Can the hospitality and leisure industry survive the social distancing phase of lockdown exit?

In recent days there has been increasing speculation about the exit route from lockdown and in particular about the potential for social distancing to remain in place for some time. 

In the face of this prospect, many in the leisure industry have been highlighting the implications of social distancing on the ability for leisure businesses to reopen profitably. The primary concern of course is for the safety of customers and the teams operating the sites and I know from speaking to friends in the sector that a great deal of thought and effort is being put into the creation of a safe environment.

Once this safety baseline has been established, a key area of focus is to establish the potential profitability of the business on a site-by-site basis under different demand scenarios. This modelling should also, as described by my colleague Bernd Brunke in this post, consider three different lockdown scenarios: short, long, strong second wave closure.

The level of demand that will exist is highly uncertain and will be impacted by:

1. Regulation driven capacity constraints

2. Customer caution due to health concerns

3. Customer spending capacity due to lost income during the lockdown / overall economic uncertainty

Due to this uncertainty, it will be necessary to zero base forecasts on a site-by-site basis to establish what costs and outgoings need to be flexed to break-even or limit losses.

This concept of zero basing is important as operators need to rebuild their site P&Ls based on how their business model has changed. This is from both a revenue stream (greater income from delivery and other services such as online for example) and cost perspective (modified labour model due to lower capacity in the kitchen, pre-ordering, click and collect etc reducing labour requirements). 

With the new business model reflected, you can then look at the cost base to prioritise costs into tiers of essential/unavoidable through to flexible/deferred. Examples of essential costs would include staff, suppliers, health & safety, compliance and licensing costs. More controversially, the flexible/deferred costs would be those of stakeholders whose interests are in the successful rehabilitation of the business to recover capital value, preserve employment or future income streams. All of these aims are served by the business being rehabilitated as soon as possible so there is an incentive to support this process. These stakeholders include shareholders, lenders, landlords, brand owners or the government.

Building up site level P&L's in this way enables businesses to establish the shortfall to break-even at lower demand levels and at what level surplus begins to be generated for distribution to lenders/landlords, brand owners, the government and shareholders (in my opinion in that order). This sort of approach will require greater collaboration and it may be beneficial through this period to work on more of an "open book" basis so that these stakeholders who are providing support can understand its necessity. 

As has been pointed out by a number of industry executives, opening a business into a market where demand levels are as much as 70% below previous levels is simply not sustainable without further support. Whilst lenders and landlords can continue to provide support by waiving or deferring payments, the government will likely need to consider providing continued direct support to the industry in order for it to reopen. This may come in the form of continued furlough payments when staff have returned to work or VAT reductions/deferrals.

Without some form of continued government support, the fear is that a great number of businesses will decide it is simply uneconomic to reopen and, with great regret, close the doors for good.