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Fri 3rd Apr 2020 - Friday Opinion
Subjects: navigating through the crisis, leading from the front, the decline to closure and there could be worse to come
Authors: Gareth Ogden, Ann Elliott, Alastair Scott and John Gater  

Navigating through the crisis by Gareth Ogden

We appear to be witnessing the first wave of the impact of the coronavirus (covid-19) crisis on the hospitality sector. Carluccio’s has entered into administration, and a day later so did Benito’s Hat. This follows The Restaurant Group giving similar notice in respect of its Chiquito restaurants. These are all businesses that have suffered during the general malaise of the casual dining sector in recent years – well before the virus surfaced in China at the end of 2019. Carluccio’s and Benito’s Hat have previously gone through a company voluntary arrangement process in recent years and Chiquito store closures were announced in September. The coronavirus impact appears to have pushed all of these over the edge, albeit from an already precarious position.
 
More ominously, those businesses previously on more sound financial footing, are now facing a ruthless and uncompromising reality. It remains to be seen in the coming weeks and months whether the government measures announced recently will be enough to protect the majority of businesses in the sector. While on the face of it, much of the promised support is positive, news of potential delays in emergency funds filtering through is exacerbated by the uncertainty around how deep the impact on the UK economy will be. Survive the lockdown – but at what cost? And what will the market be like when it does open up again? Simply put, the various measures could just prove too little too late, particularly without urgent review of the banks’ application of the business interruption loan scheme to bridge the immediate funding gap. 

Rates and rental concerns
The sector was already faced with the challenge of sky-high rents and business rates increases, well before the covid-19 crisis hit. The cancellation of business rates for all hospitality, leisure and retail businesses in the UK – regardless of rateable value – will have real and immediate impact as we enter the new fiscal year. On top of this, grants have been announced for smaller businesses based on rateable value. 

The position on rents is less clear. Landlords will not be able to evict tenants for non-payment of rents for the current rental quarter. In many cases landlords are proving to be supportive in some form or another, but there have been reports of others considering legal action to enforce unpaid rents, showing little sympathy for the need for urgent breathing space. Operators and landlords need to continue sensible negotiations with the view everyone is in this together and all parties need to take a share of the pain. A raft of business failures will not help anyone in the current climate and belligerent landlords should therefore be called to account. 

Loans
The Coronavirus Business Interruption Loan Scheme allows small businesses to borrow from banks, with an 80% loan guarantee provided by the government and the first 12 months interest-free. While this approach promises some much-needed liquidity for short-term survival, access to these loans on agreeable terms is proving difficult. 

Understandably, businesses applying for such loans need to be able to evidence they were a viable going concern before the crisis, but there are worries the banks are struggling to cope with demand and many are adopting overly rigorous criteria to these emergency loan applications. The government is therefore considering steps to remove the need for consideration for standard loan products first, as well as waiving the need for personal guarantees on loans up to £250,000. But the measures come across as rather reactionary and lacking in urgency for a sector in which survival is at stake on a day-to-day basis. Furthermore, while they may prove effective for smaller businesses, larger businesses may find less benefit.

Supporting employees 
Operators – with no income – are not only haemorrhaging cash but also facing the break-up of the teams and culture they have invested in, and nurtured, over many years. The Coronavirus Job Retention Scheme (CJRS) will be critical to most businesses for preventing a raft of redundancies, and it is now key for the sector to get the clarity it needs on how the scheme will work in practice. It does appear now this is beginning to filter through, but one theme that is arising is furloughing can be restrictive for those businesses with smaller teams. Furloughed individuals cannot provide any further services to a business while in that status, so some flexibility in its application needs to be applied.

The return to normality
The CJRS is critical on many levels. During the lockdown, operators will be looking to retain and engage with their teams, while at the same time being positive contributors to their local communities wherever possible. Exploring alternative sources of income, such as takeaway or voucher schemes, will help to alleviate the cash flow pressures, but maintaining the goodwill of staff and loyalty of customers for the time when some sort of normality returns is critical to long-term survival. Once the immediate funding requirement is in place to ensure survival, businesses should be turning their attention to their recovery strategies.
Gareth Ogden is a partner at haysmacintyre
haysmacintyre is a Propel BeatTheVirus campaign member

Leading from the front by Ann Elliott

I have worked through a number of recessions and lived through extremely difficult economic times – including the three-day week in early 1974 when electricity users were limited to three specified consecutive days’ consumption each week and not allowed to work longer hours. Only essential services such as hospitals, supermarkets and newspapers were exempt. Television companies were required to stop broadcasting at 10.30pm. 

Needless to say, this current crisis is more sudden, more devastating, more impactful and more economically damaging than that of 1974 and anything I, and probably most other people have seen, apart from war.

Like many others, I had a profitable, successful business only four weeks ago with 49 existing clients and 18 proposals out for approval. Now my team is furloughed, and I am working directly with a significantly smaller number of clients on strategic long-term projects. In April, I might invoice 5% of March’s total billing.

