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Wed 18th Mar 2020 - Propel Opinion: Too little, too late? Plus company updates

Chancellor’s help is a start but will be too late and too little for some by Mark Wingett

It’s a start, but is it enough and is it for some too late? At 5pm yesterday, it felt like the UK’s whole hospitality sector took a collective breath and waited to see what chancellor Rishi Sunak could come up with to aid them as they fought manfully to stay afloat against the impact of the coronavirus and an unwanted government intervention two days previously. Other countries had shown the way, notably France and the US, in promising stimulus for businesses big and small, and now the UK’s government needed to follow suit. The early signs were positive. Sunak announced the extension of the 12-month business rates relief announced in last week’s Budget to all hospitality companies. There was also a new lending facility agreed with the Bank of England for larger businesses and a big extension of the business interruption loan scheme, which was announced last week. There will now be loans of up to £5m available instead of £1.2m, with no interest due for the first six months, and the scheme will be “up and running by next week”. The £3,000 cash grant for 700,000 small businesses in the Budget has been increased to £10,000. All good, especially the rates suspension.

However, it is the timing of when these measures can actually make a difference that will be crucial. There will be a real concern that banks will take too long to approve facilities and covenant waivers under government guarantees. How many hoops and hurdles will operators need to go through and how much time will they need to wait to draw down this promised cash input? And is it realistic for heavily indebted companies to take on even more debt. As somebody said, that’s just kicking the can down the road. 

Sunak also said the government would be meeting with representatives of those sectors most affected – including travel and hospitality – in the coming days to discuss further support. On the controversial issue of insurance, he added: “For those venues that do have a policy that covers pandemics – the government action is sufficient to allow them to make claims.” For the smaller businesses in that sector who don’t have insurance he said he would provide cash grants of £25,000 per business “to help bridge through this period”. As UKHospitality’s chief executive Kate Nicholls said: “The chancellor has clearly been listening and these extra measures represent proper progress on last week’s Budget. The focus now has to be on making sure hospitality businesses can draw down the support loans and other funds while they still have businesses to operate, such are the levels of urgency for most businesses. We will wait with great anticipation and hope that the detail on employment support measures live up to the hype – if they are substantive, this could amount to a really helpful raft of support.”

The urgency of government action is paramount. As during the financial crisis, perhaps the details of what was announced yesterday afternoon mattered less than the promise of a comprehensive approach that genuinely provides support to every part of the economy and every part of the country. But for the hospitality sector a key part – looking after staff, was left for another day. As The Breakfast Club chairman Charlie McVeigh told me: “Many businesses will have completed their initial lay-off programmes this week. It will be too late by next week. If they have not worked out what they are doing with staff by the end of this week I would imagine that most staff will have been laid off already, especially if all venues are locked down by then. It will then be a question of what they get paid while at home, by the government. If the measures keep some/most/all businesses alive I guess that in two to six months’ time some will have a job to come back to.” A wider impact for companies who have worked tirelessly to train teams and build cultures is another worry. As Mark Stretton, managing director at Fleet Street Communications, put it: “The concept of layoffs (more something you see in manufacturing/construction) is a big challenge. How do employers guarantee that when a lockdown ends, people will be there and come back to work. How do you keep teams together and engaged?”

Within minutes McVeigh’s fears were being borne out. As the virus is meant to have hit London first, so a whole swathe of its operators based in the capital announced temporary closures. They could no longer wait for government support. That this group, included companies of the calibre of Hawksmoor, D&D London, Swingers and Corbin & King, is as depressing as it is worrying. As we have come to expect, Hawksmoor’s accompanying statement was classy: “We have made these difficult decisions in order to do what we can to protect the jobs of the hundreds of people we still employ during what may be a prolonged period of closure. This is, of course, tragic,and incredibly difficult for everyone. However, Hawksmoor will survive and we will quickly turn our attention to how we get through this period and what we can do to lend our strength to others who may need it. We hope that the government steps in as promised to provide the safety net that so many people desperately need. To our regular customers – we won’t be providing delivery or click and collect. We will be focusing on our staff and whether we can help more people. We also believe other restaurant businesses will need your custom more. Many of you have made the kind offer or gesture to buy vouchers. While we’re thrilled by the support and that option is still available on our shop, we would recommend giving that support to smaller businesses who need it more.” Sadly, I expect to hear of more closures today and over the coming days, with the possibility of a tidal wave of redundancies accompanying them.

