Is there reason for hope despite the year to forget?

31/12/2020

Peter Davies, Head of Hospitality for WMT Chartered Accountants, summarises a difficult year for the sector but offers hope for the future

Back in her 1992 Christmas broadcast the Queen famously christened the year as her “annus horriblis” following a series of calamities and setbacks. Now, as we approach the end of its very own “annus horriblis” the UK’s hospitality sector might be forgiven for wondering if 2021 will signal the start of a recovery and fightback or if many more businesses will be crushed under the burden of all that 2020 has placed on their shoulders.

Let’s not forget that along with aviation and inbound tourism hospitality was the first sector to be impacted by the chill winds of coronavirus. As early as last February many central London operators were seeing a major drop off in business caused by the drying up of both tourists and business travellers from the Far East, some six weeks before the Prime Minister’s now-infamous advice that consumers should avoid visiting restaurants, pubs and bars. That advice, without a corresponding order to close or a whiff of compensation or support, signalled both the start of the downward spiral and set the tone for how Ministers would treat the sector for the majority of 2020.

The end of March saw businesses closing their doors for an indefinite period, which turned out to be three-and-a-half long months. For some it was the final straw and in that first wave of closures many thousands of employees lost their jobs – good people who had worked hard and lost their jobs and businesses through no fault of their own. For others the furlough scheme (in its initial, cost-free to employers, guise) saved millions of other jobs from being axed, and was a notable success from the Government despite the failings and gaps in the scheme.

(At this point, let me stop for a moment to take my hat off to the HR and payroll teams of the world who managed to cope with a completely new and at times illogical scheme that went through 28 revisions in its first 12 weeks and still ensured that everyone got paid. You are also heroes of this year.)

Hospitality, along with the self employed, those who had recently changed jobs, small company owners and many other excluded groups all suffered however from the Chancellor’s refusal to admit any errors in his flagship scheme and to acknowledge that furlough should be paid on tronc – regular payments making up a large part of people’s income and which had been declared to HM Revenue & Customs with tax paid. Now it was hospitality staff as well as owners and operators who started to question how much the sector was really valued by Ministers.

(To those who say that this is an argument to do away with tronc my answer has always been that the response to being slapped in the face is never to blow your own foot off as retaliation, and nobody has ever shown me a compelling argument for who would pick up the £1bn+ per annum taxation cost of such a change).

In other areas Government was again proving slow to help what had been the fourth largest sector of the economy pre-Covid. A rent enforcement moratorium, twice extended, stopped the most egregious landlords from taking action against tenants whose income stream had been cut off but has to date failed to come up with a solution to a rent bubble. Grants were, by and large, miniscule. Various Government-backed loan schemes were introduced but understandably many operators were reluctant to take on more debt, particularly when banks started demanding personal guarantees be given.

By the late summer, however, things were looking up. The Eat Out To Help Out scheme, coupled with a reduction in VAT on food to 5%, gave a real fillip to restaurants but again left pubs, wet-led businesses, bars and nightclubs scratching their heads and wondering what they had done so wrong so as to be excluded. There was optimism that the traditionally-busy months between September and Christmas would allow the losses from earlier in the year to be recouped and mitigated. From mid-September onwards, however, infections started to rise again and pressure began to rise for further restrictions on hospitality, despite Public Health England’s own figures that hospitality was contributing to less than 5% of cases and that the real growth was coming in homes, in hospitals and care homes, and in newly-reopened educational establishments. Many began to feel that it would be hospitality which would be thrown under the bus as political cover for other decisions.

Firstly the ill-thought out 10pm curfew was introduced with no scientific backing whatsoever, which removed the second evening sitting for most businesses and ensured an unseemly (and risky) crush as everyone headed for the door, the taxi, the Tube or the bus at precisely the same time. There was a growing feeling that Government really did not understand hospitality, despite the sterling efforts of industry leaders and representatives such as the indefatigable Kate Nicholls of UK Hospitality.

