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Mon 27th Apr 2020 - Opinion Special: Pathfinders and roadblocks by Mark Wingett

Pathfinders and roadblocks by Mark Wingett

“You’re a kite dancing in a hurricane, Mr Bond.” I’m not one for quoting lines from James Bond films, but taking in the current landscape of the UK’s hospitality industry, this one from Spectre is increasingly appropriate. Our fragile industry is being blown around by forces it cannot control. Much work has been done over the past month to secure government aid so the sector is still just about anchored in place, but the rope(s) continue to buckle under the strain. The initial anger and frustration the sector emitted in response to the impact of the covid-19 outbreak has been replaced by the determination to make sure businesses, teams and the industry as a whole survives. Thoughts have invariably turned to the  road back, just how long it will be, and what that destination will look like. Answering the reopening conundrum, whenever that is, for many is a scarier proposition than life in lock-down.
First, among the wave of articles and opinion pieces on where the sector goes from here (and yes essentially this is another one), let’s not forget the challenges still to be faced just to have a chance to reopen will sadly, for many, be unsurmountable. And even if they do, the greatest threat to the industry may still lie ahead, in the timing of reopening and what that would look like. As Loungers chairman Alex Reilley states: “If you have 150 square metres of trading space or less it simply won’t be worth reopening under social distancing rules.” As a country in lock-down, as a sector hooked on socialising, the pent-up desire to do the things we love increases day by day. We crave positive signs, putting aside realistic thoughts, to kid ourselves into thinking perhaps we could still take advantage of some summer trading (and the current weather continues to mock the pub sector). We are all poring over information on what is happening in other countries, which are now grappling with issues surrounding the easing of their own respective lock-down measures. Some of these go against the grain of what we know as hospitality, including people having to sign forms at restaurant entrances about their recent health, temperature checks and sneeze screens. The general feeling is when restaurants reopen some of the measures in place could be limited menus, limited seating, head counts from staff on the doors, al fresco dining, panels and dividers, masked serving staff and customers waiting for tables in car parks. There could also be long dinner periods stretching from 4pm to 10pm to offset reduced capacity and the possibility of silverware sealed in plastic. As one chief executive said to me: “Do consumers really want to pay £50 for a ‘great' eating-out experience when being served by someone wearing a mask and a half empty space?”
Across the sector, scenario planning has been ramped up on how the rest of the year will look. Some have looked towards Hong Kong, with its Westernised demographic, as some form of indicator of what we can expect from here. The early indications are sobering. Soho House is running at 25% of normal sales because of physical distancing. Speaking to me last week, Zoe Bowley, managing director of PizzaExpress UK, said, based on the brand’s operations in Asia, the UK hospitality sector “won’t see some semblance of normality for at least a year”. She was planning for a phased reopening of her business from July, but modelling only to be at 50% of capacity by the back end of the year. Working on a similar scenario, many operators I have spoken to expect to be at 95% of capacity by this time next year. Again, there is a “big if” to all this, including the fear of a second wave of the virus. There is no fast way back. Many are taking the heart-breaking, but pragmatic view that rushing back will do more harm than good. Very few, if any, businesses could face reopening at levels they faced in the week before lock-down. Those that will have battled to come through these next few week/months may then face collapse, leading to the loss of more jobs and businesses. Reilley says: “As a sector the more we entertain social distancing measures the more we give government a sense that we are prepared to live with them. We’re better being closed for longer if it means we can safely reopen being able to do what we do best, in as near to an uncompromised form as possible.” Otherwise, as Fuller’s chief executive Simon Emeny has stated, the industry could sleepwalk into a scenario “where our costs dramatically increase, our staff feel increasingly uncomfortable about working and social distancing is there for us to monitor and put extra costs into to make sure it’s executed. So, I feel we should be taking our time to make sure it is done properly.” Time many will feel they don’t have.
Research by KAM Media released last week further underlined the stark reality of the situation. Two-thirds of hospitality business believe they won’t survive three more months of lock-down measures while 87% will cease operations without a nine-month rent holiday. It also found 42% will have to lose more than half their staff if the current restrictions remain in place beyond three months. A total of 83% said they thought it would take at least six months for customer numbers to return to levels seen prior to the lock-down, while 38% said they would expect it to take at least a year.
