As the UK economy enters a winter of almost unprecedented uncertainty, the hospitality industry is among those most at risk. With restaurant owners and pub operators facing a myriad of challenges, there have been several grim predictions about the prospects of many UK hospitality businesses, and all saying conditions are expected to worsen over the coming months.
In September, the sector experienced the fastest fall in output of any UK industry and, in a recent survey, over a third of hospitality firms polled expressed a fear that issues such as rising costs and staffing shortages could put them out of business by the end of the year.
Even before this current crisis set in, a huge number of businesses across hospitality were still recovering from the disastrous impact of the COVID-19 pandemic, with many facing the prospect of severe financial distress and potential insolvency.
The government has already taken some steps to support the sector on issues such as energy bills and business rates, while industry bodies continue to push for increased help. Once conditions improve, the hospitality industry will offer a raft of possibilities for opportunistic buyers, with M&A activity sure to be coming from private equity investors, international hospitality groups looking to expand in the UK market and domestic operators with the requisite capital to target acquisitive growth.
What is the current situation?
In September 2022, the Lloyds Bank UK Recovery Tracker showed that output within the hospitality sector had declined to 36.3 (with any score below 50 indicating contraction), representing the fastest rate of decline since February 2021 (when the UK was in the midst of its second COVID-19 lockdown).
In the same month, the Coffer CGA Business Tracker showed that like-for-like sales at UK hospitality groups had fallen 3 per cent year-on-year compared to September 2021.
This fall has come alongside plummeting confidence within hospitality. In a report released in October 2022 from UK Hospitality, the British Beer and Pub Association (BBPA), the British Institute of Innkeeping (BII) and Hospitality Ulster, 35 per cent of firms said that they might collapse by the end of the year due to the mounting problems they were facing.
For many, such fears are already a reality. According to CGA and AlixPartners, the number of licensed premises in the UK fell by 2,230 to 104,000 during the third quarter of the year, a rate that equals more than one closure per hour.
According to RPG Chartered Accountants licensed insolvency practitioner Gareth Hunt: "The main catalysts of these closures have been the increase in business costs and gas prices, interest rates rises, reduced footfall and unfortunately we are wholly expecting this trend to rise further, over the winter months in particular."
Overall, the expectation is firmly that this will deteriorate further before it gets better, with Sacha Lord, Night Time Economy Adviser for Greater Manchester, saying that recent closure figures indicate merely “the tip of the iceberg” and illustrate “a very worrying trend which we believe will only get worse over the months to come.”
"The stark truth is that hospitality businesses are paying more for ingredients, energy, and day-to-day business needs than they were this time last year, and we are seeing venues shutting due to financial difficulties on a daily basis.”
Faced with rising bills, soaring costs, plummeting consumer confidence and growing staff shortages ahead of the crucial festive period, many have pointed out that the sector could rely on direct government intervention to prevent a mass wave of insolvencies and closures.
As AlixPartners MD Graeme Smith has pointed out, such escalating levels of distress are bound to lead to a considerable degree of restructuring, including M&A activity. Smith asserted that volatility would “inevitably trigger market activity as companies are forced to restructure and merge in order to find cost savings, and additionally, as those that can – with the strength of balance sheet and financial firepower – acquire other groups.”
What problems do hospitality businesses face?
Waning consumer confidence
Hospitality is an inherently consumer-facing industry and, as such, it is arguably (along with retail) the one likely to be worst hit by the precipitous fall in consumer confidence driven by the ongoing cost-of-living crisis.
As inflation soars and energy bills rise ever higher, people across the UK are already starting to rein in their non-essential spending – a trend that is expected to deepen as the winter goes on and people spend more heating their homes.
Hospitality operators are already feeling the effects of this. According to the UK Hospitality, BBPA, BII and Hospitality Ulster report (September 2022), 77 per cent of respondents said that they had seen a decrease in customer numbers and 85 per cent said that they expected this situation to worsen.
Fears that things would deteriorate further were seemingly confirmed in November 2022, when the Bank of England announced that the base rate of inflation would increase 0.75 per cent to 3 per cent – the biggest hike in three decades – putting further pressure on consumer spending.
Responding to the announcement, Hospitality Ulster CEO Colin Neill said: “The hike in the interest rates by the Bank of England is a worrying development. This will have a serious impact on the hospitality sector here at what should be the busiest time of the year. The festive season is when many of the businesses use what should be a better trading period to sustain themselves in the leaner months in the new year. Sadly, this opportunity is frittering away.”