Unlike President Macron in France, the chancellor stopped short of measures to protect all businesses from bankruptcy (sadly some will have gone already) and there was no mention of NIC or PAYE either during yesterday’s announcement. Worryingly, as serial sector investor Luke Johnson pointed out: “I do worry that many directors now face possibility of prosecution for trading while insolvent. They need emergency legislation to fix this.”

In the interim, and I pray that is short, operators will have to battle through how best they can. Many are, as always, rising to the challenge. Yesterday, respected US restaurateur and founder of Shake Shack, Danny Meyer said his business Union Square Hospitality Group had created a relief fund for team members. He said: “To seed the effort, I’m immediately contributing my entire compensation and our executive team is taking a meaningful pay cut.” Brewer and retailer Greene King told its tenants it will delay the collection of rent and some associated charges to help them during the coronavirus crisis. Others are adapting, with many pivoting their businesses more toward click and collect, grab and go, offering home meal kits and delivery. The dining areas of all 1,300 McDonald’s UK sites are being shut down – forcing customers desperate for a Big Mac to use takeaway, drive-thrus or delivery options. Yesterday, BrewDog announced it was turning the majority of its bars into drive thru’s using its click and collect service via its Hop Drop App! In some locations it is also going to extend hours for collection to include breakfast. The sector is great at adapting in times of hardship – it will need that skill more than ever over the coming months.

One piece of news that could provide a short-term revenue life jacket came this from Robert Jenrick MP for Newark and secretary of state for housing, communities and local government, who announced that all pubs, restaurants and cafes will be able to offer takeaway and delivery services if they wish because he was relaxing the planning rules to help businesses adapt and support individuals who are staying at home as a result of coronavirus. The growth of dark kitchens could get a significant boost and perhaps allow people to keep on more staff then they first envisaged or ask some to become delivery drivers. It again puts the emphasis on the delivery firms to help their operator partners, perhaps waiving some of their fee in the process.

Cash flow remains the key focus for companies endeavouring to survive. We only hope the package of financial stimulus and aid announced and a quick follow up of funding aimed at employees can be enough to save a large part of the industry. Landlords will also need to take a pragmatic and long-term view on the majority of the sector failing/refusing to pay their March quarter rent. As Luke Johnson tweeted: “Landlords have tough choice – if they repossess and sue they risk bankrupting tenant and an unlettable void. Their investment value collapses and they must pay rates, insurance etc. No hospitality operators will be expanding in foreseeable future so any vacated space thanks to ruthless landlord action will stay void. Landlords need to work with tenants to keep them trading for next few months.” Indeed. We are all in this together.

We asked for a bold and wide-ranging response from the government, and in parts we got it. There was something to cling on to, but more is needed and fast. Good luck everyone.

Mark Wingett is Propel insights editor

Government allow pubs and restaurants to become takeaways without permission: Pubs and restaurants will be allowed to be turned into takeaways to help provide food for people in self-isolation due to coronavirus, the government has announced. Chancellor Rishi Sunak announced a package of measures to support businesses through the crisis including extending the business rates holiday to all businesses in the hospitality sector. The measures also include relaxing planning regulations to allow pubs and restaurants to start providing takeaways without a planning application. The government said that the measures will be introduced as soon as possible and will apply for a limited period. A Downing Street spokesman said: “We are going to change planning permission so that pubs and restaurants will be able to turn into takeaways or delivery straight away. That will serve two purposes – it will (also) help to get food to people who might be staying at home.” The spokesman said it would be a temporary measure that was “straightforward but will make a real difference”. Sunak also said government advice to avoid pubs, clubs and theatres was sufficient for businesses to claim on their insurance when they have cover for pandemics.

BBPA – government has 24 hours to prevent irreversible closures of pubs: The British Beer & Pub Association has told the government it must deal with liquidity and cash issues to prevent closures. Emma McClarkin, chief executive of the British Beer & Pub Association, said: “We recognise as a sector that we are in unprecedented times and are prepared to play our part, but whilst we welcome the measures outlined today, they do not deal with the immediate cash flow and liquidity problems our industry faces.Local Authorities paying out grants to pub businesses is welcome, but how quickly these are administered is critical to keeping pubs in business and employees in jobs beyond the coming weeks. The rates relief announced for pubs is welcome in principle, but we urgently need greater clarity on the detail. Such relief provides little comfort for pubs that have no income. Without an urgent cash injection our sector will need to reduce its biggest cost, labour. It also won’t be able to take advantage of the planning changes proposed by government today enabling pubs to help feed the nation through delivery. The government literally has 24 hours to put together a pub specific package to prevent irreversible closures and job losses. The pub industry stands ready to work with the government to create the rescue package that is needed.”

