Divergence in UK hospitality sector resilience emerges as accumulative headwinds continue to hurt

Insolvencies across the UK hospitality sector continue to trend upwards, reaching a new high in March and representing 14% of all business failures across the UK economy, according to government data. The accumulative impact of high interest rates, sky-high energy costs, staff shortages and reduced consumer spending due to the cost-of-living crisis continues to blunt the performance of the hospitality sector and risks greater business failures ahead. 

In the first quarter, 846 hospitality businesses filed for insolvency, according to Insolvency Service data, up 41% on the same quarter in 2022. However, a much more revealing picture emerges from a new dataset produced from CGA by NIQ and AlixPartners. According to its Hospitality Market Monitor data, the UK has suffered a net decline of 4,593 licensed premises in the 12 months to March 2023.

The headline trend in the first quarter shows net closures across the UK’s hospitality sector have continued but at a reduced rate. Britain’s hospitality sector saw a net decline of 756 licensed premises in the first quarter, which reflects a drop of 0.7% from the end of 2022 – equivalent to 8.4 closures every day. As at March 2023, there were just over 100,000 hospitality businesses – almost 14,000 fewer pubs, bars, restaurants, and other licensed premises than in March 2020, at the start of the pandemic. The closures represent a 12% contraction that underscores the accumulative ongoing impact of high inflation, staff shortages, soaring energy bills and the tail effects of Covid-19 on the hospitality industry.

Small firms bearing the brunt of combined headwinds

But this top-level data analysis masks significant variations in relative hospitality resilience between firm size and subsector industry and between city centres and regional locations. For example, independent hospitality businesses suffered a 14.1% drop over the past three years to March, compared to just 3.3% among larger counterparts. The data reveals a growing divergence in the ability of small independent firms and larger, corporate hospitality businesses to withstand the combined headwinds.

By hospitality segment, food-led businesses have proven more vulnerable than their drinks-led peers, while nightclubs and restaurants have suffered steeper closures in the past 12 and 36 months than single-purpose bars, sports and social clubs and casual dining restaurants, according to the CGA data. In the last month, Prezzo, the Italian restaurant chain, announced it was shutting 46 loss-making sites – equivalent to one-third of the chain’s restaurants – due to the rising costs of ingredients and energy, with the group reporting a doubling of utility bills in the past year. Closing Prezzo restaurants will put 810 staff at risk of redundancy. More broadly in the industry, higher costs are squeezing hospitality suppliers, where sales growth is typically linked to prices rather than volume. Elsewhere, The Restaurant Group (TRG), which operates eight restaurant brands across the UK, including Wagamama, Frankie & Benny’s and Chiquitos, says dine-in trends are improving which, along with favourable property market dynamics, has encouraged the group to open seven new Wagamama UK restaurants during the current financial year. However, elsewhere in TRG’s leisure portfolio, the hospitality firm continues estate rationalisation with a further 23 sites to close by the end of May. TRG said in its annual results that it hedges energy costs and has purchased interest rate caps to navigate cost headwinds. 

Holiday travel companies are reporting improved summer demand. TUI Group, one of the world’s largest tourism groups operating travel agencies, a 130-strong holiday airline fleet, around 400 hotels and 16 cruise liners, says summer bookings are up 13% year-on-year and at 96% of pre-pandemic levels. The UK market continues to be the most advanced sold at 64%, according to TUI’s annual results. In another sign that the UK holiday market is recovering, Brookfield has put UK holiday resort Center Parcs up for sale, seeking between £4 billion and £5 billion, according to the Financial Times, which is potentially double the £2.4 billion price the Canadian private equity group paid Blackstone eight years ago. The hospitality sector deal represents a significant test of investors’ appetite at a time when commercial property transactions have been limited, while inflation and interest rates remain elevated. Short-term ‘staycation’ holiday locations have demonstrated resilience during periods of economic weakness, as UK households holiday at home.

By geography, the rate of closures in all major cities is reducing, as pandemic concerns recede, allowing workers and tourists to return to city centres, which were more harshly impacted during lockdowns. Notably, London, the largest leisure market, which was most affected by Covid-19, has also seen its hospitality sector return to its pre-Covid vibrancy, according to CGA data.

