Hospitality sector debt levels are falling, but is it at the expense of business investment?
October 17, 2023
Our latest report into the finances and prospects of the hospitality sector published earlier this month showed that the industry’s borrowings had fallen by 18% in the last fourteen months. Only the very smallest pub, bar and restaurant businesses saw their debts rise and then only marginally. While debts still remain higher than pre-pandemic, this drop is nevertheless welcome news at first sight.
The question is whether this reduction has been made at the expense of business investment, because that would be sowing the seeds of far worse problems down the line for already-embattled hospitality businesses.
The problem with UK business investment
- Long term: business investment has lagged behind other developed economies for decades. It has been an average of 36% lower than other members of the G7 since 1990 according to a report published this year by The International Monetary Fund (IMF).
- Short term: disruptions caused by Brexit, the pandemic and the invasion of Ukraine, mean that real-terms business investment in the UK had settled at a slightly lower level by the end of 2022 than in 2016, while other G7 economies experienced a 14% increase.
- Growth: without higher investment, the UK economy cannot grow. In broad terms, a 10% rise in investment creates between a 2% and 3% rise in GDP but lower investment drags down the economy.
What happens to hospitality businesses that don’t invest?
Never mind the macroeconomics, the problem for pubs, bars and restaurants is that hospitality is really just another branch of show business. It’s all about keeping up appearances and impressing the paying customer. Unfortunately, this is a treadmill that no pub or restaurant can ever get off. Investment doesn’t just mean a total refurb or opening another site, it also means stopping the existing customer environment and experience from deteriorating.
Routine maintenance
Unless the style is deliberately shabby chic or the glitzy drama of a dimly-lit club venue, hospitality premises and their furniture can look ‘tired’ remarkably soon after opening and customers notice at once. There is also a host of equipment to keep fully functional both behind the scenes and front of house. Skimping on repairs and maintenance is the most false of economies.
Staff quality, consistency and training
Regular customers notice staff changes and poor service. It’s a huge turn off at somewhere they will have come to see as their own. A bad first experience means the diner or drinker will never even get as far as being a regular. Investment in good quality staff and their training is invaluable and essential, despite the endemic problems with recruitment, retention and soaring staff costs.
Marketing and promotion
Tough times and sparse cash flow are far too often an excuse to slash external communications and limit promotional budgets. If anything, spending in this area needs to go up, not down. Without customers and their spending power, no hospitality business is viable. Good and imaginative marketing can also help to create the ‘buzz’ that makes a venue attractive to use.
Expansion
Such difficult conditions are certainly a challenge, but they can be an opportunity to exploit a rival closing down or a landlord desperate to find a new tenant to generate some income. This strategy is not without risk and should never be pursued without rigorous due diligence, especially about the potential new site’s location, but equally these chances shouldn’t be ignored.
‘Staying alive’
Every hospitality entrepreneur should be humming this 1970s disco hit to themselves each day as they contemplate how to keep their premises vibrant, their offering relevant and a queue at their door trying to get in. Without ongoing investment in the site, the staff and imaginative marketing eventually their business will begin to wither.
So, while debts need to be repaid, any pause on investment should only be temporary, especially with the busiest and most profitable time of the year only weeks away.
If you are seeking professional advice on business investment and financing for your hospitality business, Opus is here to help. You can speak to one of our Partners who can discuss options with you. We have offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.