Fail to address high fixed costs and suffer at leisure

July 18, 2023

Recent days have seen the fall into administration of a Cornwall theme park, a Hampshire golf club and an independent cinema chain. They are the tip of the iceberg of UK leisure businesses, none particularly well known, facing an existential squeeze in revenue from cash strapped consumers.

The sensitivity of the leisure sector to changes in the economic environment was thrust into the spotlight in the almost instant downturn caused by the Covid-19 pandemic. Typically bearing high levels of fixed costs and operational gearing, businesses in these areas clearly take disproportionate hits to profitability when there is even a modest reduction in income. Four national lockdowns in the UK were extremely challenging across the broad spectrum of industry: hotels, restaurants, resorts and spas, pubs, theatres, cinemas, night clubs, theme parks, gyms, stadiums and sports clubs all remained closed for several weeks on end or throughout, meaning a dramatic loss of earnings for staff and business owners alike.

No sooner had leisure operators begun to recover after restrictions had been lifted than their fortunes were battered again: energy costs hiked by war in Ukraine, followed by a dramatic tightening of consumer spending by higher inflation and rising interest rates. More often than not, however, the killer fixed cost for businesses in these areas is real estate, whether that means rent on a restaurant unit or estate, a commercial mortgage on premises such as a club, or a long lease on a hotel.

Very soon after the first lockdown commenced in March 2020, many leisure companies, large and small, faced unforeseen issues around property costs, not least because their operations had been thriving ahead of the pandemic.  Those quick to seek advice and brave enough to grasp the nettle were able, at least in part, to resolve real estate issues by finding constructive solutions in the best long term interests of both parties in a contract. Revised, turnover based rents became one approach to keeping businesses in this sector operating from their established premises, while removing the risk of a void for landlords.

Many such enterprises would not have survived without taking early action. Others may have limped along with the benefit of luck and unusual levels of forbearance, but it’s highly possible that the underlying problem was just kicked a little further down the road and remains unaddressed. This ostrich strategy is unsustainable and usually fatal in an industry where, even in relatively good times, tastes and buying patterns may change. The leisure spending landscape is highly competitive, with points of difference difficult to establish outside the obvious areas of value for money and superior service. Consumers may well be shunning expensive retail purchases in favour of ‘experiences’ but while the economic big picture remains bleak, only leisure operators in the most resilient shape will have a chance to benefit.

Businesses in this tough sector should enlist professional help with managing fixed costs as tightly as possible, therefore mitigating the impact of all types of business interruption, past and present or unexpected changes arising from competition. Key areas of focus might include:

  • Tenancy agreements and break clauses
  • Asset reviews
  • Leasing and finance options for equipment
  • Improving efficiencies, productivity and cost saving
  • Hospitality-specific issues regarding tax, VAT, HMRC and PAYE
  • Employment issues
  • Cash flow optimisation

No two businesses, even direct competitors in the same segment of the broader leisure industry, face exactly the same challenges. Sometimes, the feeling that a difficult situation is ‘unique’ makes owners and managers reluctant to take expert advice. Doing nothing and expecting positive change, however, is a recipe for disaster.

Written by our analysts’ team at Buchler Phillips, an independent boutique firm with an impeccable Mayfair London heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.

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