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| 3 minutes read

The hospitality storm will pass – but strong management now is essential

With headline inflation threatening to breach 10%, there is most definitely the sense that we are in unchartered territory. Even for the elder statesmen and women of the hospitality sector, it is 30-plus years since this sort of inflationary pressure was in play.

The operating landscape has been described as a post-COVID “perfect storm”, with an emerging cost-of-living crisis, supply challenges, people shortages and the ripple effects of the conflict in Ukraine all buffeting the sector. You know it’s significant when the governor of the Bank of England’s language falls only just short of headless horsemen.

As difficult as market conditions are – not helped by the reversion of VAT to 20% last month – these challenges, nevertheless, are expected to be a temporary situation and not a fundamental shift. While it is easy to be pulled in by the wave of negative economic news swirling around the market, operators must remember that the underlying dynamics of the hospitality sector remain attractive.

To this point, it’s undoubtedly been a turbulent year for the investment market. It looked pretty tough at times in the fourth quarter last year, but right now there are very acute short-term challenges being faced. The propensity for eating out remains undimmed and hasn’t shifted consumer behaviour. But there is absolutely the need to revisit business plans and try to understand the impact of inflationary cost pressures and consumer behaviour, to gain a better sense of what the future holds now.

The rise of delivery, extension of trading windows and changing working patterns have made a broader range of locations economically viable, especially market towns and smaller cities, and we’re seeing this reflected in roll-out plans. Beyond the short-term disruption, we believe the longer-term sector dynamics demonstrably support continued investment.

Strategic complexity requires strong management 

Investor focus is on growth more than ever, but it’s a more complex picture now than pre-COVID. While growth strategies used to be based around scaling the number of physical sites (and what successful exits were built upon), factors to consider now include omnichannel options, multi-brand strategies, more volatile consumer behaviour and location, plus a greater expansion of franchising and the need for a coherent and integrated digital strategy.

Such complexities place a premium on a strong management team, able to create a growth plan for this new world and demonstrate return on investment potential for all aspects of the evolved model. The management teams that can bring all of this together and demonstrate return on investment from these channels are absolutely in demand, because, post-acquisition, buyers/investors want to retain that intellectual capital within the business so it can catalyse further growth.

One of the great examples of this is highlighted in a previous results announcement from The Restaurant Group. It talks about the returns that it can now deliver from the dark kitchens that it is opening with its Wagamama brand. It is a low-capital, high-return environment that wins investors’ hearts and minds. Similarly, Azzurri’s ability to “switch on” 130 Coco di Mama locations overnight (well, over three weeks) across the country, using the kitchens of other brands, speaks to this brave and new post-pandemic landscape.

In the immediate future, with the current levels of disruption, many businesses will be revisiting cash flow forecasts that may have become out of date and reassessing the validity of any capex and new site roll-out plans. Opportunities for expansion remain, but at present, the end of the rent moratorium has provided more of a trickle rather than a wave of new sites flooding the market.

There is a chance that the recent removal of the last vestiges of government support, which played a key role in the survival of many businesses during the pandemic, combined with inflationary pressures, could trigger some restructuring activity. Some of these situations will have been building over the last two years. Perhaps in the natural scheme of things, they would already have tipped over, and the inevitable has been delayed until now due to government support and interventions.

That said, it is clear to us that there is still a lot of support, certainly from banks and investors, for businesses that have engaged with their stakeholders in the right way and are demonstrating they're doing everything they can to rebuild and recover. This will help to keep the pain across the sector to a minimum.

While challenging, the current situation is not permanent. Hospitality and leisure is deeply engrained in the fabric of consumers’ lives. It is a fundamental pursuit, and we expect that once the sector has navigated the short-term challenges, the weight of money and investor support will still be there to back strong teams to take advantage of the breadth of growth opportunities that remain in the market.


An earlier version of this article was previously published in Propel

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hospitality, leisure, trhl
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