Celebrations are still on ice for the hospitality sector, even as Freedom Day looms. Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, looks at what this means for investors.
The bar and restaurant sector appears to be brandishing its cap like a comeback kid. Outside terraces are heaving, the Euros football championship has pulled in the punters and revellers are making the most of their new found social freedoms. Booking in advance for a favourite table often seems like an obstacle course, with a supreme effort needed to target early reservations to get ahead of rival customers. As far as the hospitality corner is concerned, it seems the roaring twenties may have well and truly begun and memories of the pandemic lockdowns are receding fast. But scratch the surface and the champagne is still very much on ice for the bar and restaurant sector.
Even though many businesses could start serving customers outside from 12 April, in May many were still unsure what the future will hold despite the rapid vaccine roll-outs. According to ONS data, almost a fifth of bar and pub businesses said they had low confidence that they would still be operating by the beginning of August, while less than a quarter said they were highly optimistic about their prospects for survival. This compared to just under half of all other businesses who say confidence is high.
It’s not surprising that so many owners have a glass half empty perspective on their prospects. In December, as the third wave swept over the country and time was called on the industry, all pubs and bars surveyed said profits have fallen by more than 50%. Even by late spring, a third still said profits had halved, despite the phased reopening.
Many have had to spend big chunks of revenue they have earned on putting in place outdoor seating arrangements to capture outdoor trade and endure the headache of liaising with local authorities for access to roads and pavements. Although so called streateries in towns and city centres have pulled in the custom, and helped create a party atmosphere as the country eases from lockdown, many bar and restaurant owners fear councils could call time on the revelry. Many are now trying to turn temporary approvals into permanent solutions, but it’s not an easy task with councils varying in their degrees of support due to strict highway and planning laws.
Landlords and restaurant owners are trying to cope with this extra administrative burden on top of grappling with the complexity of payroll. Towards the end of the third lockdown, in early April, the number of staff on furlough within the accommodation and food services sector, which includes bars and restaurants, peaked at 1.65 million. Recovery has been slow, as even by May just over half of the pubs and bars surveyed had more than half of staff off on furlough, as they adjusted to changing demand, compared to just over 8% for all other businesses.
There may be queues now forming outside popular venues, but despite a bounce back in customers, job uncertainty still remains relatively high in pubs and bars. 59% of businesses in the sector said they were not going to make staff redundant by August, compared to 81% in all other businesses.
The share price of a string of bar and pub chains is mirroring the muted cheer among publicans as the sector reopens. JD Wetherspoon still needs a good dose of tonic as it is languishing around 17% below pre-pandemic levels, as social distancing rules continue to disrupt its business model of pulling in high volumes of punters, while keeping prices low.
Revolution bars is still down a whopping 62% compared to February 2020, even though it has forecast a strong recovery this summer. It has announced plans to raise money through a rights issue to try and reduce its hefty debt pile. Pub chain Marston’s is also 10% lower compared to pre-pandemic levels, after falling to a £105 million pre-tax loss in the 26 weeks to 3 April, with lockdowns clearly hitting very hard. But it was counting on staycations and the euros to draw in the seated crowds and boost its fortunes. Those hopes will be mirrored at Fuller Smith and Turner, whose shares are also still down 7% compared to February 2020.
Investors in bar and pub group Mitchell and Butlers and The Restaurant Group, which owns Brunning and Price pubs, Wagamama and Frankie and Benny’s appear to have more of a glass half full attitude with their respective shares prices already having staged a much stronger recovery compared to pre-pandemic levels. The Restaurant Group’s recovery is partly down to the strong take up of delivery slots for its Wagamama chain. Curbside pickups and deliveries have certainly helped sustain many companies through the crisis of lockdowns. But courier firms like Deliveroo and Just Eat put a hefty charge for restaurants and bars on each order placed, which eats into margins, so takeaway service is far from a cash cow for many establishments.
Having jumped through the hoops to reopen, with social distancing restrictions still in place before the final yards to Freedom day, another crisis looms. Recruitment is proving very difficult for management to deal with, partly due to a large exodus of European workers from the UK. Other workers quit the industry for new careers during lockdown, with little appetite to return to unsociable hours. Employees are being poached by rival joints, with one restaurateur telling me that owners are on the prowl, booking tables simply to sweet talk her staff into leaving as they serve the starters. Some restaurants are now axing lunch time service mindful of the pressure which has already piled on their existing workforces, and fearful of yet another exodus from the industry.
With many overseas holidays still off the cards for now, it’s going to be a scramble to meet soaring domestic demand, so wages or staff perks are likely to rise, which could eat into the margins of recovering companies.
Freedom Day may allow customers to pack back into their locals once more and take up coveted seats at the bar, but there’s still a long way to go before the sector can celebrate with a cheers to good health.