Hospitality trading conditions remain challenging. Consumers’ demand for eating and drinking remains strong, but pressure on spending may increase as the economy continues to slow. Trade associations, such as UK Hospitality, have warned the government that the reduction in support for energy bills from April will squeeze hospitality businesses already facing high inflation, increases in minimum wages, and higher debt servicing costs. There are some early indications that the labour market in the hospitality sector has started to loosen. For example, according to the latest Office for National Statistics labour market report, vacancies in hospitality are down 22% over the last year and by 9% in the last quarter. However, with sector-wide vacancies still at around 132,000 – 48% higher than pre-Covid levels – staff shortages remain a dominant problem.

In the first quarter, six out of 15 of the UK’s biggest city centres saw the number of licenced premises flatten or grow, while cities such as York and Brighton still suffered contractions. Over the past three years, Aberdeen, Birmingham, London, York and Glasgow all suffered steep double-digit contractions in licenced premises (ranging from -18.9% to -14.7%, respectively), while Bristol and Liverpool were remarkably resilient over the same period (at -1.5% and -2.6%, respectively). 

The data reinforces the reality that low margin, high turnover businesses have little room for manoeuvre in a weakening economy. Earlier this month, on May 11, the Bank of England’s Monetary Policy Committee (MPC) increased the Base Rate – for the 12th consecutive time – by 0.25 percentage points, to 4.5%, increasing UK borrowing costs to their highest levels since 2008. Interest rates reaching their highest levels since 2008 is a significant concern for hospitality businesses and could significantly impact business viability. MPC members noted that GDP growth was stronger than expected, while demand remains resilient, and the broader labour market remains tight. Consequently, CPI inflation was projected to take longer to return to the 2% target, which implies a higher for longer path for the Base Rate, which presents further challenges for hospitality businesses. 

Navigating hospitality headwinds

For hospitality businesses struggling to meet their liabilities, secure a refinancing, and operate on a sustainable profitable footing there are several issues to consider. BTG Advisory is well-placed to advise on the following scenarios, and more besides. During cashflow shortages, paying taxes (e.g., VAT, PAYE and corporation tax) is often the first casualty. HMRC has tightened requirements to secure additional time to pay taxes owed through a Time to Pay Arrangement (TTPA). Typically, HMRC now requires a 12-months maximum payment plan, with a lump sum up front and a good compliance record. Extending existing debt facilities is also becoming more challenging due to a wave of CBILs and CLBILs loan maturities coming up. Therefore, businesses may need to secure a full refinance. Private equity funds retain some interest in the hospitality sector, although with greater distress in other industries; the distressed players are mostly looking for more rewarding risk-return plays. 

The restructuring landscape has evolved in the past two and half years. In December 2020, HMRC regained its preferential status for certain taxes owed to it (e.g., VAT, PAYE and National Insurance) in the priority order for distributions in insolvency procedures, such as CVAs. HMRC’s enhanced creditor status, known as Crown Preference, now requires creditor deals to repay ‘crown debt’ in full ahead of all other creditors (unless HMRC consents to accept a discount of debt owed). Consequently, the appeal of CVAs for many struggling businesses seeking a turnaround is significantly reduced. 

Restructuring plans are available in other forms, including agreements which reduce struggling firms’ debts through shareholder equity injections which also reset property lease obligations (e.g., the likely path forward for Presso and Virgin Active). Under such turnaround plans, often an initial payment is required to the secured creditor with future profits directed to fund additional payments to preferential and unsecured creditors. As ever, the restructuring options available to businesses will always be higher for those firms that seek early advice. Options can also include securing fresh equity, refinancing, asset sales, trade sale, and financial due diligence to identify how firms can improve balance sheet management, as well as administration options. Insolvency is never inevitable for struggling firms. Acting earlier always improves outcomes. If you would like to talk to one of our team about your firm’s circumstances in confidence, do not hesitate to get in touch today.