20 May 2020
In early March I had lunch with two restaurant and food service operators and we discussed how the restaurant sector had ridden the casual dining crunch and why there was a lot to be optimistic about for the future of the sector. Two weeks later and the whole Hospitality sector was in disarray in the wake of the Coronavirus outbreak. On Friday 20 March the Government forced all restaurants, pubs and bars to close until further notice. A few days later, Hotels closed as part of the nationwide lockdown.
This is a seismic shock to the whole sector, and whilst there is hope that the shock will be short-lived, with hospitality units hoping to reopen again at the beginning of July, many businesses will suffer and some may never recover – those that do will probably be in a different form to what they were before. Furthermore, how will Covid-19 affect the business model of the future if there is a second or third wave of the virus and Hospitality businesses have to shut down in a similar manner? The risk premium for a Hospitality start-up has just gone up! It is clear that businesses are going to have to be resilient, innovative and adaptable in order to survive, and survival is probably as good as it is going to get over the next couple of years.
According to Open Table, restaurant bookings started to decline from the second week of March – now they have evaporated completely. A small lifeline allows restaurants to convert to take-away operations only during the lockdown. Others, including pubs and vineyards, are running more delivery services to customers’ homes to keep going. Hotels have been housing essential workers.
The Government has introduced a series of measures which help Hospitality businesses manage their costs and cash flows, ranging from a year-long business rates holiday, suspension of rent payments to landlords for at least three months, and the now well-known ‘furlough’ scheme. In addition, businesses with a rateable value up to £51,000 will be eligible for a cash grant of up to £25,000 to help them through this period. These measures are all very welcome, but will not last indefinitely. As such, whilst clearly welcome, they represent a sticking plaster approach, which then relies on a recovery in the short term. Eventually businesses will just run out of cash, unless investors or banks are willing to support, which is increasingly unlikely, in spite of the funding initiatives promoted by the Government such as the Business Interruption Loan Scheme (CBILS), the Bounce Back Loan Scheme (BBL) and the Coronavirus Future fund. Further details of all these Government initiatives are set out in our publication – ‘Protecting your business during the Covid-19 outbreak’.
Although the Coronavirus Act 2020 protects commercial tenants from eviction for non-payment of rent until 30 June 2020, it does not remove their obligation to pay rent. It is therefore important for the landlord and tenant to work together to come to an agreement where the tenant is having difficulty in paying rent due to the impact of Covid-19. There are several alternative rent arrangements to consider, including rent reductions, rent suspensions and rent deferments. The landlord could agree to apply part of the tenant’s rent deposit as cover for the next rent payment in order to ease the immediate pressure on the tenant. If there is no agreement, there is a risk of the tenant going bankrupt without a lower rent bill. From our discussions with restaurant operators to date, this has been one of the most challenging issues for them to deal with. Some landlords have been reasonable in their negotiations, but others appear unwilling to compromise given the financial situation operators find themselves in with forced closures. We understand that landlords may well have their own obligations to the banks, but it requires all parties to come together to share in the pain.
Our research shows that the number of petitions to wind up restaurants over unpaid bills has already increased by 165% in the year to 20 April 2020 compared with the previous year, with another surge expected to follow once lockdown measures are relaxed and the temporary ban on winding up orders ends on 30 June. Hospitality businesses will have only a small window to get customers back through the door before restart costs and the costs of implementing social distancing measures deplete cash and send them into insolvency. The big unknown is how quickly will turnover levels return to pre-crisis levels? The Government can do more to help, particularly during the upcoming summer months, to help restaurants and cafes to get up and running again, for example, by allocating certain outside spaces such as squares or pedestrianised streets to operators for additional chairs and tables.
There has to be hope for the future though. The sector will recover, although somewhat scarred. The sector will need leadership with a mix of experience, creativity and entrepreneurship to rise from the abyss. Technology will have a big part to play in the ‘new normal’. It could create opportunities for a range of start-ups coming through the pipeline, who will be able to attract new funding from investors who also seek new opportunities as and when the storm passes. Customers will also remember those operators who have acted honourably during the crisis, such as the healthy fast food chain Leon, which continues to keep its sites open to customers where NHS teams and essential workers still rely on its services and staff members are happy to continue working.
Coronavirus will change the Hospitality sector forever, but it will rebuild by putting its people first. Hospitality is about being friendly and welcoming to visitors and guests. This attitude will be key in these extraordinary times to get through to the other side.
If you have any more questions regarding the hospitality sector, please contact Martin Jones or your usual UHY adviser.