Queensland Premier Annastacia Palaszczuk (Image: AAP/Darren England)

The premiers’ new clothes

My mum used to sometimes buy fancy new clothes and never wear them, the stated reason being she didn’t want to damage them. The theory didn’t make sense when I was ten, and it makes even less sense now. 

It appears that Queensland Premier Annastacia Palaszczuk and Western Australia Premier Mark McGowan are starting to treat their economies like a new Diane von Furstenberg. 

On Wednesday, Palaszczuk’s chief health officer Jeannette Young warned that “if the tourism industry wants a realistic scenario, then they should be preparing for September”. She then warned (without any real justification) of “terrifying” consequences, stating “when we saw that curve going up, it was just going straight up — it was no different to what was happening in New York, or Spain, or London or Sweden”.

The having health officials making economic decisions is problematic for a number of reasons. Most critically, health bureaucrats are being judged based on how close to zero they can get caseloads.

That’s certainly important, but it’s absolutely not the only measure of success. The lockdowns were never intended to be a competition to see who could be the first to get to zero cases (returning infected overseas travellers means that’s likely an impossibility anyway), but being able to avoid a health system calamity and give time to ramp up testing and tracing facilities.

That’s largely been achieved, so the challenge is now how do states keep cases under control, while ramping up as much economic activity as possible to avoid what is likely to be a serious recession, or potentially even worse, given the increasingly dire numbers coming out of the US in recent days. 

Tourism contributed $12.3 billion to Queensland back in 2017-18 and is responsible for more than 100,000 jobs. In Queensland, a total of six people have died as a result of the virus. 

It seems Palaszczuk is very concerned about keeping her new dress clean, no doubt with an eye on Queensland’s October election less than five months away.

Perhaps someone should remind state premiers that voters without jobs are unlikely to care if the number of cases is single digits or zero. 

Winner winner

Among the many victims of COVID-19 in the business world (a list that is likely to grow very significantly in the months to come) there have also been pockets of winners.

In particular, COVID-19 has acted as a significant accelerant in encouraging shoppers to switch online. 

This is beneficial in two ways. First, the obvious one: online platforms have witnessed an explosion in revenue as many of their competitors have been closed (or difficult to access). 

More interestingly is the benefit wrought through a drop in what online businesses call CPA (cost per acquisition).

One of the first things investors look at when valuating an online business are its unit economics. That is, how the lifetime value of customers (how much gross margin a customer will pay to a business over their lifetime as a customer) compare to the cost of acquisition. The bigger the delta (or gap) between the two, the more valuable the business.

This is why software as a service businesses like Atlassian are considered to be so valuable — the lifetime value of customers is very high because they tend to remain customers a long time.

Australia doesn’t have a big pool of publicly listed e-commerce businesses, but Kogan and Temple & Webster are two key ones. Both have had a very good crisis.

Kogan’s share price has rocketed from $3.45 in March to $9.56 now, as hundreds of thousands of new customers have used the site for the first time (with many enjoying the experience and likely to become repeat customers). Temple & Webster has increased from a pre-pandemic $2.70 per share to more than $4 now. Wesfarmers reported extraordinarily strong growth at its recently acquired Catch.

The theme is also occurring across the online world, as COVID-19 accelerates the switch from offline to online. The corollary to this growth is fourteen US retailers have filed for bankruptcy in this year already, including iconic brands such as J Crew, JC Penney and Neiman Marcus. 

What was litigained?

As the federal government looks to tighten rules on overseas-based litigation funding of class actions, my old friend Stephen Mayne launched an impassioned defence of class actions, claiming they “have been an excellent innovation in Australia … significantly improving disclosure and acting almost like a private ASIC, which has been necessary given the relatively poor performance of ASIC”.

That’s certainly one view on class actions. Albeit a strange one.

Another view is that class actions are a tax on shareholders paid to lawyers and do absolutely nothing to improve executive malfeasance and reduce the scourge of agency costs.

A recent Myer class action is a classic example. The case was finally settled earlier this month (after both sides presumably accrued millions in legal costs).

It involved former Myer shareholders suing the company after former CEO Bernie Brookes announced in September 2014 that Myer’s profit would be higher than the prior year’s $98.5 million. The following March, Brookes told the market that profit would actually be $75 million to $80 million, which caused shares to drop  by 31% (they then continued falling for years to come).

What then happened? One group of Myer shareholders (those who owned shares in September 2014) sued another group of shareholders (those who own shares when the action was lodged).

There was no net gain to anyone — even if the plaintiff shareholders had been successful, the culprit had years before walked away not only scot free, but with tens of millions in lucre (and later went on to have a disastrous time at South African retailer, Edcon). 

The class action did nothing to curb executive malfeasance — it’s like telling a thief to give back their balaclava but allowing them to keep the loot.

All that happened was lawyers got richer, and shareholders got poorer.