Introduction
As the UK economy has lurched from pandemic emergency mode almost straight into a stagflation and cost of living crisis, hospitality company finances tell a tantalising tale not just of survival against all the odds, but even some positive signs.
We have now analysed the latest published accounts of every pub, club and restaurant company in the UK for the third time in a little over a year. The outcome of our latest research is entirely counter-intuitive, uncovering a welcome improvement in some financial risk measures, but still with some worrying warning signs flashing, especially for smaller hospitality businesses.
This reflects the wide range of support provided to the sector by the government during the Covid crisis, including the furlough scheme, business rates relief, temporary VAT cuts, the Eat Out to Help Out scheme, local grants and the various Coronavirus support loan schemes. Creditor enforcement was prohibited too, leaving landlords and suppliers without remedies for unpaid debts, while HMRC deferred PAYE and VAT liabilities from before the pandemic.
The partially positive financial profile may also come from the delay in filing accounts at Companies House, which means that at any point in time, accounting information in the public domain is between nine and eighteen months out of date.
Nevertheless, we are now awash with dire warnings about the prospects for hospitality and while our latest research shows some upward trends, these are from a worryingly low base. In essence, hospitality was never out of the Deep Dark Wood, it had just got a little bit nearer daylight and a safe financial haven.
Market Characteristics
This is an industry that creates of 5% of the UK’s GDP or some £85bn in gross added value when accommodation spend is added to the activities of pubs, clubs and restaurants. It employed 3.2m people or 10% of the workforce before the pandemic, but certainly fewer now. UK Hospitality, the trade body for the industry has estimated that 200,000 people left the industry during the pandemic. It now deploys £34bn of assets, borrows £13bn and has an overall net worth of £8.2bn.
Research published in August 2022 by Alix Partners shows the hospitality market finally stabilised in Q2 2022 with no net shrinkage in sites in those three months. This followed consistent falls in site numbers during the pandemic and Q1 2022 figures revealing that 920 hospitality sites closed in the period (a rate of 10 per day). Nevertheless, this still leaves the industry with 9,200 fewer sites than before the pandemic struck. Smaller independent businesses are struggling the most to survive, accounting for 74% of the closures in Q1 2022 and seeing their numbers fall even within the overall flat picture in Q2.
Financial Risk Profile
There are currently 77,680 companies registered at Companies House, whose business is to run pubs, clubs or restaurants. We analysed their finances using the data analytic system at Company Watch, the financial health monitoring specialists. A summary of our research can be found here.
Some 44% (34,458) are in the Company Watch warning area, indicating that one in four of these vulnerable entities will file for insolvency or undergo a significant financial restructuring during the next three years based on an analysis of their latest published accounts. This percentage is a significant improvement since December 2021 and April 2021 when the at-risk figures were 50% and 58% respectively.
Our analysis of the sector’s finances reveals that the average financial health score awarded by the Company Watch system (H-Score®) is only 35 out of a maximum of 100, compared to the whole economy where an average closer to 50 would be expected. This is up from 32 out of 100 in December 2021. One in four (19,456) hospitality companies had negative balance sheets with a combined deficit for these ‘zombies’ of £1.9bn. The percentage of zombies has improved slightly from 26% in December 2021 and 27% in April 2021.
Another very worrying finding is that 21,877 (28%) of the companies have negative working capital, with a total deficit of £4.3bn. This means that their short term liabilities due for payment in less than a year exceed their ‘quick’, easily realisable assets such as receivables, inventory and cash. This is deeply undesirable financial model in such uncertain times.
Smaller hospitality businesses
Our analysis also confirmed how fragmented the industry is and how fragile some parts of it are, with 21,765 (31%) companies having total assets of £25,000 or less. With fragility comes much greater risk. 55% of these smaller businesses are in the Company Watch warning area and their average financial health rating is only 29 out of a maximum of 100.
Business failures
Mercifully, insolvencies in the sector have been limited because of the various government support measures, in particular the furlough scheme and the ban on creditors issuing Winding Up petitions or landlords enforcing rent arrears. They remain at relatively subdued levels. According to Insolvency Service statistics, there were 1,127 failures of pubs, clubs and restaurants in the first six months of 2022 an increase of only 13% compared to the equivalent period pre-pandemic in 2019.
Despite having weathered the Coronavirus storm, it cannot be assumed that this trend will continue, particularly now that government support has been withdrawn and with the new set of extreme difficulties now facing the sector.
Rising debt levels in smaller hospitality businesses
The overall borrowings of the industry have fallen slightly in the past eight months, dropping from £13.3bn in December 2021 to £12.9bn now. Unfortunately, this statistic hides a far darker picture amongst smaller hospitality entities. For those with assets between £100k and £249k, total borrowings are now 155% higher than in April 2021. For the next tier of companies with assets between £25k and £99k they are 252% higher and for the smallest businesses with assets under £25k, borrowings are up by 164%.
What now for hospitality?
It is impossible to understate the sheer ferocity of the challenges now facing hospitality businesses. They impact every part of their finances. The top line is threatened by the impact of the cost of living crisis on customers’ ability to afford to eat and drink out. Profit margins are being savaged by input price increases. Overheads are surging off the chart. Bank of England predictions that consumer inflation might peak at 13% are irrelevant when pubs and restaurants are seeing their energy prices soaring to four or five times what they were paying before. There is no price cap for commercial users.
The other adverse factor is labour shortages. This limits the hours many businesses can operate in the short term and therefore the contribution from trading to fixed overheads. Worse still, it is damaging the quality of experience that customers are getting and harming reputations, which will have longer term implications.
There are no silver bullets in a crisis of this magnitude, nor can the sector expect the government necessarily to get it right with any emergency support it might be persuaded to provide. The only way forward is for hospitality to provide the best standards to customers it can, despite the extreme difficulties it faces, and to adapt its offerings to the issues facing its customers.
As in the retail sector some years ago, when the good retailers came through very tough times and the poor ones perished, the survivors and winners in hospitality will be those which are efficient, know and relate to their customer base well and have sound finances.
If a hospitality business can’t tick all of those boxes, then it should get expert advice and get it quickly. It’s surely wise to have an experienced navigator guiding you along the exceptionally bumpy road ahead.
It is impossible right now to watch a news broadcast, read a newspaper or scan through a news website without being struck by the warnings of Armageddon for our pubs, clubs and restaurants, already weakened by the pandemic. Calls for immediate and targeted help from the government for the hospitality sector are multiplying and escalating.
August 2022