People
The welcome return of normal trading activity that followed after the removal of COVID restrictions has been offset in recent weeks by staff shortages, supply-chain issues and continued discussion of COVID issues such as vaccine passports. This means that the sector is far from out the woods and that, in our view, resilience will be a key watch word as businesses look to rebuild.
The Government’s recently launched Hospitality Strategy highlights that while structural issues and the unprecedented nature of the pandemic left the sector facing many challenges, it also demonstrated an incredible adaptability and resilience. As the sector recovers, the focus for management teams must be to build upon some of the positive and necessary changes implemented over the past year - and put in place strategies to increase business resilience in the face of future challenges.
There are many aspects to building resilience, but four key areas that we believe management teams should be focusing on are:
1. Refining estate strategy
Many months of home working and the reality that a more hybrid working model will be adapted by many businesses has placed even greater focus on operators’ estate strategy. At the same time, accelerated trends, such as delivery and click & collect, greater technology adaption, and the move into retail has meant that a resilient estate strategy needs to take into account not just location but also physical site configuration due to the impact of omni-channel sales.
How permanent the shift to hybrid working patterns will prove to be is not yet certain, but this crisis has highlighted the risk in prioritising one location type such as city centre business districts. The search for new sites can now be broader to add diversity but operators will need to consider what changes may be necessary to their operating model to trade in, say, suburban locations compared to city centres. Expansion can now also come from the use of dark kitchen space (although the use of dark kitchens started before the pandemic and central production units have been around for a long time), either through collaboration with delivery groups or on a self-owned basis. Drive-thrus are also enjoying a renaissance with more and more operators in the QSR space exploring this location type.
The growth of delivery and click & collect revenues has created the opportunity to increase sales density per site through reconfiguration. It is no longer the case that more covers equal more revenue. Having a larger kitchen area that can increase output at the busiest times can increase total revenues due to serving more off-premises sales, even if this comes at the expense of tables. It may even be possible to offset internal covers loss with the use of outside space which became licensed during the pandemic. Nick Collins, chief executive of cafe bar operator Loungers, said recently that the business is coming out of the crisis with a “better-balanced estate” and investment the group had made on outside space over the course of the crisis would benefit sales for the long-term.
2. Leveraging technology
Technology was already beginning to play a significant part in the sector’s development, but the pandemic has increased its adoption and scope of influence. Consumers have embraced enhanced mobile order and pay services, along with click & collect and digital menus, for example, and for many this tech is here to stay. I was struck by a statistic that I saw recently that stated well over half of 18- to 24-year-olds would prefer to continue ordering online even after the country has been vaccinated. The likes of Pret and Itsu have invested in “stores of the future” to remove friction from the consumer journey and enable operational efficiency. Operators are learning that digital channels should enhance, rather than replace, traditional models and also become more sophisticated in how they use the data they are mining to facilitate better scheduling to reduce labour costs and plan supply-chains.
The use of all this extra data to drive business improvement is only just beginning and we expect this to be a key area of focus in the coming years. Subscription models such as those recently introduced by Pret and Leon are further examples of where technology has helped create new revenue streams and gain a greater understanding of customer behaviour and spend. The effective use of technology and data can help to make businesses more agile so they can adapt to changes in the market as they arise.
3. Organisational resilience
A powerful spotlight has been shone on how companies treat their teams. The crisis provided the opportunity for many to reassess this crucial part of their business and discover whether their corporate culture was healthy or otherwise. A key part of this is how operators recruit, retain and reward staff – particularly in light of the current well-publicised labour shortages. Gastro-pub group Peach recently introduced a new profit share initiative, changing the way it rewards its managers following the pandemic; Honest Burgers, the Active Partners-backed brand, has launched a scheme to help employees develop their own food and beverage concept ideas; premium bar operator Arc Inspirations is running an incentive trip to New York if the company hits its EBITDA target. There will be many more examples across the sector but never has the phrase ‘people are our greatest asset’ rung so true. Having alignment between leadership and their teams has never been more important as this enables companies to react and adapt to changing markets and operational challenges.
A great example of this is the current disruption caused by supply-chain issues. Whether this is down to COVID, Brexit or industrial action is a moot point - the fact is it is a material problem facing many businesses and they need to adapt to deal with it. Higher product prices and restricted availability are causing issues at the coal face. This issue can’t all be solved centrally, so companies where site level teams are empowered and aligned with the leadership team are better able to react and adapt at a local level. Actions we have seen taken at a site level include simplifying menu choices, finding alternative local suppliers, switching out ingredients or simple honesty with customers that for a short time certain items will just not be available. It has also thrown into sharp focus the need to have strong supplier relationships, many of which will have been damaged or bolstered during the crisis through operator behaviours. You need to look beyond your own company to assess resilience fully.
4. Scenario planning
Businesses should be well-versed in the need for scenario planning given the circumstances of the past 18 months. Restrictions may have been lifted but many senior sector figures are reporting volatile trading as consumer confidence remains shaky. No-one really knows how it might bounce back and how consumers might behave as we move beyond summer and into autumn and winter. A further national lockdown would appear unlikely given the success of the vaccines in preventing serious illness, but this will be our first winter post-vaccine roll-out so it is not inconceivable that more localised action might be taken.
Operators should have in their drawer their contingency plans in the event of further disruption so they know the steps they need to take to cut costs and deal with their operational and financial stakeholders so that any bumps in the road can be absorbed. Less drastic scenarios should also be considered where certain revenue streams are slower to recover than expected such as city business districts or travel hubs. If this is the case, might further decisions need to be taken on site closures and a pivot to different location types in any expansion plan, for example.
The pandemic has been described as the ultimate test of resilience that the sector has ever faced. All facets of individual businesses have been challenged, stretched, broken and reassembled - including the reputation of many a management team, brand and customer offer. The resilience shown by many operators over the past 18 months has been remarkable - more will be required as we enter the recovery phase.
An earlier version of this article was previously published in Propel.
