The financial health of the UK’s leisure and hospitality sector remains in a precarious state. Since coronavirus restrictions were lifted entirely back in early 2022 the sector started to show early signs of recovery, with many optimistic for a covid-free summer season to come. But that optimism has waned.
Successive negative shocks to the UK and global economy have weakened the balance sheets of many service industries – including cinemas, museums, historical sites, events, theme parks, restaurants, cafes, pubs, catering and hotels. etc. All of these businesses are reliant on consumer confidence and discretionary spending, which are both softening. Consumer economic anxiety and perceived increases in prices for non-discretionary goods – such as higher energy, fuel, food and transport costs – erodes discretionary spending, particularly for low and middle-income households. Earlier in the year, household spending was forecast to recover from two years below normal growth levels, as the risks associated with Covid-19 diminish. However, high inflation and low real wage growth – which combined to undermine consumers’ purchasing power – present risks to this outlook, with implications for the recovery in the leisure and hospitality sector.
UK consumer confidence levels plunged to an all-time record low in May, at -40, according to GfK’s consumer confidence barometer, which dates back almost 50 years. Consumer confidence is now lower than in “the darkest days of the global banking crisis, the impact of Brexit on the economy, or the Covid shutdown,” says GfK. Google Mobility data shows an 11% decline in shopping and recreational outings relative to pre-pandemic levels, according to a report in Financial Times. Credit and debit card spending on discretionary items, such as clothing and furniture, also declined 14% from pre-pandemic levels in the second week of May, according to Bank of England data.
The abrupt demand shock to the economy at the onset of the pandemic hit leisure and hospitality businesses particularly hard. In the hospitality sector, an estimated £10 billion in Covid-related debt sitting on balance sheet which will take two years to pay down, according to HospitalityUK’s Kate Nicholls, in evidence to a parliamentary select committee back in March. Companies were forced to take on additional debt in order to survive. There is also a backlog of rent arrears owed to landlords accrued during the pandemic, which is effectively an additional debt liability. “Covid for us is going to last. We are going to have a long economic covid. One in three hospitality businesses has no cash reserves. We are undoubtedly going to see business failures over the next two years as we come out of that process,” Nicholls told the select committee.
The adjacent UK tourism sector lost an estimated £180 billion of revenue over the last two years, according to VisitBritain data cited in the same parliamentary select committee. Government support amounted to £37 billion, according to Tourism Alliance’s Kurt Janson, which leaves “a hole of about £140 billion that businesses are trying to recover”. Those businesses “will remain in a fragile state for the foreseeable future as they try to rebuild their reserves and pay off the debt they have accumulated over this period”.
The broader macro environment – including supply chain disruptions, labour shortages as well as energy, food and wage pressures in the UK and internationally – indicates rising operating costs while momentary tightening is destroying demand to tame surging inflation. The UK economy expanded by 0.8% in Q1, a significant deterioration Q4’s 8.7%, and weaker than the 1.0% consensus forecast, according to ONS data. Alarmingly, the entire positive GDP contribution in the period came in January. Monthly GDP estimates show that GDP rose by 0.7% in January, followed by no growth in February and a fall of 0.1% in March 2022. Consumer-facing industries, retail sales and the hospitality sector were particularly weak. “It now seems likely that GDP will contract in Q2. And with the full hit of the cost-of-living crisis yet to be felt, the chances of a recession have just risen,” says Paul Dales, chief UK economist at Capital Economics. However, the broader consensus currently is for flat growth in Q2, followed by 0.3% in Q3. The Office for Budget Responsibility’s (OBR) forecasts for the next two quarters are 0.6% and 0.3%, respectively. Thus, the consensus remains – for now at least – anaemic growth, but not a recession.
In April, UK annual consumer price index (CPI) inflation reached a fresh 40-year high, at 9.0%, according to the Office for National Statistics (ONS) data, driven by soaring energy and food prices. The spectre of a recession – at home and throughout key international markets – may burst the assumed “pent-up demand”. While separate ONS data shows UK retail sales provided an unexpected 1.5% rise in April, it was driven by supermarket sales of food and alcohol, implying people have pivoted to recessionary behaviour (e.g. staying at home rather than going out). This squeeze on spending power risks offsetting the build-up of household savings during the pandemic. It is a red flag to the leisure and hospitality sector, battling to revive demand and balance absorbing price increases and passing some onto customers with eroding demand.
Most leisure and hospitality businesses in these sectors tend to operate on low profit margins, and now must return to self-sustainability amid historically high debt levels, rising inflation, softer consumer confidence and lower discretionary spend. While many leisure and hospitality businesses that successfully navigated the past two years will endure through a potential UK recession, there will certainly be swathes of previously viable businesses which may not survive. The single best action struggling businesses can take is to engage an adviser early in the onset of financial distress to maximise the turnaround options available.
If your business or one in your portfolio is affected by these issues, and would like to discuss corporate options, including mediating Covid rent arrears, refinancing, and managing your businesses through a potential stagflationary environment, please do not hesitate to get in touch with one of our team today.