The lost generation?

From LEGO to Walmart to LVMH Moet Hennessy, family businesses account for as many as two thirds of all companies worldwide with some, like Hoshi (which was founded in 718), dating back well over a thousand years. These businesses have weathered pandemics, financial crises and waves of industrialization.

However, 2020 was different. The COVID-19 pandemic has hit most companies hard. While many family enterprises – by which we mean a business that is dominantly controlled by a family with the intention to sustain family control across generations – have honed and developed the capability to survive shocks, the current crisis has been unique in its complexity and has challenged even the most resilient and adaptable firms.

At the end of March 2021, after 60 years of providing four-star accommodation in Zurich, the Glärnischhof will close due to the effects of the pandemic. A 95% drop in revenues was more than the hotel could bear. Its owners have spent recent weeks trying to find jobs for their employees and a new business for themselves. In fact, since the crisis began, notably the worst peacetime global contraction since the Great Depression, half of Switzerland’s restaurants and hotels have been threatened with ruin.

Of course, Covid’s impact has not been confined to Switzerland. The shutdown of tourist attractions such as the Louvre, London theaters and Disney World, has had a serious impact on the small hospitality businesses which depend on them. The closure of ski lifts and restaurants in resorts in Italy and France, as well as the shutting down of café culture in cities such as Paris has also been devastating. This year a majority of the world’s economies is forecast to register per capita incomes below 2019 levels, and this outlook is expected to only slightly improve next year. This will have a disproportionately high impact on family firms, which own a high percentage of hospitality businesses.

Governments have stepped in with financial injections to help stave off immediate bankruptcy and mass unemployment. However, this might not be enough. Estimates of the number of “zombie firms” in the Eurozone ran as high as 13,000 a year ago. Many are propped up by governments, loans, and suspended bankruptcies. These support measures had a surprising side-effect: a decline in the number of bankruptcies, at least in the short-run. In this environment, firms with the means to pursue acquisitions will find a rich choice of good assets at bargain prices.

A survey by the Canadian Federation of Independent Business forecasts that a third of independent hospitality businesses there will close due to the COVID-19 lockdown. A worst-case scenario by the consultancy McKinsey for the US hospitality sector suggests revenue in 2023 might be 20% below 2019, however Bloomberg’s Bankruptcy tracker racks up an ever higher incidence of hotels that cannot be saved. Only those that survive may end up content with a fifth less.

In Japan, the number of hotel bankruptcies jumped by more than 50% to 118 in 2020. In the UK, job losses in the hotel sector exceed 600,000. From the 240’000 small businesses in New York, up to one-third are estimated not to reopen ever again. Many of these small businesses are family-owned restaurants, cafes or niche corner shops.

The situation is dire and could mean the end of many long-established family-controlled hotels and restaurants, unless there is an orchestrated effort to protect the sector and a willingness by owners to adapt to change.

What has happened to the resilience of family businesses?

The foundation stones of a successful business include taking a longterm perspective, being financially prudent, sticking to core values, and having an entrepreneurial spirit. Family-controlled businesses have been shown to be more focused on the long-term than others. Senior executives tend to stay longer than in publicly traded companies and this protects unique institutional knowledge that can be beneficial in a crisis.

Family concerns usually spend and invest carefully and are less likely to pick up debt capital, leaving them with resources to use as a buffer in difficult periods. They tend to use entrepreneurial means to spark renewal during generational transitions.

But while these traits may have encouraged longevity in the past, the fallout from the current crisis has left family firms under great stress. They need to revive their entrepreneurial spirit and look to examples of success set by innovative industry start-ups.

Agility, business model innovation and entrepreneurialism

Within the hardest-hit sectors, the crisis has widened the gap between those able – or not – to invest in digitalization and a fundamental reimagination of their business model. Many family-controlled businesses risk of falling behind on digitalization. “COVID-19 has wiped out 10 years of hotel job growth,” observed Chip Rogers, President and CEO of The American Hotel and Lodgings Association. The sector needs rethinking if a wave of bankruptcies is to be avoided. To combat such seismic change, businesses must adapt.

Even disrupters such as Airbnb have been hit by the slow down. They are facing demands for, as Booking.com puts it, “higher transparency, flexibility and value for less”. There is much to learn from these online giants. For example, Airbnb reoriented its offering with great speed and refocused on helping people escape the pandemic in cities by offering countryside getaways. Thanks to this ability to change quickly, the company enjoyed a successful IPO late last year.

Clearly, there are limits to transforming a small, local business; a family-owned hotel may be compelled to stay local. Even so, learning how to make decisions that enhance customer value requires entrepreneurship and adaptability. Remaining too traditional and cautious could put the company in peril.

Fortunately, research has shown that family-controlled businesses outperform rivals in innovation and efficiency. Like small speed boats, they have far greater flexibility than the giant chains which are more like super tankers. Superior customer loyalty is also a huge advantage.