Plummeting consumer confidence is coming at arguably the worst time for hospitality businesses, with rising input costs and other factors meaning that they are caught between a rock and a hard place: facing a need to raise prices at a time when people are seriously clamping down on their spending.
It’s not just households that are being hit by rising energy bills as Russia’s war in Ukraine pushes oil and gas prices higher. Businesses across the UK are also feeling the impact, with those in the energy-intensive hospitality sector among those hardest hit.
While the government’s introduction of the Energy Bill Relief Scheme earlier in the autumn may have assuaged some fears that businesses (which, unlike households, do not benefit from an energy price cap) would see energy bills rise exponentially, virtually all hospitality businesses have seen significant increases.
According to UK Hospitality, BBPA, BII and Hospitality Ulster’s study, 96 per cent of hospitality firms have seen their energy bills rise and, as with consumer spending, the impact of this will only become more apparent as winter goes on.
Alongside the raft of other issues hospitality firms face, significant energy price increases will be a major factor in pushing many towards financial distress and insolvency. Even if businesses aren’t at imminent risk of closure, higher bills are already forcing many to adjust how they operate and the hours they open for business.
According to recent ONS figures, more than a third of pubs and restaurants in Britain have shortened their trading hours over the last three months to limit the amount of energy they consume. Illustrating just how exposed hospitality is to higher energy costs, just 7 per cent of businesses across all sectors had cut their hours.
Of the hospitality businesses that have reduced their trading hours, 6 per cent were closing for an extra two days per week, 7 per cent were closing for one extra day and 21 per cent had reduced their overall hours, while not cutting whole days. Clearly, for any business, such an approach will not be sustainable over the long term.
As energy prices are pushed up by the war, inflation is also pushing up costs for raw materials, with 93 per cent of restaurants, for instance, recently reporting that they were seeing food price inflation.
The UK is in the midst of a staffing crisis (driven by several factors, but arguably most influenced by COVID-19 and a post-Brexit shrinking of the recruitment pool) and, once again, the hospitality sector is among those worst affected.
Across all sectors in the UK, the vacancy rate stands at around 4 per cent. In the hospitality sector, however, it is 11 per cent, highlighting the difficulties that hospitality businesses are having attracting and retaining talent.
According to the British Beer, and Pub Association (BBPA), British Institute of Innkeeping (BII), UKHospitality (UKH), the Institute of Hospitality and charity Springboard, the ongoing recruitment crisis is costing the hospitality sector £22 billion a year.
Data from workforce management firm Fourth suggests that around 8.3 per cent of the UK’s hospitality workforce left the sector between August and September this year and this outflux is raising concerns that businesses will be unable to cope at a time when they should be entering their busiest period.
Amid widespread fears that hospitality businesses will experience severe staffing shortages in the run-up to and during the key festive period, UKHospitality has estimated that the sector will require up to 250,000 new seasonal employees.
As the conditions worsen for businesses in the hospitality sector, even some businesses that are not in imminent danger of collapse are being forced to make difficult decisions. In November, The Breeze Restaurant & Bar on the Isle of Wight’s Island Harbour (a marina which had entered administration earlier in the year) announced that it was to close “for the foreseeable future”.
While the restaurant has not entered insolvency proceedings, and its owners insist that the closure is a temporary measure, the reasons behind the decision illustrate many of the problems faced by small restaurant and bar businesses in the current economic climate, including rising costs and staff shortages.
In a statement, the restaurant’s managers said: “We are currently in the process of evaluating its long-term viability, but the restaurant will need to remain closed for the foreseeable future.”
They continued: “It has become increasingly hard to find experienced and qualified staff and this has caused us enormous difficulties over the last summer season. In addition to this, the recent rising economic costs have also contributed to our decision."
However, it’s not just smaller independent operators who are feeling the pinch, with many larger companies in the hospitality sector also forced to take action against mounting headwinds. In September, pub giant Wetherspoons announced plans to sell 32 pubs, including many prominent venues across London and the South East, explicitly stating that it was a “commercial decision”.
In November, after announcing that it expected to generate losses of £30 million due to rising wages and the cost of repairs, the company stated that it was to sell off seven more pubs. Despite reporting that trading was coming closer to normal levels and that it had significantly cut its pre-tax losses following the end of COVID-19 restrictions, the company is still clearly taking major steps to streamline its portfolio.