Therefore, it is unsurprising many operators are looking at ways to bridge that gap – pivoting to delivery or grocery, creating new revenue schemes that may continue to be permanent parts of their businesses going forward. But for most it has been about hunkering down, hibernating and reducing the cash burn. Those that have continued have been in the majority from the takeaway/grab-and-go/fast casual/quick service restaurant (QSR) category, models that are designed to practice social distancing and to continue to generate high/controlled footfall. These pathfinders have been joined recently by brands such as Burger King, KFC and Pret. Leon plans to reopen six London restaurants for takeaways, in addition to the 16 it has kept open that have become grocery stores. Burger King recently opened six of its 550 restaurants for deliveries and will look to ramp this up to ten openings a week going forward. The majority are expected to come from its circa 150-strong drive-thru estate. Industry analyst Simon Stenning is forecasting circa 15% of the fast food and takeaway market will be operating by the start of May, meaning some 6,000 outlets out of the approximately 41,500 fast food outlets will be open.
I expect more of their fast-casual cousins to follow suit. Tortilla and Honest Burgers have both indicated they will reopen sites for delivery next month. Nando’s and Gourmet Burger Kitchen, both with serving models already in place that could aid social distancing for staff and customers, will surely follow, although the latter’s future remains in doubt. The influence of both delivery and technology has long been growing in the sector, but the covid-19 outbreak will work as a further catalyst to both. Just Eat has seen unprecedented levels of new restaurants looking to join its platform over the past month or so. It’s UK managing director Andrew Kenny told me he believes the coronavirus crisis might lead to a further paradigm shift for the delivery channel and exclusive agreements between operators and aggregators may not be the most appropriate route forward. The question will be how many of these operators will use delivery as a bridge to normality or to change their business models forever. Established companies launching virtual delivery brands was already in the rise pre-covid-19, more will surely follow, with PizzaExpress already starting work on one. The relationship between operators and aggregators – that has at times been fraught – will also need to change. In the US, the discussion has turned to placing a cap on delivery commission fees. These talks had been going on before covid-19, but have now become louder with restaurants closed across the country and delivery one of the few viable channels still open to consumers.
Last week it was reported Pret was seeking a “€100m urgent loan from global banks” as part of measures to make up for lost sales once stores reopen after the coronavirus crisis. Pret chief executive Pano Christou said the business had enough cash to make it through the current lock-down but it needed funds for a “test and learn stage” to develop the operation once restrictions have been lifted. The testing and learning had already started earlier this year, at the brand’s Houndsditch site, where a number of digital innovations were trialled. This included digital labelling on shelves and a payment solution via a new app that allows consumers to select products and pay without going to the till. The new app also had an order-ahead feature, while the venue offered self-service tills and had coffee machines placed near the tills to help order pick-up. Beacon technology on the tables was also being trialled in the store. Simplifying operations, reducing contact points between staff and customer, and reducing labour costs, undoubtedly more in the QSR/food-to-go sectors will go down this route. One operator was already working on an automated back of house machine to produce its offer last year – expect more to explore this route also.
Of course this sounds all fine and well for the fast food practitioners, although judging by the queueing issues outside a recently reopened Five Guys in Edinburgh, some further restrictions will need addressing. What of pubs and restaurants? As the sector gradually reopens after the lock-down they will be faced with multiple challenges in the period before a return to “normality” – whatever that is. Broadly, these fall into three key areas – covering how to win consumers trust that its okay to return; operationally delivering a safe environment for all; and be cash generative with low volumes during a long ramp-up. All three will be constantly playing on the minds of business leaders. Reilley shared pictures on Twitter at the weekend of how one of his Lounge sites would look if capacity was reduced to take into consideration social distancing measures. The image of a sparse space was stark and depressing. Reilley made the point in the group’s larger Cosy Club sites it may be easier to accommodate social distancing measures, but what about brands such as Franco Manca, Pho, Mowgli and Giggling Squid, to name a few? Part of their charms is the buzz of the closeness designed into their sites. Should they up their delivery credentials until the world turns and, if so, will that be enough to bridge the gap until social distancing measures are completely eased? What now for Wagamama’s communal tables? After years of lines being blurred in the industry, some will become a lot clearer, others will become even more blurred.