As autumn turned into winter the double whammy of the second lockdown and Tiers 3 and 4 meant that any lingering hope for businesses of recovering lost ground was extinguished. Parts of the North of England had seen their hospitality sector shut for months, but when London – one of the world’s great gastronomic cities – was again closed it signalled another wave of permanent closures and redundancies. The Chancellor’s “son of furlough” scheme – which now required significant employer contributions from businesses with no income – proved less effective in stopping the job cuts second time round. Estimates of job losses vary, but are being measured in the high hundreds of thousands with many more set to be announced early in 2021. Increasingly envious eyes have again been cast to the Continent, where Governments – particularly in Germany – have offered their hospitality sector real and meaningful support based on lost trade.

The “annus horriblis” seems certain to continue into the first quarter of 2021 despite the announcement (30^th December) of approval for the Astra-Zenica vaccine. The release of the second vaccine must surely result in Ministers throwing every possible resource at rolling out innoculations in order to make serious headway in vaccinating the elderly and the vulnerable. At this point, it must be hoped, restrictions will be eased allowing for a return to a semblance of normality and a chance for a sustained period of trading to capitalise on the pent-up demand of the nation’s diners for whom take-out and finish-at-home have been their only options. Once that happens there is, I think, some quiet cause for optimism.

It seems inevitable that Government will have to broker, at some point, a compromise on rent arrears built up during 2020. Many landlords have debt to service and are facing tough financial pressures themselves so the help and assistance cannot all be aimed at tenants. The compromise over the unpaid 2020 rent bubble must, however, be coupled with long term structural changes including an end to upward-only rent reviews and, moving forward, the widescale use of turnover-based rents which will hopefully restore a more collaborative approach from both landlord and tenant and an end to the current imbalance of power in the relationship.

The lower level of rent which will inevitably prevail post-pandemic should also lead to attractive opportunities for new openings, particularly as retail retreats further in the face of online shopping. In the new world it must be hoped that this will mean a variety of hospitality outlets being able to afford High Street sites once again instead of these areas being solely the preserve of the large groups and chains. Lower rent levels may encourage more start-ups and help the movement of micro-businesses from street food and pop-ups to real bricks and mortar sites. Although delivery has helped provide an income stream for some during lockdown it is unlikely to be a substitute for real premises, in part due to the high commission rates charges by sites such as Deliveroo.

Government will also need to review the current levels of taxation, in particular by extending both the business rates moratorium (preferably in advance of a root-and-branch review of the whole broken system), making the 5% reduced rate of VAT permanent so bringing us into line with many other competitors for the business and tourist spend, and extending that lower rate to the entirety of hospitality. Again and again over the years hospitality has shown a capacity to deliver growth, jobs and taxation revenue which far outstrips the initial tax cut. It can do so again. Calls for a Minister for Hospitality are well-intentioned, but any such future Minister will need to be more than just a nodding dog around the Cabinet table ensuring that nothing much changes except the Government can say it has listened and acted, although not on matters of substance.

There will need to be a sharper focus on staff, both in terms of retention but also training and development. For those businesses which have managed to retain their key staff through many lean months of closure and furlough there will need to be the payback for that loyalty by way of increased career progression and reward. Training and education will need to become wider than just the basic skills necessary for staff to perform everyday tasks and remuneration packages will need to become smarter, more varied, and more in tune with the needs and expectations of employees.

The short-term impact of redundancies swelling the numbers looking for work will soon be outweighed by the inevitable diminution of the labour market which will come from Brexit, the new points-based migration system, and the changing political climate in the UK for EU nationals. The historic high levels of employee turnover in the sector will not be sustainable in a world without the flow of EU nationals that has existed previously, and businesses should therefore look first to retaining those staff they already employ and in whom time, money and effort has already been invested. Making the sector a career path of choice  for school leavers and graduates is likely to be a long term challenge.

The next few months will undoubtedly prove challenging and I expect to hear of more businesses where, sadly, the final straw is reached and the towel thrown in. There will be many more conversations about redundancies and similar difficult decisions. But one of the reasons I love hospitality, and love working with hospitality owners and operators and teams, is the creativity and optimism, the drive and dynamism, and the sheer bloody-minded determination and passion to deliver fantastic, meaningful, and life-affirming experiences to their customers again and again.

I wish you all a happy New Year and here’s to ending 2021 in a far different place to where we entered it.