Britain’s pubs will be totting up the long weekend’s takings, hoping that mixed weather over an earlyish Easter wasn’t too much of a dampener. Sadly these things matter in an industry that has at best limped along since Covid and saw nearly 800 boozers enter insolvency in 2023, up by half on the previous year.
Redcat Pubs, the chain led by former Greene King boss Rooney Anand, is the latest group to put part of its business into administration. It blames “significant challenges in the operating environment of the hospitality sector.”
The Chancellor’s recent extension of the alcohol duty free, while obviously welcome by pubs, can do little to turn the tide. The hospitality sector is still trying to shake off the hangover started by Covid and lockdown, a financial hit that has since been compounded by the cost of living crisis and higher energy bills.
Events of recent years have only highlighted what has always been the case: the hypersensitivity of the hospitality sector to changes in the economy. Typically bearing high levels of fixed costs and operational gearing, leisure and hospitality businesses clearly take disproportionate hits to profitability when there is a reduction in revenue.
A notable fixed cost for operators 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, Buchler Phillips began accepting engagements on behalf of several leisure companies, large and small, with related issues around property costs, not least because their operations had been thriving ahead of the pandemic.
In the spirit of turnaround and restructuring, the best approach to resolving real estate issues for leisure and hospitality businesses is to find constructive solutions and lowering the tone of the discussions in the best long term interests of both parties in a contract. In recent times, agreeing a revised, turnover based rent has been one possibility to keep businesses in this sector operating from their established premises, while remove the risk of a void for landlords.
Looking ahead at future-proofing businesses in these sectors, it is possible to plan for obstacles. Hospitality is ultimately a consumer focused sector where tastes and buying patterns may change. It’s highly competitive, with points of difference difficult to establish outside the obvious areas of value for money and superior service. The few that get it right may be well placed to enjoy a certain level of support from cash-strapped consumers who are forgoing purchases of items, yet are still happy to spend on relatively inexpensive socialising and ‘experiences’.
Pubs which have pivoted successfully to become mainly restaurants are faring better than traditional boozers, which have their work cut out convincing drinkers to venture out for the privilege of paying many times more per pint than they might in a supermarket. Those determined to tough it out, emboldened by the medium-long term prospect of lower inflation and interest rates outlook, may find it worth exploring some more radical measures beyond merely cost savings and efficiencies: property leases and turnover based rents; hospitality industry-specific aspects of tax, VAT, PAYE and possible negotiations with HMRC; asset reviews; cash flow optimisation; leasing or financing options for equipment. These, and a good deal more, might help to mitigate the impact of unexpected changes in the competitive landscape or, indeed, further business interruption. The key is not to leave any of this too late. Pubs and other hospitality businesses need all the help they can get in shifting the post-Covid hangover once and for all.
Written by Bea Vakharia, Analyst at Buchler Phillips, a UK based independent boutique firm with an impeccable Mayfair heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.