Leisure & Hospitality
Sector trends & challenges
As restrictions unwind and the sector gradually reopens, managing costs whilst consumer demand remains fragile will pose a significant challenge for many operators.
The sector has been a major beneficiary of government support throughout the pandemic. As these schemes taper away through 2021, some operators may find the ‘new normal’ no longer aligns with their previous business model.
The sector was already grappling with high debt levels even before the start of the pandemic. Additional lending through COVID-19 may prove difficult to service, especially if interest rates increase.
Sector rating profile
The leisure and hospitality sector in the UK is very diverse and it is clear that certain parts of it have been in a state of turbulence for many years now. Casual dining chains have been grappling with high debt levels and ever-changing consumer tastes, whilst changes in technology and consumer demand have seen some traditional leisure attractions struggle to remain relevant. That said, a number of sub-sectors were in good health prior to the pandemic, not least gym operators who were expanding rapidly across the UK. Perhaps more than any other section of the economy, COVID-19 has hit hard, in many cases effectively shutting down all operations for large periods of time. Financial distress levels across the sector have leapt upwards with many businesses now entirely reliant upon extensive government support to stay afloat. As we look ahead the potential for another lost year in also too real, particularly in the travel and tourism sub-sector. With unprecedented levels of debt now needing to be repaid, this looks set to devastate many operators who have managed to hang on this far.
Leisure & Hospitality
Leisure and Hospitality is a broad sector, ranging from gyms and cinemas through to hotels, restaurants and casual dining. Unsurprisingly, its been one of the worst affected sectors through the COVID-19 pandemic as its very raison d'être – meeting and interacting with others – has become increasingly at odds with the demands of social distancing.
Visibility over the recovery trajectory is challenging. Even with reduced social distancing restrictions, many venues will struggle to break even for quite some time. Consumer behaviour is uncertain, with many likely to remain wary of non-essential social contact. Modelling demand will prove a challenging and critical action involving both financial and operational teams.
Operational challenges increasing expense. The cost of COVID-19 measures – from increased hygiene standards to staff screening and absenteeism – will impact on the bottom line.
Maintaining dialogue with landlords. Many leisure and hospitality operators will need to work collaboratively with landlords as the reopening process proceeds.
Impact will vary by geography and hospitality type. Attractions and amenities catering for international tourists in urban areas such as London are likely to see a more prolonged fall in demand. Local independent restaurants, by contrast, may see a relatively quick recovery, whilst hotels with significant wedding businesses may see a large proportion of revenue deferred rather than lost completely.
We expect restructuring activity in the casual dining sector to accelerate. We also anticipate a number of businesses who undertook CVA processes in recent years to become in need of yet further restructuring.
The slowdown in the hotels segment is particularly interesting. Many businesses are sitting with significant debt burdens and are trying hard to lower their cost of capital. Even prior to COVID-19, RevPar trajectories had moved into decline in the regions and were slowing in London. With COVID-19 slowing international travel and tourism for the foreseeable period, some will be questioning the viability of their business model. Overall uncertainty about the recovery trajectory and additional costs required to operate COVID-secure environments will weigh most heavily on those businesses with higher fixed costs (such as leases or debt). They may not have the ability or willingness to trade through a potentially long period until they have repaid downturn funding and are cash flow positive. We therefore expect to see significant potential for lease negotiations, debt restructurings, CVAs and forced M&A activity, with asset valuations almost certain to decline.
Despite the clear challenges facing the sector, we do see reasons for optimism in the medium-term. The pandemic has reminded consumers of the value of leisure amenities and the need to support their local pub, restaurant, cinema or gym. As ever, the businesses most likely to thrive in a post-pandemic environment are those with a compelling consumer proposition, offer good value and continue to invest in service.
Giraffe / Ed’s Easy Diner, CVA
Our team implemented a CVA for the restaurant chain, with all voting creditors choosing to approve the CVA, surpassing the 75% total required to pass the resolution.
This was a critical step for the business, allowing them to complete their financial restructuring plan and embark on a comprehensive operational transformation program.
Our team were appointed to manage the liquidation of travel agency Thomas Cook following the firm’s failure.
This included the closure of the 555 stores and the sale of airport landing slots.
A sale was agreed for the stores to Hays Travel with the re-opening of stores and many jobs saved.
Find Your Expert
Will Wright leads the Leisure & Hospitality sector team at Interpath, supported by a national team of experts across the country. For a full list of our senior people with experience in this sector use the button below.Our senior team