Everything I have lived for and loved for the past 20 years has gone in an instant – my wonderful team, my fantastic clients, my sales and my sense of purpose. I am not expecting, nor want, any sympathy. I am absolutely not alone, and many businesses and individuals are suffering much harder than we are. My family (including my 90-year-old father) are all well, but I know life is very bleak indeed for thousands of people.

It is challenging to think about the future in the midst of despair though I know a lot of businesses are now planning for when the market will open again. The issue I face, like many others, is I will start day one of the new world with 100% of my cost base but will also have to plan for any accumulated debt (delayed rent etc), with no idea of when business might return to normal – whatever that might look like. 

Planning in the sector seems to be following three rough scenarios – potentially full closure for the next 12 weeks (and also a possibility of closure for 24 weeks) then: 

– Initial peak, slow-down and then recovery to 90% of previous sales level over 12 months
– First six months at 50% and next six months at 80%
– Full-blown recession/depression

There are probably many other potential planning options being discussed. Leaders are understandably cautious about planning for a quick return to 100% of last year’s trade and are constantly reviewing. As one chief executive remarked this week: “At least next year’s like-for-likes look promising!” Nothing will be the same again.

A few years ago, I interviewed more than 50 leaders in the sector on how they defined leadership. In summary they said: 

– First of all, set your vision. A very clear, simple, understandable and compelling vision of the future. Know where you are going and where you want to be. It doesn’t have to be complicated. 
– Build the team and organisation you need to deliver this vision and manage their performance. They have to totally be aligned behind it – and you have to be able to motivate and inspire them to deliver it.
– Communicate that vision so everyone knows why they come to work every day. One leader described it as a “pyramid of engagement”, giving reasons why the organisation should be involved in creating success.
– Ensure your team has the resources to deliver the vision – that maybe budget, people, IT or simply time.
– Clear away anything that prevents the business from delivering the vision. Ask: “What can I do to make the boat go faster?” If not, get rid.

I have seen these principles, developed for normal trading circumstances, adopted in this new one by a myriad of fantastic leaders. They have: 

– Had a vision for getting their own businesses through this crisis
– Determined the team they need to help them through it
– Purposefully and comprehensively communicated to their teams and their customers
– Sought the best advice and listened to best practice
– Not allowed anything to get in their way 

I could name so many awesome leaders I have seen put these principles into practice in the past few weeks in extra ordinarily demanding circumstances. I am a huge fan already but to me Kate Nicholls has been superb in demonstrating outstanding leadership skills in this crisis and been an example to so many others.

Nelson Mandela said: “It is better to lead from behind and to put others in front, especially when you celebrate victory when nice things occur. You take the front-line when there is danger. Then people will appreciate your leadership.”

So many leaders have stepped up to the front line. I salute them and watch them with huge admiration.
Ann Elliott is chief executive of Elliotts, the leading integrated marketing agency in the hospitality and leisure sector – www.elliottsagency.com
Elliotts is a Propel BeatTheVirus campaign member

The decline to closure by Alastair Scott

The past three weeks have been – I think – the most turbulent of my business life. I thought I might just reflect on these few (short??) weeks as we start to move fully into the shut-down phase. This inevitably starts the new and more optimistic phase of how we reopen and make our great businesses even more successful than they were before. As an operator of three leased inns, I hope my reflections might be, in some respects, representative of how others are also feeling.

Week one (w/e 8 March) – hotel revenue started to plummet
Looking back this was a slightly surreal week, with us starting to believe the virus was really coming but not yet knowing what the implications were. Bedroom cancellations started to come in and build quite quickly, with more than 70% of our booked rooms cancelling in the week. Our challenge, as with many others, is our bedrooms provide all the profit for our biggest Inn and so we could see our earnings and our ability to repay debt stopping pretty fast. We made contact with our landlord and the bank to explain how business was already being affected, as we concluded we would not weather this storm with small scale changes.

Week two (w/e 15 March) – food and drink income started to decline, but only by 15% 
But it was accelerating – and again we could see a load of challenges as things only got worse. We cancelled our landlord and government payments because it was clear it was the big guys who were going to help us through this, and they needed to share our pain. I say only 15%. The problem of course is the industry is a high-fixed cost industry, with 50% profit margin once we have broken even – and often the extra 15% of sales is 100% of our profit!

Week three (w/e 22 March) – food and drink income fell by 50% Monday to Friday
In this week we started to make quick adjustments to our sales forecasts and rotas. Surprisingly after Monday the pattern of trade was very predictable. We adjusted rotas to one on front-of-house and one on back-of-house and started to figure out ways we could make marginal profits. We put our efforts into smaller menus, and were starting to plan for dining at home, village shops, and takeaway menus that could then earn us a marginal profit assuming no rent and rates – there was no way we could have earned it without. Then Friday night happened, with the double-edged sword of pub closures and furlough pay. Time to rethink.

