is to you. You tell me the place—it can be in your driveway if you want—and I’ll take care of the food, tables, chairs, waiters: I’ll set up the whole restaurant right there.’ And that’s how I got started in the catering business.”

This business took off, and Franco eventually had to rent commercial space in the Santa Tere neighborhood of Guadalajara in order to provide service to the many event planners who sought him out. But then the pandemic lockdowns forced him to transform his activity, and now he’s moved to a small kitchen near the Benito Juárez Auditorium, where he offers daily food-delivery service to office workers and companies.

“Instead of taking on debt, I preferred to remake the business,” says Franco. His experience has taught him that “you’re broke, you’re really down and out when you have no customers left and no one is looking for you. That’s what I experienced in the last few weeks of the restaurant: there was simply nothing to be done.”

Juan Pablo used to have a kitchen at this location, but he had to move to keep expenses down.

Another sector that has been hard hit by pandemic lockdowns is the private school sector. For the last 15 years Mónica Patricia Fernández has run the Centro Pedagógico Colibrí, which offers child care and kindergarten. In order the stay afloat and continue serving its 50 children (in March 2020 it had 107 youngsters enrolled), this year the school shut down one of its two locations. “The 2009 crisis had a bigger impact in numerical terms, but I was in better shape for this crisis than for the last one. It took me years of effort to get Colibrí on its feet, years of struggling with just a handful of kids enrolled. When that crisis hit, I had all of 14 students, but very little staff. This time my operation was bigger, better organized, with a better team of collaborators, so the crisis didn’t catch me so off guard, even though it hit harder.”

Even though the Centro Pedagógico Colibrí had to “downsize” by closing one of its locations, it’s now dealing with an uncertain future “debt-free. I never considered taking out a loan because, given such an uncertain panorama, I felt I couldn’t take on the commitment of making payments on something that wasn’t a sure thing. For my personal needs, I admit to using the credit card to pay my daughter’s tuition and other family expenses, because I cut back my own salary in order to give priority to my teachers.”

Mónica Patricia Fernández recognizes that “another problem is the overdue portfolio that schools like ours have been left with; that really put me in a tight spot, because normally I charge the month of July and there were parents who took advantage of the pandemic: they already owed me four or five months of tuition, because I would offer them financing, and they took advantage of the confusion and simply disappeared without paying.”

Poncho, Érik, Lupita, Ismael, Ale, Aldo Michel and Mane. They form the AnyTime Fitness team. Mane says that during the economic difficulties brought on by the pandemic he did everything he could to keep the whole team working, and although it was hard, no one lost their job. “We’re like a family,” he says.

Aside from the cancellation of social events and in-person classes, another class of businesses left reeling in the pandemic was gyms. Mane Castillo owns a franchise of the AnyTime Fitness brand, which he had to close in March 2020 due to the lockdown ordered by the authorities. “I honestly thought it would blow over in two or three months. Chalk it up to uncertainly or my lack of information, but I figured it would be like the influenza outbreak in 2008— it would last 45 or 60 days, and that would be it. I was planning how to start back up in late May or early June. My emotions at the end of April were like a roller coaster: I realized that my business unfortunately was not going to survive, and I started making plans for my own survival, because I bought the business through financing, and I’m still paying off the loan.”

But “as time went by, we were given a chance—like most small businesses, I think—to renegotiate many things on a personal level; I managed to renegotiate my rent, plus a lease I had, and loans. My businesses are franchises, so we also succeeded in renegotiating the royalty payments to the franchisor.”

Even though he had to cut back his business plans last year, Castillo has not given up on his goal to open a new franchise in 2021. With respect to debts, “I owe less than I did before this all started, and I’ll tell you why: when I needed it most, I went looking for help to Lord knows how many institutions, and not a single one could offer me a solution. There’s no telling whether it was for the better or for the worse—maybe now I’d have a business unit open, but maybe it would have been a bad idea. I tried to take out loans, and I applied for the support offered by the Jalisco state government; unfortunately, my name was never drawn. I know people who did get the support, but I didn’t. What I can tell you for sure is that I haven’t taken out a loan in the last 12 months. I just applied for one to buy new equipment, but I feel good about it.”.

[1] Geography and Statistics National Institute in its initials in Spanish

[2] Fondo Bancario de Protección al Ahorro in its initials in Spanish

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MAGIS, año LX, No. 499, mayo-junio 2024, es una publicación electrónica bimestral editada por el Instituto Tecnológico y de Estudios Superiores de Occidente, A.C. (ITESO), Periférico Sur Manuel Gómez Morín 8585, Col. ITESO, Tlaquepaque, Jal., México, C.P. 45604, tel. + 52 (33) 3669-3486. Editor responsable: Humberto Orozco Barba. Reserva de Derechos al Uso Exclusivo No. 04-2018-012310293000-203, ISSN: 2594-0872, ambos otorgados por el Instituto Nacional del Derecho de Autor. Responsable de la última actualización de este número: Edgar Velasco, 1 de mayo de 2024.

El contenido es responsabilidad de los autores. Se permite la reproducción previa autorización del Instituto Tecnológico y de Estudios Superiores de Occidente, A.C. (ITESO).

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