10/13/2020
A month or so ago, or about five years ago in COVID time, I was listening to a discussion on CNBC among stock market analysts. The topic was the divergence between markets and the economy. Why were markets doing so well while the economy was doing so poorly?
One of the analysts pointed out that the total dollar volume increase in the stock market since its low point in March was virtually identical to the amount of stimulus money that the government and the Federal Reserve Bank had pumped into the economy. Coincidence? Probably not.
But it’s not the whole story. Another analyst argued that the difference between the stock market and the economy is the average size of the companies included in one versus the other.
There are 5.6 million businesses included in the American economy, 98 percent of which employ fewer than 100 people. The stock market is primarily made up of the 500 largest U.S. companies, which have an average payroll of 52,810 people.
Big companies live in an entirely different financial world than most small companies. They have access to capital from a variety of sources, and many of them have huge reservoirs of retained earnings that they can use for acquisitions, expansion of production facilities, or a rainy day.
Not every big company is in good shape, of course. Those that aren’t doing well include a raft of big-name retailers who were in bad shape pre-COVID, plus those whose business relies upon crowded, enclosed spaces, such as theaters, airlines and cruise lines.
In general, though, bigger has been better. Among the so-called FAANG companies (Facebook, Apple, Amazon, Netflix and Google), business has never been better, and all five were at record-high valuations by the end of July. In mid-August, Apple became the first company to exceed $2 trillion in market capitalization.
That’s nice for them, and their stockholders, but I am curious about the rest of us. Does size determine our chances for survival in the age of coronavirus? There aren’t a lot of studies addressing the current situation of small magazine publishers like me, or small niche retailers like you, so I decided to check out a different business that I thought we could all relate to.
I started looking at how art museums were doing during COVID-19, and found that size does indeed seem to matter. As you would expect, virtually all of them closed for the spring and early summer, at a cost to them collectively of $33 million a day. According to the American Alliance of Museums, up to 30 percent of them may never reopen, and they are the smaller museums located in smaller cities.
In a June article for Artsy, author Claire Voon compared three art museums that represented large, medium and small examples of the species. That she chose them according to size goes a long way toward answering my question in itself.
First up was the Metropolitan Museum of Art in New York, which is the largest art museum in the United States and the fourth most-visited museum in the world. If size is a good defense against the virus, this is Fort Knox.
The Met has 2,200 fulltime employees, resulting in a monthly payroll expense of $16 million. Its annual operating budget exceeds $320 million, and it sits on an endowment of $3.6 billion.
That would make it comparable in size to a major university. Having been involved with some local nonprofit cultural institutions, I can’t even imagine dealing with numbers like those.
Due to the enormous endowment, the museum has no problem managing a few million in losses here and there, but the long shutdown implied a loss this year of more than $100 million, which is enough to get the attention of the board of trustees. Not wishing to lay off employees, they decided to create a $50 million emergency fund by cutting some of their acquisitions, programs and educational efforts.
More to the point, those trustees were not chosen for their good looks. They represent some of the deepest pockets in New York, which is to say the world. If the museum needs more money in order to get through this crisis without damaging its position or its mission, they are prepared to open their checkbooks.
The medium-sized museum was the Cleveland Museum of Art, which entered the pandemic with 470 employees and a budget of $57 million. Unlike the Met, it was forced to furlough about a third of those employees and reduce the hours or salaries of the remaining staff.
The Cleveland Museum has an endowment of $826 million, which it is trying to avoid tapping, but that will be difficult. Although it reopened in June, it doesn’t expect attendance to rebound for at least another six months, and gifts from patrons will not make up the shortfall. Some events will have to be canceled or postponed, and others will be replaced with less expensive programming.
The small museum was the Museum of Contemporary Art Detroit (MOCAD), which had 22 fulltime employees and a budget of $1.8 million. All but five of the employees have been laid off, and those that remain spend most of their time trying to secure emergency funding from the government or elsewhere.
MOCAD has primarily relied upon grants in the past, coupled with seasonal fundraisers and a major fall gala. Such events have had to be cancelled, leaving the museum with a projected deficit of $500,000 through October. The $10,000 endowment fund would hardly make a dent.
The museum will need to do whatever it needs to do. It will have to conduct emergency fundraisers, it will have to cancel costly shows, it will have to cut its hours to the most profitable ones, and it will have to find new donors.
I’m well aware that nonprofits are different from other businesses. Most of us don’t ask our customers for gifts, nor would such gifts be tax deductible. In surviving the pandemic, though, I do think the situation is about the same.
The largest companies in most industries will do fine, and are already thinking well beyond the pandemic. Quite often, they stand to benefit from the consolidation caused by the crisis.
Medium-sized firms will have more of a struggle, but they’ll get by. Perhaps they wouldn’t survive the pandemic if it were to go on indefinitely, but it won’t.
Small companies will have to scratch and claw and fight to survive, but you know what? I wouldn’t count us out.
It’s who we are. It’s what we do.
You can e-mail Kevin at kfahy@fwpi.com