Revolution reports coronavirus mitigation efforts: Revolution Bars Group, the operator of 74 premium bars, has reported action to mitigate the effects of coronavirus. It stated: “In very recent days, the group has experienced a decline in like-for-like revenue following the increasing impact of Covid-19. Following the UK government’s announcement late yesterday advising the public to stay away from bars and the actions of other governments, it is reasonable to expect the trading environment will be very challenging for the foreseeable future. As such, the board expects a material deterioration in trading performance for the remainder of the financial period ending 30 June 2020, however, given the continued high level of uncertainty it is not possible to quantify the precise impact at this time. To help mitigate the impact of Covid-19 and preserve cash, the group is taking actions to remove cost and non-critical capex from the business. These measures include: Reduction in payroll costs across the business; review and reduction of unprofitable trading sessions; reduction in other variable costs such as entertainment and door staff; suspension of rent and deferral of business rates; requests to defer PAYE and VAT payments The group welcomes the government’s support for the business rates holiday for 12 months announced late yesterday, but this does not go nearly far enough and we hope that there will be further measures in the coming days to provide assistance with payroll entitlements to gain surety for our employees, amongst other things. The group’s net debt position as at the end of week 37 (last week) was £10.5m in line with the board’s expectations. The board continues to monitor the group’s funding requirements closely and is proactively exploring all the options available. As demonstrated in its recent Interim results the group delivered positive momentum driven by both its strong brands: Revolution, and Revolución de Cuba.” Rob Pitcher, chief executive, said: “At this difficult time, we are doing all we can to protect our business and our employees from the Covid-19 virus and any financial hardship its effects may have. We would welcome further government support. Whilst we face a very challenging period in the current financial year, we are determined to make the right choices for the group, employees, shareholders and all other stakeholders.” 

The Restaurant Group forecasts coronavirus impact: The Restaurant Group has reported an increasing and material impact of Covid-19 across its businesses with group like-for-like sales being down 12.5%. The company stated: “In particular, our Concessions business has been significantly impacted with like-for-like sales down 21.7% and getting worse by the day given International travel bans. The Restaurant Group’s key priority at these unprecedented times is the health and safety of our employees, customers and business partners. The group has been reviewing the rapidly evolving situation relating to Covid-19 and has modelled a scenario of the potential financial outcome in the coming months. It is now clear that the increasing effects of Covid-19 will result in a material reduction in our expectations for revenue and profit across the business for the first half of this financial year (the period ending 28th June 2020).Today, the company is therefore providing guidance on the potential impact on our full year results of Covid-19. This guidance is predicated on the following revenue assumptions: An overall decline in group like-for-like sales of 25% in FY2020 (assumed down 45% in the first half and 5% in the second half); A significant decline in our Concessions business (down 92% in Q2) with significant disruption persisting through the remainder of the year (down 31% in H2); A sustained reduction in footfall across Leisure, Pubs and Wagamama, with like-for-like sales across these businesses down 68% in Q2, including ten weeks of shutdown, before normalising through H2; In response to the uncertain environment, the group is taking a number of actions to protect profitability and to conserve cash: The group will reduce capital expenditure for 2020 by at least £45m from the previous guidance of £75m; The group is highly focused on delivering maximum operational efficiency across all areas of our business over the course of 2020 and is targeting to save at least £45m; The group will be working with landlords across all business areas to ensure that no minimum guarantees are enforced within Concessions, where rents are largely turnover based; and to ensure that the rent roll for 2020 across our other businesses equitably reflects the unique and unforeseeable situation. The forecast assumes at least a 50% reduction in fixed rent across all our Wagamama, Concessions, Pubs and Leisure restaurants, and reflects the business rates holiday for three quarters of 2020 as announced yesterday in the chancellor’s statement; The group will work with lending banks to seek covenant holidays throughout 2020 in order to preserve maximum flexibility to operate the business through this challenging period. As a result, the group currently estimates Adjusted Ebitda for the financial year ended 27 December 2020 to be between £95m and £105m with leverage (pre-IFRS 16 net debt to Ebitda) of between 2.2x and 2.5x. Under this scenario, we would retain a minimum of £75m of cash liquidity throughout the remainder of the 2020 financial year. The group estimates that in the event that the entire group is in shutdown for a period in excess of that assumed above, then the adverse impact on cash would be no more than £15m for each further month of shutdown. Clearly the situation is evolving rapidly and there is no certainty around the severity and duration of the impact on the business. The company is continuing to consider its funding options, both equity and debt, on an ongoing basis. The Restaurant Group is fundamentally a resilient business with a strong asset base, substantial cash liquidity and strong cash flow. The group has a strong management team in place and the capability to adapt and respond quickly to changing market conditions.”

