Very high

Leisure & Hospitality

Although COVID-19 will continue to dominate the sector for some time to come, operators should also be looking for opportunities ahead.

Sector trends & challenges

  • COVID-19 challenges

    From staff retention and recruitment through to supply chain fragility and uncertain consumer sentiment, the sector will need to take a flexible and prudent approach.

  • Managing debt

    The sector was already grappling with high debt levels before COVID-19. Operators will need to think hard about how to manage debt - especially if interest rates start to rise.

  • Sector consolidation

    The pandemic has forced many operators to start considering their long-term business strategy.

    We are likely to see increased non-distressed deal activity as operators reposition their brands.

Sector rating profile

Although the UK leisure and hospitality sector is relatively mature, it’s clear that certain parts were already experiencing a degree of turbulence prior to the COVID-19 pandemic.

 

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.

 

Unsurprisingly, leisure and hospitality has been one of the worst-affected sectors by COVID-19. The long-term legacy is likely to be a high level of debt across both larger and smaller operators. This may prove unsustainable if interest rates rise or market conditions fail to fully rebound.

Leisure & Hospitality

The leisure and hospitality sector has been on the economic frontline of the COVID-19 pandemic.

From gyms and cinemas through to hotels, restaurants and casual dining, the sector has been buffeted by the headwinds caused by multiple lockdowns, complicated social distancing rules, supply issues, labour availability and huge swings in consumer demand.

Whilst the future remains uncertain, however, there remain opportunities for consolidation and to use this time for brand renewal.

Entering 2022, the Omicron variant is inflicting further hardship on a sector desperate for a strong end to 2021. Whilst government support has arrived, it’s unlikely to prove as generous as in previous pandemic waves. Weaker operators may find themselves still exposed when these further temporary measures come to an end.

In addition, operators across the sector will still be facing these underlying challenges:

  • High debt levels – the sector was already grappling with high debt levels before COVID-19. Operators will need to consider how to manage debts, especially as interest rates rise over the next 12-18 months.
  • Landlord dialogue – the commercial rent moratorium is due to end in March 2022, leaving leisure and hospitality operators exposed to a significant cash flow hit at the end of Q1. The government-supported arbitration process for COVID-related rent arrears has the potential to be cumbersome and costly.
  • VAT increase – from 1 April 2022, VAT on hospitality will move from 12.5% back to 20%, squeezing margins.
  • Cost inflation – from labour and energy through to food and drink, significant input cost increases are likely to remain – hitting both margins and the disposable incomes of customers.
  • Labour shortages – an issue unlikely to go away quickly. Retaining, recruiting and training talent – from front-of-house waiting staff to qualified gym instructors - will remain a challenge.

Maintaining dialogue with landlords will continue to be essential in order to reach mutual agreements on rent arrears. Turnover-based rents are becoming more popular in the short-term whilst businesses try to build up to pre-pandemic productivity.

We expect restructuring activity in the casual dining sector to accelerate with a number of businesses who undertook CVA processes in recent years likely to require further restructuring support.

Hotels

The challenge facing the hotel segment at present 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 the pandemic slowing international travel and tourism for a longer period than initially predicted, some will be questioning the viability of their business model.

Overall uncertainty about the recovery trajectory and additional costs required to continue operating 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 even into 2022.

Opportunities

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.

We are likely to see increased non-distressed deal activity as operators reposition their brands. There is likely to be some consolidation within the sector, as financially stronger operators take the opportunity to expand and generate operational efficiencies as part of a longer-term growth strategy.

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.

Thomas Cook

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