Surviving for recovery, thriving through opportunity

In response to the global pandemic, the hospitality sector has spent the past ten months having to react to the ever-changing trading conditions imposed by the Government. Business managers and owners reacted swiftly by taking the grants, relief and funding/lending available to them. However, without revenue to build the war chest necessary to see a business through the winter months of January and February many pre-pandemic successful businesses are facing the prospect of not being in a position to reopen when restrictions are lifted.

Those businesses that have sufficient available liquidity are likely to bounce back, with many analysts predicting a short term mini-boom when restrictions are lifted. This may cause its own issues with insufficient capacity, exacerbated by any ongoing social distancing measures. However, businesses are likely to need to adapt their operating models for both the medium and long term.

Businesses which are over-geared with significant debt service costs and underinvested sites may find their ability to bounce back restricted.

Key actions to consider

Those businesses that survive will be fighting for the attention of the consumer. Consumer habits and attitudes are likely to have changed. Taking time to reconnect with the consumer to understand their requirements will enable businesses to identify how they might differentiate their offering and effectively adapt their business practices. This can be done in a number of ways including through social media, online surveys and real time feedback. There is likely to be a flight to quality, with the risk that some brands will disappear if they do not connect with their customers and secure brand loyalty.

We are likely to be living with social distancing for many months to come and the use of technology will become more prevalent: checking in on arrival, ordering and payment. These are likely to become the new normal at least in the medium term. By adopting such technology businesses are likely to improve operational performance and profitability, however, adopting new technology always comes with an additional cash cost.

Many businesses will have undertaken a full operational review at the outset of the pandemic. Now is the time to undertake a further review to identify whether it is possible to make the business leaner and more efficient, particularly around hospitality businesses three major cost groups, food and drink for resale, staff costs and property.

It may be possible to renegotiate supplier terms or consider alternative suppliers to improve performance. However, given the uncertainty of what future trading may look like, and the number of variables an operator will have to deal with, it may be sensible to maintain existing supply chains and goodwill as is for time being. Given the challenges that the food and drink suppliers have suffered themselves, it may be challenging to negotiate reduced prices and extended payment terms.

The fact that a Brexit deal was agreed at the end of 2020 is good news for the hospitality sector. This should help the supply chain, particularly food ingredients and wine imports arriving from the EU with limited interruption.

Businesses should consider developing multi-skilled employees to improve efficiency and reduce cost. Key site staff including managers and assistant managers appear to have been sheltered by the furlough scheme and remain available to hospitality businesses once they can reopen operations. However sites in university towns which rely heavily on students as part of the workforce may struggle in the short term should universities be forced to close again.

For many businesses in the sector one of the largest costs will be that associated with property. There have been calls for the extension to the business rates relief in the retail and hospitality sector which is due to come to an end on 31 March 2021. Open and honest communication with Landlords is key. Many Landlords will have their own financial obligations to meet. Landlords have had restrictions place upon them regarding the enforcement action they can take and it remains to be seen as to whether these restrictions will be lifted in the short-term. Renegotiating lease terms with a Landlord may not be simple. Should landlords agree to reduce the ongoing future rent payable, landlords will look to amend other terms of the lease, such as the extension of the lease term and build in the recovery of the rent they have forgone in 2020 into the extended lease. They may also look to remove tenant break clauses or build in a profit participation clause.

Hospitality overseas

Businesses should closely observe the hospitality market in the UK and overseas, learn from their competitors and identify the best ideas that can be adopted in their business and spot the pitfalls to be avoided. An agile management team will react and respond to the changes in the customer attitudes. It is likely that we will see more focus on our local communities and live our lives within a smaller radius at least until travel is on the agenda again.

A critical point for restaurants and bars will be when a normal trading environment emerges and how that will impact their underlying cash position, particularly when creditors attitudes begin to shift from being supportive to looking to reduce their exposure. Ultimately, successful businesses adapt and there will be significant opportunities post the pandemic for profitable, invested business which have the correct funding structure and the right customer offering.

Authors:

SARAH RAYMENT
Partner, Business Restructuring
+44 (0)207 893 3241
sarah.rayment@bdo.co.uk

MARTIN ASBURY
Director
+44(0)121 265 7255
martin.asbury@bdo.co.uk