Marston’s provides coronavirus update: Marston’s has provided an update in light of the government’s advice to the general public earlier this week to avoid pubs and other hospitality venues in order to contain the spread of the Covid-19 virus. The company stated: “For the 24 weeks to 14th March 2020, like-for-like sales in our pubs were 1% below last year. In Marston’s Beer Company, beer volumes are in line with expectations. Although recent trading has been impacted by Covid-19, this has been marginal to date and pub like- for-like sales have been broadly flat over the last two weeks. That said, we anticipate that the government’s advice will result in significantly lower sales in the coming weeks. Given the ongoing uncertainty, we are unable to quantify the impact of Covid-19 on our financial and trading performance at this stage, however we expect a reduction to our expectations for Financial Year 2020. The scale of this will depend upon how the situation develops and over what timescale, and the impact of further measures taken by the government. We are taking an extremely prudent approach and being cautious in our management of the business during this period of unprecedented uncertainty. In 2019, we commenced a debt reduction programme, with a target to reduce debt by £200 million by 2023. We have made good progress towards that target, having ceased the new-build programme, reducing capital expenditure by approximately £80 million per year and increased the disposals target for this financial year from £45 million to £85-90 million. In addition, we have taken the following actions: We have significantly reduced capital expenditure for the foreseeable future; we are reducing overhead and other variable costs; working capital, including stock levels, is being managed very tightly; recognising that tenants and lessees face similar challenges, we have reassured them that we will suspend rent on a case by case basis where it is appropriate to do so. We have completed £60 million of disposals in the year to date. Given this, and based upon transactions in the pipeline, we retain our full year target of £85-90 million. Recent statements from the UK government suggest that the current state of much reduced social activity is likely to continue for several months at least. If that is the case, it is unlikely that an interim dividend will be recommended in May, retaining c.£20 million in the business. We have appropriate headroom on both our bank and securitised facilities, supported by a 93% freehold estate. As a consequence of this, and the actions we have taken to date, we believe that we have sufficient liquidity to maintain operations at a materially reduced level of business. In addition, we are having discussions with our banking group about the provision of covenant waivers for the second half-year, in the event these should be required. Whilst at an early stage, those discussions have been constructive. In addition to the above, we welcome the measures outlined by the UK government yesterday to provide support for the hospitality sector. The overriding message was ‘we will do whatever it takes’ to ‘support jobs, income and businesses’. The measures proposed include the provision of £330 billion to provide liquidity for businesses, and significant reliefs for business rates and rent. Further measures are to be proposed which are intended to support employment. Whilst the full details of these proposals have still to be scrutinised, they represent good progress towards the very significant commitment which the hospitality sector requires from the government, and an acknowledgement of the importance of pubs to jobs, the economy, and communities.”

M&B – we can no longer quantify coronavirus impact: Mitchells & Butlers has stated it is unable to quantify the impact of coronavirus. It stated: “For the first 24 weeks of the year, up to 14 March, like-for-like sales were 0.9%. Within this recent trading has been severely impacted by Covid-19 and the containment measures taken by the government, including the recommendation to avoid pubs and restaurants which is now expected to lead to a further significant downturn in sales. Given the rapidly evolving nature of the situation it is impossible to quantify the impact Covid-19 could have on our financial performance. However, we expect a significant reduction in our expected outturn for 2020 and, given this uncertainty, can no longer provide detailed guidance on the expected forward financial performance for the year. We are working proactively to protect our trading and cash flow through a number of actions including suspension of the capital programme and reduction of costs across the business. The group currently has a strong balance sheet with material cash resources which should be sufficient to fund obligations through the half year on 11 April 2020, and well into the second half. The next securitisation restricted payment and covenant test is at the half year. Sufficient headroom has been established such that we believe the group could suffer a significant loss in the remaining four weeks to the test date and still clear covenant levels. We are working hard to deliver a performance within these parameters and are encouraged by the measures announced last night by the chancellor, notably business rates relief and access to a credit guarantee facility, which should further underpin our future performance and liquidity.”

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