The Covid surcharge: Companies confront the unforgiving economics of coronavirus
Rising costs, weak demand and customer limits challenge efforts to reopen for business
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Companies from major retailers and package carriers to local restaurants and hair salons are awakening to a new economic reality in the age of the new coronavirus: Being open for business is almost as hard as being closed.
Facing higher costs to keep workers and customers safe and an indefinite period of suppressed demand, businesses are navigating an ever-narrower path to profitability. To make the math work, some businesses are cutting services and jobs. Others are raising prices, including imposing coronavirus-related fees aimed at getting customers to share some of the expenses.
For large companies, the price -- and perils -- of operating in a pandemic are already coming into focus.
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Walmart Inc., Target Corp. and Home Depot Inc. this week said they absorbed more than $2 billion combined in added expenses for wages, bonuses and other benefits for workers during the early months of the pandemic. McDonald's Corp. laid out conditions for franchisees to reopen their dining rooms that include cleaning bathrooms every half-hour and digital kiosks after every order. Ford Motor Co. this week opened its American assembly plants for the first time in two months, and promptly had to idle factories in Michigan and Illinois after employees tested positive for Covid-19.
Customers shop at a Walmart store on May 19, 2020 in Chicago, Illinois. (Photo by Scott Olson/Getty Images)
The stakes can be higher for small businesses, which tend to operate on thinner profit margins and smaller cash reserves. As they begin to reopen after weeks of being shut down, they are confronting a cost-revenue ratio that is increasingly out of whack.
Prices of food and other items have risen. Employees need protective equipment at work. Rising unemployment, safety concerns and limits on the number of customers a business is allowed to serve are setting a cap on sales. Some have tried to raise prices to bridge the divide, but greeting consumers who have been staying at home with higher costs is a delicate proposition.
Billy Yuzar saw adding a surcharge to diners' tabs as a simple way to compensate for higher food prices at his West Plains, Mo., restaurant, Kiko Japanese Steakhouse & Sushi Lounge. It was more convenient than raising menu prices, Mr. Yuzar said, because he could update the fee in the business's point-of-sale computer in one step.
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Regular customers were supportive, he said, but when a photo of a Kiko receipt showing a Covid-19 surcharge surfaced on social media, people who had never been to his restaurant began calling to complain.
"The people from this community and my actual customers don't mind at all paying," Mr. Yuzar said. "The backlash that I got is just because of these tweets."
Mr. Yuzar has removed the surcharge and raised menu prices.
Other small businesses have stuck with the surcharge strategy.
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Herman Halici, the owner of Dan's Super Subs in Woodland Hills, Calif., said the price of meats such as pastrami, roast beef and corned beef has risen by up to 60%, and new procedures mean that employees must spend 25% more time on cleaning. In response, the shop has added a surcharge of 75 cents to $1 a sandwich. Most customers have been understanding, Mr. Halici said.
"Out of a hundred people, maybe two complain about it," Mr. Halici said. "Unlike before, everyone goes to the grocery store now, so they understand about the meat prices."
Some states have cracked down on price gouging during the pandemic, but Covid-19 surcharges don't appear to have drawn many official complaints. A spokesman for New York's attorney general said the office hasn't received any complaints about surcharges, while a spokesman for Missouri's attorney general said the office has gotten one out of 1,501 total price-gouging complaints.
A surcharge has helped Melissa Aviles grapple with higher costs and lower capacity at her salon, Studio M, in Amelia Court House, Va. After reopening, it can only host one customer at a time, so she can do just four hair-color appointments and one haircut a day, compared with eight to 10 appointments in normal times. Finding supplies such as Lysol also has been a challenge because of high demand.
Ms. Aviles said one customer questioned Studio M's new $3 sanitation surcharge but was understanding once she explained the rationale. "I'm fortunate that I live in a small town, and I'm close with my clients," Ms. Aviles said.
Costs are rising for health-care practices too, leading some to consider adding fees. Jeff Shapiro, a dentist with a practice in Manhattan's financial district, has always worn a surgical mask while he works but has switched to pricier N95 masks following industry recommendations. He now also dons a face shield and disposable gown for each appointment, and said his office may spend tens of thousands of dollars on improved air-filtration systems.
He estimated his costs have risen by $25 to $50 for a patient visit.
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"I think patients would be understanding, if not happy about it," Dr. Shapiro said regarding the possibility of a surcharge. "If you don't do this stuff, the ramifications can be far worse."
The pricing strategy also has landed at large package carriers, with United Parcel Service Inc., FedEx Corp. and DHL Express applying surcharges for some international shipping during the pandemic.
DHL Express said its costs have risen in part because cargo space it buys on commercial airliners has become scarce because of flight reductions. A spokeswoman said it has added an emergency-situation surcharge during the pandemic on some levels of international shipping service, with exemptions for packages that support health-care purposes.
UPS has been applying a fee it calls a "peak surcharge" on international shipments since April 12. The charges top out at $1.81 a pound on express shipments from China, where the novel coronavirus outbreak began late last year, to the U.S., which has the world's highest number of confirmed cases.
"The peak surcharges, which apply to international shipments, reflect the current dynamic market conditions and uncertainties caused by the coronavirus," a UPS spokesman said.