After months of economic uncertainty, there is little doubt that the coronavirus outbreak has had a crippling effect on businesses up and down the country. The impact of the pandemic has affected organisations from a variety of sectors such as retail, transport, education, manufacturing, health and beauty and the tourism industry to name a few. However, it is also evident that certain industries have been affected more than others. One of those business sectors severely impacted by the lockdown and which has felt the full impact of Covid-19 is the hospitality industry.
The importance of the hospitality sector to the UK economy
The industry itself is an integral component of the UK economy, which comprises around 20,000 small businesses and contributing more than £120 billion a year. It is also the third-largest sector for employment with an estimated 3.2 million people working in restaurants, pubs, and other outlets. As a matter of fact, the hospitality industry itself is larger than the automotive, pharmaceutical, and aerospace industries combined. Other supporting evidence to demonstrate the importance of the sector to the economy are emphasised by statistics published by Eventbrite which stated that the UK event industry alone was worth £42.3 billion to the UK economy in 2018, employing over 500,000 people and delivering 35 percent of the UK’s total visitor economy. Such statistics clearly demonstrate just how pivotal this sector is, and why the pandemic has crippled the hospitality industry to the point where it has negatively impacted on the economy.
Murmurings of pessimism were already being uttered in early March on just how the industry would cope should the UK experience a potential outbreak. With the situation escalating rapidly, leading to an eventual lockdown which was announced by Boris Johnson on 23 March, the sudden withdrawal from society was going to impact on all businesses, irrelevant of size.
This had of course all initially started to have an impact when Boris Johnson addressed the British public on 16 March asking them to withdraw from going to restaurants, pubs, theatres and cinemas. This was naturally met with disappointment and anger from business groups who claimed that such a stance would decimate the industry. However, following the rapid rise in infections witnessed in the UK, and the death count rising on an almost daily basis, there was little choice but to announce a lockdown to the nation if the UK was to avoid a catastrophic death count by the end of the pandemic. No doubt that this news would be seen as highly debilitating to the sector, but the harsh reality is that the Government’s main focus during this state of national emergency was to keep the mortality rate from Covid-19 as low as possible – with a target of just under 20,000 in comparison to an estimated prediction of 200,000 had such measures of social distancing not been implemented. Whilst we have since seen the death toll rise to over 45,000, it was clearly imperative that lockdown measures were needed to avoid a catastrophic loss of life to the nation.
The question which then needed to be asked by those businesses in the hospitality sector was what was the government going to do to support these businesses and to stop them from entering insolvency? There were several businesses that literally feared for their future, with the British Beer and Pub Association writing to the Prime Minister demanding urgent steps to be taken to prevent mass job losses and permanent pub closures. Additionally, the initial fears prompted anger from many in the industry who claimed that they would be unable to make insurance claims without a concrete ban from the government. The Association of British Insurers did respond to this by declaring that in the event of a forced closure the “vast majority of firms would not have purchased cover that would have enabled them to claim on their insurance to compensate for their business being closed by the coronavirus”.
On 17 March, the UK government pledged to provide an unprecedented package of £330 billion to help businesses through the pandemic, with a rate of “direct support” measures including tax cuts and millions in grants and loans. Although this could be seen as a monumental move by the government to protect businesses in the short-term at least, the issue with this is in relation to any loans that you are essentially piling on more debt on those worst affected, and arguably all you are doing is providing a stay of execution. The chancellor himself also stated that there is absolutely no way the government would be able to save everyone affected financially – businesses and individuals alike, and unfortunately, this will see several businesses in the hospitality sector face impending insolvency.
The inevitable lockdown and the crushing impact it will have on the economy
Inevitably, on 23 March, Boris Johnson announced that a lockdown would need to be implemented in order to slow down the rates of infections, allowing the NHS ability to cope with the alarming number of patients admitted to hospital with severe symptoms of the virus. Coincidently, with the Prime Minister himself then contracting coronavirus, and being admitted to hospital and spending a few days in intensive care, the magnitude of the pandemic further hit home in terms of the seriousness of its impact on the economy. Following Boris Johnson’s discharge, it was revealed by the Office for Budget Responsibility - the independent fiscal watchdog, that Britain’s overall economy could shrink by 35% in the second quarter. Furthermore, we could see unemployment in the UK jump by two million because of Covid-19, even though the government’s Furlough scheme aimed to help businesses to retain staff during closures and disruption as opposed to seeing a flurry of redundancies take place.