Announcing the latest raft of sell-offs, Wetherspoons said that sales had begun to slow over recent months, while costs had risen and that trading continued to be impacted by the after effects of COVID-19. In particular, the firm emphasised that "costs, especially in respect of labour, food and repairs, were substantially higher".
The lingering effects of COVID-19
The hospitality sector has seen vacancy rates trend sharply upwards since the COVID-19 pandemic, but this is not the only ongoing effect of the virus, nor is it necessarily the most serious. Reliant on customers coming through the door and spending extended periods of time inside their places of business, hospitality firms arguably had the most to lose during the UK’s extended lockdowns.
Even when they were able to open, cashflow continued to be adversely affected, first by social distancing rules that severely limited capacity and then an ongoing reluctance among many consumers to return to pubs and restaurants once lockdown ended. Wetherspoons’ Tim Martin is just one high-profile figure in hospitality to recently claim that trading continues to be impacted by the pandemic.
Perhaps just as damaging, and another issue likely to become more harmful over the coming months, are the debts that businesses accrued during the pandemic. The majority of hospitality businesses took on government-backed loans (such as CBILS or Bounce Back) in order to survive the pandemic. While these no doubt helped many to make it through, payments and interest on these loans are now due.
Furthermore, a moratorium on creditor action during the pandemic insulated many businesses being driven out of business by other debts. However, these protections have now been withdrawn, leaving many companies with huge (potentially unserviceable, given the raft of other issues they face) debt piles and vulnerable to insolvency action.
Finally, hospitality is one of many sectors to have been adversely impacted by the major uncertainty that has permeated UK politics over recent months. With three prime ministers since the start of September and a budget that was almost entirely abandoned weeks after it was announced, consumers and businesses alike have been mired in uncertainty at a time when the UK economy is in a state of chaos.
The implementation of a freeze on alcohol duty, for example, will have come as a huge relief to pubs and restaurants. However, the prompt reversal of this decision is indicative of the upheaval that has made planning for the future virtually impossible over recent months.
While the Sunak government, so far, seems to be more stable than those of his two predecessors and there has been good news in the form of Jeremy Hunt’s £14 billion business rates support package, business owners still remain in the dark on many issues, for example what form energy bill support will take beyond April 2023.
What does the future hold?
The government’s action on business rates will have come as a huge relief to the hospitality sector, with rates having been called unfair and described as having a disproportionate impact on hospitality and services sector businesses.
This also came alongside the welcome announcement that support on energy bills will continue for the most vulnerable sectors, of which hospitality is certainly one, beyond April 2023. However, further perpetuating the uncertainty that has plagued hospitality of late, Chancellor Jeremy Hunt’s autumn statement did not specify any details regarding what this extended support would look like.
For some operators, who have already seen energy bills increase as much as 400 per cent this year, even the current measures are not enough, meaning the vague prospect of continuing support (potentially at a reduced rate), is unlikely to provide much comfort.
There is also dissatisfaction with government action on VAT and alcohol duty. Following widespread calls within the hospitality industry for the 20 per cent VAT rate to be cut, the Chancellor instead announced that the rate would merely be frozen until 2026. Alcohol duty, meanwhile, went unmentioned by the Chancellor, despite industry pressure for the previously scrapped freeze to be reinstated.
Overall, the government’s autumn statement has done little to quell uncertainty within the sector, with business rates relief being praised, but criticism that support in other areas is not going far enough and that there appears to be no clear plan to return the hospitality industry to growth.
UKHospitality CEO Kate Nicholls commented: “What we failed to hear today from the chancellor was any plan for economic growth, despite him recognising its importance. Businesses create jobs, deliver higher wages and contribute millions in tax revenues but without a serious plan from the government, margins continue to be squeezed without a path forward.”
Combined with the cost-of-living crisis, which is showing little sign of abating despite consumer sentiment improving slightly since the end of Liz Truss’ tumultuous tenure as PM, the prospects for the hospitality sector remain precarious in the short term.
Where might hospitality sector opportunities lie?
Struggling big names could represent a major prize | Market tipped to improve
While smaller operators will of course be those most vulnerable to the pressures impacting the hospitality industry, bigger names have also been struggling after their post-pandemic recoveries were cut short by inflation, labour shortages, supply chain issues and rising interest rates.