Week three – Saturday, 21 March – closed
With the pubs closed we started to do the maths, with an intention to carry on with as many activities as we could. But we quickly arrived at the conclusion that closure was the best financial option. Any of the other activities we previously wanted to do would have been loss-making and challenged our resources even more. The definition of furlough pay meant volunteering to do takeaway and provide some village services would probably fall foul of the law. So we reluctantly moved to a furlough position on 100% of staff – except for the two directors who receive no base salary anyway!

Week four – contemplating the costs of closure and how we might reopen 
We have tried to minimise our running costs, with as little energy and other costs as we can. Many suppliers have been reasonable and more understanding than I might have expected. A few have left a sour taste in the mouth, which might be a short-term commercial necessity for them, which I entirely understand. But our running costs are low, and with no rent, rates, or capital repayments to the bank we can survive at about £10,000 a month for our three sites. But we won’t be able to pay our staff in April if the government don’t pay us; we aren’t rich. And so far the banks want personal guarantees to do anything. This will be interesting and no doubt the subject of much further debate.

The future
We are very optimistic about the future. While we expect social distancing to be deployed in our premises in the short term, we see an exciting long-term position and certainly have not given up. We love our pubs but will in the end make some hard commercial decisions about what we do and whether all of our sites are worth the effort in the long run. I suspect some will not have the energy, or the cash. I hope many will be up for the restart of what is a great industry that will be more valued by our supporters at the end of this lock-down process.
Alastair Scott owns Malvern Inns as well as the labour management system S4labour
S4labour is a Propel BeatTheVirus campaign member

There could be worse to come by John Gater

The industry has had the stuffing knocked out of it by a virus called covid-19, which sounds a little like something from a 1960s sci-fi novel. Who could possibly have dreamed in 2020 almost the entire planet could be brought to its knees by what the media portray as a “conker shell object with a few more spikes”? As the sector shut-down and the inevitable calling of final orders was announced by Downing Street, a shudder went through the whole industry because in many cases operators and entrepreneurs must have feared this could herald the final curtain call. 

Working capital is the lifeline of any successful business and the prospect of quickly using up reserves to pay down creditors, general operating liabilities and most importantly staff, must have come to many as the stuff of nightmares. Boris Johnson and his team should be applauded for their quick announcement of various initiatives aimed at staving off a full blown depression. However, the creation of any massive nationwide financial “life support” involving billions of funding being started from scratch isn’t something that can happen overnight. Qualifying staff can look forward to receiving the benefit of the 80% furlough formula but how do many who live literally from hand to mouth survive in the interim? I heard someone say: “Well they can apply for a three-month moratorium on their mortgage repayments”, but realistically how many of our sector personnel can afford mortgages in the first place? Another comment I heard was: “Well they can’t be evicted for three months so what do they have to worry about?”– not exactly a very realistic comment perhaps!

Personnel are the lifeline of the hospitality industry and without loyal, hard-working and, importantly, committed staff, we can’t exist. But what can be done to support our teams while the new government financial support works its way through a new wage-cushioning system? Furthermore, what is the likely outcome of businesses that when they finally reach the end of the enforced close-down find themselves quite possibly with no working capital and a stack of accrued bills to face? Government has been generous postponing VAT and National Insurance payments; landlords may have in many cases rather begrudgingly agreed to a rent holiday; suppliers might have pressed the pause button on chasing overdue invoices; and even delayed utilities payments might have offered some respite but “come the hour, come the day” – these costs will have to be addressed and liabilities will need to be fully discharged. If there’s no money in the bank, there are bound to be a swathe of insolvencies, liquidations and ultimately an unwelcome yet significant loss of jobs. Granted there are new loan initiatives being offered but a business has to be extremely careful not to submit loan applications that are full of holes and ultimately simply can’t be repaid. I doubt the government will offer to guarantee 80% of any risk that looks flaky.

Right now finance directors must be run off their feet modelling and re-modelling cash projections and chief executives must be walking the floorboards at 2am worrying how they’ll get through not just the next three months but ultimately find a way to successfully press the restart button.

I was due to launch my new concept in March but clearly “dodged a bullet” by reviewing my feasibility one final time in February before signing the contract and cratering the deal. I fear a lot of new ventures were launched this year and how terrifying it must be for those who now find themselves caught up in something of virtually biblical proportions. One of the clients I advise has a group of restaurants that we managed to almost completely turn around in less than a year but has now been adversely affected like everyone else. After months of ball-breaking work it’s a heart-breaking scenario!

Wouldn’t it be wonderful to be able to look into a crystal ball and have clarity of the future? Alas, the reality is perhaps that the immediate future is far too worrying to even contemplate and we’ll all now have to just take a deep intake of breath and hold our nerve as I fear from a business perspective, the worst could yet be to come.
John Gater is an industry veteran and sector investor

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