26 May 2022

Opinion from Adrian Leopard & Co

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Hospitality industry generally trading at a low level
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Hospitality industry generally trading at a low level

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It doesn’t look that good either from a trading or investment perspective. There is a long way to go before public confidence is restored

The health of our hospitality industry is a matter of interest and I dare say concern to all of us.

After the most dastardly year imaginable, life is now supposedly moving back towards normality but as we have said on numerous occasions, it is not clear yet what normality is going be.

Two weeks have now passed since “Freedom Day” and we can begin to take stock of what has been happening. CGA research tells us that hospitality trade levels are well below pre-covid levels and this is basically because little over half of consumers have in fact come back and gone into hospitality venues and 42% of consumers say that they have been going out less than they would have done pre-covid whilst only 21% say they have been going out more.

Reasons given are being uncomfortable being in close proximity to other people and a third are simply uncomfortable about visiting venues again at the moment. That is strikingly high given that we were led to believe that everyone was hankering to get out and about. It is also clear that younger people are happier to get out again, about 66% whilst the older members of society are holding recovery back. That of course is very much in keeping with how covid-risk is assessed – the older you are generally speaking, the higher the risk.

What does this mean for pubs and restaurants? Well of course they are still going to be limping along because if they can only achieve something like 50% of normal turnover they are just going to fall short of sufficient revenue to pay their bills and in time that sort of pressure will inevitably bring about more business failures. So the industry is not out of the wood yet.

This all brings a big knock-on effect to investment in the sector. Well that is down too, significantly. In fact last year saw business investment in the hospitality industry fall by 13.7% according to an analysis of ONS data.

Hotels and restaurants are businesses which are only worth what the capitalisation of their profits will allow and no matter how much sales agents huff and puff about excellent premises worth a lot of money, the truth is they are not if trade is bad! Over recent years profits have been falling generally in the hospitality industry and that was before covid was a twinkle in the eye. It is not entirely why the industry has been going downhill but issues like increase in national minimum wage have had a huge effect on profitability. In April 2016 the first minimum wage was set at £7.20 per hour and in April 2021 the new rate was set at £8.91. That is an increase of 23.75%, higher if you take into account that the April 2016 figure was also an increase, and in addition to that work place pensions have come in and imposed an additional percentage for employers. These increases are really significant because in a hotel or restaurant business, the wages bill is the highest single overhead. What is more it is not just the lowest paid of staff who have been earning more, the whole thing percolates up the scale as more highly paid staff want to maintain differentials.

So it is the ever-decreasing circles syndrome.

And as to why business investment is down, that is simple too. In part investors have been holding back and simply not investing at all pending the outcome of the pandemic and secondly we have been studying the market closely and have seen selling prices of properties slashed by huge sums in some cases, like hundreds of thousands of pounds. Needless to say, rich cash buyers are always interested in a good deal so when properties have to sell, usually because of insolvency, these buyers slide in and pick up the spoils for much reduced prices.

If you are a hotel owner, now is not the time to sell if you do not have to. Buyers will look at potential turnover and profitability and the cash is just not there and until trade gets back to normal, it will not be. There are various estimates as to how long it will take but the majority of pundits appear to favour about three years, 18 months to get back to break even and then 18 months to restore profitability. All this of course give or take a year or so and the process only really getting off the ground once the pandemic is truly seen to be receding.

By the same token, if you are a buyer, be careful because you will undoubtedly have to sustain trading losses while you bring things back together.

So consumer confidence is the key; it may just be that removing the restrictions is going to have the opposite effect especially at a time when new cases remain extremely high. What is a certainty is that if Jo Public does not feel inclined to be wooed, he won’t be.

Adrian Leopard 02-08-21

Photo Lidia Stawinska

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Adrian Leopard & Company is the trading name of Alderney Offshore Ltd, a company registered in Alderney, Channel Islands number 1220.

Address P O Box 1027, Alderney GY9 3AS

Registered Office Seldomin, Longis Road, Alderney GY9 3YB.

Adrian Leopard & Co is represented in the UK by 3CL (UK) Ltd trading as Adrian Leopard Associates.

Telephone enquiries may be made on 08449-4-08449 or 01684-230360.

E Mail [email protected]

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