Despite the problems facing hospitality, there are strategic reasons for targeting these companies for acquisition, including the benefits of owning instantly recognisable brand names and highly developed networks of locations across the UK. Industry experts, including Harry Stoakes, of BDO’s Corporate Finance division, expect the market to pick up significantly by the second half of 2023.
Samantha Ward, UK Hotels Leader at PwC, is guardedly optimistic for the hotel sector: “With a laser focus on cost optimisation and the right investment strategies, I believe hotels across the UK can weather this latest disruption, emerging stronger and more resilient for the future.” PwC sees London hotels faring considerably better than their regional counterparts.
In the meantime there are likely to be many more companies right across the hospitality industry falling into significant financial distress, giving buyers an opportunity to acquire brands at valuations that have fallen far below the levels they might usually be expected to command.
With more than 40 sites across the UK, AMT Coffee is perhaps the UK’s most recognisable travel hub-focused coffee business. The company’s estate covers airports, train stations and hospitals, amongst other locations, across the UK and Ireland.
Despite its high-profile status and ubiquitous presence, the company suffered badly from declining footfall during the COVID-19 pandemic, as commuter numbers plummeted and international travel virtually ceased.
The business was subsequently impacted by many of the headwinds afflicting the wider hospitality sector, including labour shortages, supply chain disruption and inflation. As a result, the company was placed into administration in November 2022.
The same day, the company’s business and assets were acquired by food service firm SSP Group, in a deal that saw 18 outlets closed, but secured the future of 25 locations, which will continue to operate under the AMT brand, and 200 jobs.
Commenting on the sale, Interpath Advisory director and AMT joint administrator Sam Birchall said: “AMT Coffee is a familiar name to many commuters and travellers across the UK and Ireland, so we are pleased to have concluded this transaction with such a well-established operator in SSP Group, safeguarding the future of the brand as well as a significant number of jobs.”
Incoming US giants could target restaurant properties
In an insight this October, we discussed how the struggles of UK companies, the weakness of the pound sterling and the comparative strength of the US dollar meant that US buyers were in a uniquely powerful position to target UK businesses at rock-bottom valuations.
Few industries are currently struggling as much as the hospitality sector, but these struggles are coming at a time when several major brands from other parts of the world are targeting expansion.
Of course, US brands have dominated the UK fast food space for years, led by originators such as McDonalds and Burger King, with other operators such as Five Guys and Shake Shack among the more recent entrants to find success in the UK market.
Clearly, the UK has high consumer demand for imported brands that were previously inaccessible on the domestic market. This is once again being demonstrated by a new generation of overseas food giants that are making ambitious moves to enter the UK market.
Over the past couple of years, major US brands including Taco Bell and, more recently, fried chicken chain Popeyes have begun targeting rapid expansion across the UK, along with other international firms such as Canadian chain Tim Horton’s and Filipino giant Jollibee.
These companies are largely operating with highly scaled-up growth and market extension acquisition strategies, as they look to rapidly build a major presence across the UK in key locations such as city centres, retail parks and service stations.
For struggling restaurant operators with outlets in such strategically attractive locations, the growth plans of these highly-capitalised international giants could offer a valuable exit opportunity, potentially enabling owners to exit prior to insolvency and achieve a sale that enables them to settle their debts and even help fund a future endeavour.
Popeyes is one of the US’s most famous fried chicken brands and, over the years, has grown to boast an established international presence. This expansion brought it to the UK, with the launch of its first location in Stratford, East London in 2021.
The launch was a huge success, with the Stratford restaurant reported to have become highest-performing of the chain’s 3,700+ international locations. Subsequent openings have been similarly successful, with launch days regularly seeing long lines forming outside the restaurants the night before they open.
Given the enormous success that Popeyes has so far seen in the UK, it’s little surprise that the business is poised to ramp up its expansion strategy. The company says that it plans to open 20 new UK restaurants in 2023 (bringing its UK total to 31) and is specifically looking to acquire sites in high-demand locations.
As well as several planned city centre openings, the company has said it is looking to acquire drive-thru sites, as well as locations in out-of-town shopping parks, with one opening already planned at Rotherham’s Parkgate Shopping Centre.
Commenting on the company’s UK acquisition and growth plans, Popeyes UK CEO Tom Crowley said: “Consumer demand has been high for a drive-thru ever since we landed in the UK, so it feels like a real milestone for us.”