Hospitality hit hard
The UK Hospitality’s own Quarterly tracker reported that the hospitality sector saw a 23.1 percent contraction in the three months to March, highlighting how hospitality had taken an unprecedented and hugely disproportionate hit as a result of the pandemic and must remain a special case for the UK government going forward. Furthermore, the trade association’s Chief Executive Kate Nicholls commented that the “decline we (the hospitality sector) are seeing in other sectors, alarming although they may be, are incidental compared to the truly alarming hit that ours is taking”.
During the peak, the UK hospitality industry had essentially ground to a halt with an estimated 75 percent of companies in the sector closing and 85 percent of the workforce furloughed during the months of March and April.
Is there light at the end of a dark tunnel?
Despite the uncertainty, among the chancellor’s multi-billion rescue package was a 12-month freeze on business rates for all operators, which was met with a lukewarm response. Emergency legislation to protect businesses that cannot pay their rents from eviction for three months has also helped to further allay those fears, although groups had been calling out for a cut in VAT (as opposed to a deferral, as has already been announced).
A reduction in VAT did eventually arrive, when on 9 July the chancellor announced a cut in VAT to 5% on food, accommodation, and attractions until 12 January 2021. The scheme aims to encourage people to go on a family day out or to take a trip to the pub as this will become cheaper to do so than normal, provided that the saving is passed onto the consumer. However, whilst a pub lunch will be cheaper, alcohol is not included in the reduced VAT package. The scheme itself will also benefit accommodation in hotels, B&Bs, campsites and caravan sites, while attractions such as cinemas, theme parks and zoos will also see the tax cut in what should hopefully be a real boost to the hospitality sector. Mr. Sunak added: “This is a £4 billion catalyst for the hospitality and tourism sectors, benefiting over 150,000 businesses, and consumers everywhere – all helping to protect 2.4 million jobs.”
Mr Sunak has also announced a ‘Eat Out to Help Out’ discount scheme, which will provide a 50 percent reduction for sit-down meals in cafes, restaurants and pubs across the UK, up to the value of £10-a-head, from Monday to Wednesday every week throughout August, with the scheme forecasted to cost the Treasury £500m. Nonetheless, the scheme is said to be the perfect solution to several businesses in the industry echoing popular bar and restaurant chain Brewhouse & Kitchen’s view that this is the ‘perfect solution to help businesses overcome the difficulties’ caused by Covid-19. The scheme can be viewed as a win-win for both the government and businesses by allowing venues to remain open, thus enabling businesses to bring back staff who were furloughed and save jobs along the way. The public will of course also see the benefits from this, being able to eat out with a possible 50 percent price reduction.
Caution remains however
Despite the various ways the government is trying to assist businesses, the future is still shrouded with a dark cloud of uncertainty especially if we are to witness a second peak later on in the year. Even those firms who have postponed events to later in the year are in limbo as there are no guarantees that demand will have recovered by Christmas.
With hotels only recently opening at the beginning of the month, events either cancelled or postponed, and several restaurants only recently reopening, there is a chance that the hospitality sector is still going to struggle in the short to medium-term. SMEs in particular are going to be facing cash flow problems that even government aid may not be able to solve. However, the sector has to believe that there is light at the end of the tunnel and those who adapt and innovate are most likely to benefit from the inevitable longer-term consumer habit changes.
How SKSi can help those affected
With the coronavirus pandemic creating additional difficulties for business owners and directors in an already competitive industry, it is important not to forget that there are also several challenges that exist within the sector and which were prevalent even before Covid-19 struck. The hospitality sector has had issues affecting profitability which include rising staff wages due to the increased minimum wage and the sector working on tight margins. In addition to this, there are also rising business rates to consider and an increase in food and wine imports.
If you are a director or owner of a business in the hospitality sector and are worried about the future of your company, then it is imperative that you seek professional advice as soon as possible as there will likely be more options available to you than if you leave it too late. In addition, we may also be able to assist you with understanding some of the legal and commercial complexities that may arise as a result of the current climate and in the hospitality sector in general. Furthermore, if you are benefitting from the government-backed furlough scheme and are worried about how you will survive in the long-run, we can advise you on what to do next and weigh up your options which best suit your business going forward.
