Mohith Sondhi, Senior Director of Debt Finance at OakNorth Bank
The hospitality sector has been incredibly hard hit by the pandemic, wiping out £80.8B of sales between April 2020 – March 2021[1].
The Government’s strategy has been to try to limit the number of businesses failing and jobs being lost because of temporary liquidity pressures. As a result, we’ve seen unprecedented levels of fiscal stimulus and Britain’s borrowing levels hitting a peacetime high. However, as the Chancellor has stated on numerous occasions, while these measures have been necessary, they can’t go on forever.
Within the next few months, we will see most of this Government support coming to an end. This will likely lead to a cliff edge dividing businesses into two streams: those which are going to surge ahead and do well in the recovery, and those which unfortunately are not going to make it through.
It’s important however, for lenders not to lump all these businesses into the same bucket and to appreciate that every sector will have numerous sub-sectors, and each business is unique, so it’s important to take a granular view. The hospitality sector for example can typically be split into four areas: food and beverage, travel and tourism, lodging, and recreation – but within each of these, there are numerous sub-sectors. For example, within the food and beverage sector, there will be take-aways, casual dining restaurants, fast-food chains, fine-dining and Michelin star restaurants, gastropubs, wet-led pubs, etc.
When it comes to recreation, the experience of a golf course (which takes place outside and therefore will have seen most COVID restrictions lift months ago), will be very different to an in-door climbing centre which will have only been allowed to reopen recently and probably has to spend a lot on PPE, air conditioning, extra cleaning, etc. – especially as it’s an activity that involves a lot of people touching the same things. The experience of a casino which typically don’t have windows (and therefore no fresh air), and requires the touching of cards, chips, slot machines, etc. which will have also have had a very different type of experience through the pandemic compared to many other recreation businesses.
Looking ahead, in the short term we’re seeing a feel-good factor, fuelled by sporting events (European Championships, the Olympics, Wimbledon), the continued success of the vaccination roll-out, summer holidays, and the warm weather. All these will help give the hospitality sector a boost. Consumer confidence will also play a vital role in its recovery, as the more the consumer feels life is returning to normal, the more comfortable they will be to socialise, which will drive recovery in the hospitality space.
However longer term, the sector faces some significant challenges, most notably when it comes to recruitment. Data from UK Hospitality shows a current vacancy rate of 9% across the sector implying a shortage of 188k workers[2]. Meanwhile, the British Beer & Pub Association has warned of “serious” staff shortages[3]. All of which stem back from the Brexit vote and have been exacerbated by the pandemic.
We’re therefore expecting a K-shaped recovery with different parts of the economy, different sub-sectors, and even different businesses in the same sub-sector, recovering at different rates, times and magnitudes. The businesses that are likely to do better in the recovery are those that have embraced technology. Across the hospitality sector for example, companies will need to take every opportunity to move touchpoints online as part of a broader effort to protect the health and safety of customers and employees alike.
The key for all hospitality organisations will be to strike the right balance between these technology-enabled self-services and the need or desire for human interaction in service-based offerings. It will also be down to which businesses have been able to pivot and come up with new offerings fast enough. This is something we’re hugely excited to see develop over time.
[1] Source: UK Hospitality
[2] Source: UK Hospitality