“We’ve carefully planned our site acquisition strategy in line with where we’re seeing most demand from our customers, and it’s great to see it coming to life. We’re working at pace currently on opening our Liverpool, Brighton and Leicester branches before the end of the year – but we always have one eye on the future and are looking forward to continuing sharing our expansion plans."
Investment could offer opportunities for struggling firms
As well as going through a period of extreme pressure, the hospitality industry is also in a state of flux. The COVID-19 pandemic accelerated many changes that were already beginning to impact the sector, with the increased use of technology and the growing popularity of home delivery over dining out being arguably the biggest changes.
While these shifts will have posed many challenges for traditional pub and restaurant operators, they also offer potential opportunities and, for those with sufficient capital, the possibility to proactively overcome the headwinds battering the industry by expanding and diversifying their services.
Mollie’s Motel & Diner, a restaurant and hotel business with locations in Bristol and Oxfordshire, with another set to open in Manchester, is one hospitality business that is responding to industry challenges through investment.
The company’s Managing Director Darren Sweetland recently said: “No one is immune to the current challenges. But what we can do is shape the lessons learned from them into the foundations of what we intend to be a large, scalable business.”
“In the hospitality industry, digital innovation has been lacking for quite some time. So, we scratch-built an integrated digital ecosystem with best-in-class technology partners, all connecting with each other via customised APIs.”
For those that can afford it, it would seem that investment in higher growth areas could offer the best response to the mounting challenges facing hospitality firms. While this will not be possible for those that are struggling the most, proactive investment in diversifying a business could enable many operators to build more resilient businesses and, ultimately, find a way to keep trading through the current crisis.
For companies with the scope to do this, acquisitions will offer the quickest route to diversifying their service offering, providing hospitality firms can quickly acquire and integrate new businesses and technologies.
Attracting external investment could provide one route to acquisitive growth for hospitality businesses. While investors such as private equity firms may currently be looking more closely at other industries, hospitality firms who are able to pitch a solid growth plan focusing on emerging and high-growth areas of the market may be able to attract the investment they need to target an acquisition-led growth strategy.
Gary Usher is a prominent chef in the North West of England, having made numerous TV appearances and being named Restaurateur of the Year 2021 by The Caterer magazine.
In 2011, Usher launched his business Elite Bistros and over the past decade the company has expanded (sometimes in the face of extreme pressure) to become an acquisitive, highly-diversified business.
During the COVID-19 pandemic, amid fears that the business would fold, the company revived its fortunes by tapping into the boom in home delivery with the launch of the Elite Bistros at Home and raising £172,000 through crowdfunding to launch the at-home and event catering service Elite Bistros Events.
With the hospitality industry facing its biggest challenge since the pandemic, Elite Bistros is once again investing in order to keep growing and diversifying. In November 2022, the company secured funding from business finance broker PMD Business Finance to help fund the six-figure acquisition of the group’s first pub, the White Horse in Churton.
The White Horse closed in 2020 and has been empty since, but, following its acquisition by Elite Bistros, will be turned into a gastro pub offering accommodation. As well as using funding from PMD to complete the acquisition, the company has again turned to crowdfunding to finance the renovation of the pub.
Commenting on the deal, John Platt from PMD’s deal team said: “We have a long standing relationship with Gary and his team and have worked closely with them for the last seven years, so we’re proud to have helped them see this deal over the line.”
“It will allow Elite Bistros to continue diversifying its offering and brings a disused pub back to life for the Churton community.”
Cash is king as always. Businesses that survive in tough times are those that address the fundamental priorities of keeping their cost base as low as possible and staying consistently on top of cash management. This might require negotiating more favourable terms with lenders and restructuring their balance sheet.
Sadly, not all hospitality business owners have this level of acumen, and there will be many owners of fundamentally profitable businesses who leave it too late to address their distress issues.
The best hope at that stage will be for them to seek a buyer, either prior to insolvency or after entering administration. The goodwill component of the exit will be largely decimated, leaving the assets at firesale value.Not great for the owner but potentially very profitable for quick buyers.
The question for prospective buyers of profitable businesses is how long it will take for the numerous headwinds impacting the sector to abate and for market uncertainty to subside.
Despite the somewhat grim picture, however, there are signs that the UK’s hospitality sector remains attractive, with recent distressed acquisitions, deals backed by external investors and the ambitious growth plans of new international players demonstrating that there is still significant interest in the industry.
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