With the staged reduction in social distancing measures, the Hospitality sector has been largely successful in reopening in what remains a challenging and logistically complex environment. Whilst it’s been encouraging to see that many have returned to the pub to meet friends and family, there are still several potential stumbling blocks to navigate.
Raising a glass
Demand within the sector has increased in line with the staged re-opening of UK hospitality venues. The Office for National Statistics (ONS) monthly business survey reported revenue of £5.2 billion in May 2021 - the highest level since August 2020 when HM Treasury’s much-heralded ‘Eat Out to Help Out’ scheme was in full swing. Whilst this is undoubtedly positive news, that figure remains around 25% down on the comparable data for May 2019. In addition, the impact has been felt unevenly, with sites offering outdoor space and with a local client base winning out over indoor venues in business districts.
The European Football Championship which took place in June and July is expected to have generated additional demand. Research undertaken by Barclaycard suggests sales at bars and pubs were up 40% in June as the combination of good weather and football lured drinkers back.
Although the weather has been somewhat less impressive since, the further relaxation of restrictions on 19 July and 16 August alongside a nation largely holidaying at home is likely to keep the drinks flowing throughout the summer. That said, the sector is still facing a range of challenges which will continue to provide a testing operating environment.
Bumps on the road to recovery
The pingdemic: A large number of workers in the industry are still being forced to self-isolate following notification by the NHS COVID app or NHS Test and Trace.
Although the regulations around self-isolation for the fully vaccinated have now been relaxed, operators will still need to consider their duty of care to employees and customers. In addition, given the typically youthful workforce, it may still be several weeks before more junior personnel are able to avoid ‘automatic’ self-isolation.
The result has been venues closing or reducing opening hours and service availability, often at short notice. Despite the change of rules, localised outbreaks are likely to remain an operational headache for some time to come.
Staff shortages: The pingdemic has coincided with, and contributed to, a wider shortage of experienced and/or qualified staff across the sector. Whilst we’ve seen some great examples of pub chains proactively helping non-UK staff with residency applications, a combination of COVID and Brexit has nevertheless led to widely-documented staff shortages. In some cases, this has led to hospitality locations reducing hours of service and/or food and beverage offerings.
The withdrawal of the Coronavirus Job Retention Scheme (CJRS) on 30 September 2021 may provide some relief as workers currently on furlough are released back into the labour market. That said, even with the prospect of signing-on bonuses and increased hourly rates, the shortage of suitably experienced staff may take some time to work through.
There is a wider belief in the industry that staff shortages are here to stay. This stems from a permanent reduction in the level of labour available from overseas together with the availability of alternative employment in other industries (for example logistics, warehousing) which may offer more favourable hours or greater perceived job security. Both factors are likely to place sustained upward pressure on wage costs.
With a greater proportion of inexperienced staff, maintaining high standards of customer service, both front and back of house, may create challenges of their own. In an intensely competitive and social media driven sector where one bad review can result in long-term reputational damage, investment in recruitment and training may reap lasting dividends.
VAT rise: The sector currently enjoys a temporary 5% VAT rate, introduced by HM Treasury as a further measure to support ongoing trade. However, VAT is scheduled to increase to 12.5% on 30 September 2021 and return to the standard 20% rate on 31 March 2022. Many pubs have not passed this reduction directly on to consumers and have instead used it to offset increased operating overheads (cleaning, table service, reduced covers etc). Pubs will need to consider how they respond to these rate increases and decide if it’s possible to pass some of the costs onto consumers.
Coronavirus Business Interruption Loan (CBILs): Repayments are starting to fall due. This is likely to result in liquidity issues for a number of pub groups who may need to consider alternative financing arrangements.
Commercial rents moratorium: In March 2020, the UK Government announced that landlords were precluded from forfeiting commercial leases and evicting tenants for non-payment of rent. Whilst this was initially slated to last three months, the moratorium has been extended several times since and is now due to end on 25 March 2022. Pub groups with large leased estates who have made use of this protection should now prioritise discussions with landlords.
Seasonal disruption: With good weather and outdoor hospitality in vogue, there have been clear signs of a bounce back across the sector. This has been seen most acutely in suburban and rural locations with plenty of outdoor space. However, as the nights draw in, the sector will remain vulnerable to changes in COVID case numbers. A full return to cosy indoor drinking environments may be some way off yet despite the relaxation of most formal social distancing measures. Even businesses who chose to invest heavily in plentiful outdoor space may still find they struggle to tempt customers in through the winter months. Whilst it may appear that we’re slowly returning to ‘business as usual’, as with everything pandemic-related, very little should be taken for granted.
M&A activity
There has been some notable M&A activity in the sector in recent months, as proactive operators seek opportunities to expand their operations and portfolios. These range from Marston’s acquisition of eight Brain’s pubs in December 2020 through to the purchase of Hawthorn Leisure by Admiral Taverns in July 2021. This deal activity is expected to accelerate further as operators seek to take advantage of the rebound in demand for hospitality in general. For existing operators, controlling costs, forecasts, and upside/downside variability will be a critical first step if sale or consolidation activity is being actively considered.
Actions businesses should consider
In this uncertain environment, businesses should ensure that their forecast and budgeting processes are rigorous and consider the impact of various changes on the horizon – from VAT rises to supply cost inflation and sustained wage pressures. Forecasts should include a downside scenario which models formal lockdown restrictions or reduced trade as a result of consumer reticence. This will allow businesses to identify issues and potential pinch points early on.
When it comes to matters of liquidity, taking decisive action can avoid an uncomfortable hangover later on. Early engagement with key stakeholders (lenders, landlords, suppliers and HMRC) can provide much needed time to identify a solution.
At Interpath, we have a wealth of experience in bringing together diverse stakeholder groups, identifying solutions and helping companies navigate a path through financial, operational or commercial difficulties. If any of these issues resonate with you, please contact us.
