Sector flexes to survive

The UK’s hospitality sector continues to seek ways to ease its cashflow crisis, as a continued government lockdown restricts the ability of businesses to trade.  

Industry groups are warning of the scale of longterm damage to the sector, if closures are insisted upon for many more weeks. And, with financial support programmes scheduled to end, business owners are looking for alternatives to grow incomes.  

A recent survey suggests that already 6,000 UK licensed businesses have permanently closed, representing more than 5% of the UK hospitality sector. “One in five businesses say they do not have enough cash to last beyond February,” warned Kate Nicholls, chief executive of UKHospitality. “The entire sector continues to be hit hard, but restaurants have arguably been hit hardest of all. Not surprisingly, many of the worst off are independent businesses teetering on the verge of collapse due, in large part, to the issue of rent debt.” 

“This is a stark reminder of the importance of having an exit strategy and ongoing support for businesses. Sustaining businesses, keeping them alive and keeping jobs protected is vitally important and is going to be key to recovery once we emerge from this. If we have the right support in place now, it will make the job of recovery much more achievable once we are in a position to reopen again.” 

Nicholls has called for “a bold, wide-ranging package of financial support to ensure as many businesses as possible are saved”, headed by extensions of existing VAT and business rates relief.  

Some hotels have remained open during lockdown, principally to accommodate travelling key workers; Whitbread recently said more than two thirds of its hotels are operational in some form.  In a few locations, hotels have also been called on to accommodate local homeless people, in an arrangement often managed by local councils. But for many, lockdown means effective full closure.    

One hope for a cash injection came in the form of a UK Supreme Court ruling, around the issue of insurance cover for pandemic business losses. The ruling substantially backed an appeal made by the Financial Conduct Authority, to clarify whether insurers were liable to payout to affected businesses; many insurers had previously declared their policy wording meant they did not provide cover specific to the circumstances.  

However, not everyone will benefit from the ruling. One insurance company in the spotlight, Hiscox, has told brokers it thinks that less than a third of its policies will be obliged to pay out, under the court decision.  

Some alternative temporary uses are beckoning, for shuttered hotels. Several have signed up to become vaccine facilities, including Village Hotels, which is partnering with Pharmacy2U. And in Chesterfield, Derbyshire, the independent Casa hotel is switching to providing vaccines from February. “We’re ideally located with plenty of space and we’ll have a dedicated car park at the site for people coming to get their vaccine,” said owner Steve Perez. “The more vaccination centres we can have in Chesterfield, the better – and the quicker we can get back to living our lives again. We can’t wait to get going.” 

Also on the agenda is the use of hotels as overspill health facilities, and as quarantine space. Best Western and the London Hotel Group spent some time preparing to support the NHS by accommodating non-critical patients. “Throughout this crisis we have looked to provide innovative solutions….thinking differently about our strategically located hotel portfolio and how it could support the NHS in this time of need,” said Meher Nawab, chief executive of LHG, which has 1500 rooms in the capital. “We have been working together to adapt our hotels to assist the NHS with short- and medium-term solutions.” 

More recently, the UK government has been considering the potential to require all people arriving into the UK to quarantine in a hotel, for several days, a solution that has been used in several Asian nations including Singapore and Australia.  

But Rob Paterson, CEO of Best Western UK told a Radio 4 news programme that this is not straightforward: “We’ve had conversations – we’ve done some work to understand some of the challenges around hosting covid-positive patients, or quarantining customers or arrivals. There’s three key areas that can be a barrier… many of the insurance providers that hoteliers have today simply will not insure the building for covid-positive patients.” Then there’s staff, potentially feeling uncomfortable working around confined guests, who may be positive.  

And there’s infection control. “We saw in Australia one of the quarantine hotels for the government in Victoria had a break-out and it resulted in a prolonged lockdown.” Quarantining also has issues of capacity limits.  

“There’s certainly a commercial opportunity, so I think there will be a huge interest in doing this, but I think rushing into this would be a mistake,” he warned.   

Reopening also presents challenges, and a Christie & Co analysis of the behaviour of hotels emerging from previous lockdowns provides some colour on the likely direction of travel this coming season.  

Report author Olivia Chaplin, director of hotels at Christie, commented: “It is clear that hoteliers are reluctant to rush into a reopening given alternative options. The decision to operate in the current environment is a balancing act between levels of demand and available supply in the market – too many rooms open, and occupancy will fall below the breakeven point; remain closed and lose out on the opportunity to act quickly to capture whatever demand is still available and be ready when the demand picks up again.”  

Christie recommends hoteliers assess likely demand, and think about local business sources, before reopening; balance costs with demand as much as possible; and make the most of government support.  

HA Perspective [by Chris Bown]: The UK government continues to provide a melange of mixed messaging. The lockdown won’t be lifted anytime soon, we are warned, yet financial concessions to support business have a definite end date, which is fast looming. That mismatch needs to be fixed – and fast.  

Then there’s the murmurs about potentially quarantining arrivals into the UK. Aside from the fact that this is about nine months late as an idea, if it is put into action it’s also going to further skewer Heathrow airport and almost all the businesses that feed off it. And as BW boss Paterson warns, it’s not exactly going to be a great opportunity for hoteliers.  

For those that don’t read the Australian media regularly, the hotel quarantine model fell spectacularly apart in Victoria. Poor management at one hotel led to private security guards who worked there spreading 90% of the infections in the region’s second wave of covid-19; having picked it up from guests, they spread the bug while carrying out second jobs such as pizza delivery. The incident has been subject to a judicial inquiry in Australia, and has claimed the scalps of public officials.  

Still, every cloud. The disgraced hotel involved, Rydges on Swanston, has changed hands, and the new owner is carrying out a full refit before launching it as the Crowne Plaza Melbourne Carlton. 

Additional comment [by Andrew Sangster]: The bad news from the sector just keeps coming. Last year the lockdowns associated with the pandemic cost UK hospitality businesses an average of GBP200m per day. 

There was a 54% drop in sales in 2020 according to the CGA Quarterly Tracker, collapsing from GBP133.5bn in 2019 to GBP61.7bn in 2020. In the final quarter of 2020, sales were down 57% when compared to the final quarter of 2019. 

But all this is historic. What matter for investors is the future. And this looks a lot less bleak and, difficult to envisage given the current level of pain, possibly booming. 

For UK hospitality companies, the closing of borders is likely to generate a huge boost in demand. To offer some crude guidelines, look at the 2019 Travel Trends survey from the Office for National Statistics. 

In 2019, there were 93.1 million visits by UK national overseas worth GBP62.3bn. Overseas visitors to the UK numbered 40.9 million, spending GBP28.4bn. The net balance here is 52.2 million visits and GBP33.9bn in spending. 

This balance is now going to be deployed into the UK travel and hospitality market. To put it into context, Visit Britain reckons the total spent on domestic tourism by UK residents was GBP24.7bn in 2019. In other words, it is possible than UK domestic tourism demand will more than double this year if borders remain closed. 

What seems pretty clear is that UK tourist businesses do not need a VAT cut or any other form of tax handout from the UK government this year provided we open up from Easter. The problem is going to be too much demand rather than too little. 

A VAT cut at a time when prices will be sharply rising (as they should) would not be a good look for the industry. Businesses have been forced to close by the Government and needed support during this period of closure but on reopening the key thing is for the Government to put in place policies that will facilitate long-term development of the industry. This matters more than a short-term handout. 

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