This is all without thinking about how customer behaviour will be changed in the longer-term. We all presume younger generations, with their inbuilt “invincibility”, will lead from the front when it comes to going back out to eat and drink, to socialise, but what does this mean for the brands/businesses that aren’t aimed at that demographic? The “grey pound” places a crucial role in the weekly trade levels for brands such as Cafe Rouge, Bistrot Pierre and many destination pubs. When will these people venture out again? Speaking to Mel Marriot, managing director of Darwin & Wallace, last week, she was aware her own business would have to do more to appeal to those under 25. Those with more of a slant toward families will also be wary. Can we expect a ramping up of family-meal offers/deals across all delivery platforms? James Hacon, founder of Think Hospitality, says: “As we come out of lock-down there is no doubt in my mind people will socialise within wider family circles – it just won’t be in pubs and bars straight away. The opportunity to sell food and drink for these occasions will be considerable I think.” Also, how quickly can operators switch mindset from trying to limit levels of cash burn to focusing on cash generation? It will be a fine balance that may take longer than many hope or can cope with.
But all of the above comes with a “big if”. The country remains in lock-down, and whether we have passed the peak of the virus or not, an easing of social distancing measures looks like it will be a slow and phased process, especially under a prime minister who may be more risk adverse after surviving his own battle with the virus. The sector is expected to see a long period of various forms of social distancing, either mandated or through consumer choice, having a negative impact. Then there is the question of government support running out. Some progress has been made but more help will be needed – not just for getting to the reopening phase but beyond to when trade is back to some kind of normal levels. The sector can’t be open and the support from the government stop – there will need to be tapered support for the next 12 months, especially around furloughing. Perhaps the Coronavirus Job Retention Scheme could stay in place and be eased out gradually, supplementing less and less of people’s wages as trade picks up again. There will also be measures brought in to stimulate the sector’s revival – some have suggested a VAT cut. The relationship with landlords will still need in some cases repairing but certainly re-evaluating. A #NationalTimeOut is a must, but longer term perhaps an industry approved turnover rent deal is one solution that needs exploring. UKHospitality has proposed a six-point plan to help businesses reopen when it is safe to do so, including a comprehensive fiscal package to stimulate demand post-crisis, an overhaul of business regulation, and for greater pressure to be put on insurance companies to take a more proactive and fair approach to legitimate claims.
Going further forward, will pandemic clauses need to be inserted into contracts with landlords, investors and staff? We will need a phased opening solution that works for the whole sector, not just sections of it. No one should be left behind – and bars, wet-led pubs and nightclubs seem the most vulnerable here. As Reilley says: “Ultimately we want to get back to growing and aid the economic recovery, but it will be challenging if one hand is tied behind our back.”
At present there are, as industry veteran Ian Neill pointed out to me, too many “fact gaps” around what we can expect from what will be an extraordinary reset of society, to provide fully-formed opinions, let alone answers to where we go from here. One will be how social distancing is officiated, what works for one part of the industry won’t work for all – and perhaps here is where some of the future focus should be on lobbying about how this will be overseen. Too much and like Reilley says, there will be no point in opening at all. Depending how close they are to their own liquidity cliffs, many operators will not be able to look that far ahead. One certainty, sadly, is more pain – administrations/business closures/redundancies are ahead of us. This whole situation has highlighted the fragility of the sector and the need to build a business model that’s not entirely reliant on eat-in/drink-in sales. As an aside, how do you value a business at the moment? Others include how you build back trust with consumers, build back relationships with suppliers, and pay for reopening. Will a consumer-base, many of which will be financially under the cosh as well, stomach price rises? Here again, the fast food chains will be in the box seat.
Entrepreneurism and the enthusiasm to serve are both traits in plentiful supply in the industry – always have been and always will be. The sector has again risen to the challenge with remarkable resilience and courage, and we have already seen many great results from those diversifying. For example, and there are many, here’s a tweet from Tim Foster, co-founder of Yummy Pub Co: “Today we will officially blow all of the other days’ take out of the park. Not only are we a grocery store, but now we move into a hot food takeaway with our best-selling dish this week as fish and chippies, which will be joined (if all goes well) by our burger concept next week.” The government will need to come up with creative solutions to get the UK out of lock-down and the economy up and running again. It maybe some solutions will not work for everybody, and that will be the same for the broad family that makes up our industry, where a one-size-fits-all approach won’t work. The wheels on the hospitality sector’s survival bus are starting to turn slowly again, the engine is starting to rev but not everyone will have a ticket to ride – and for many lucky to still do it may be best to stay on for longer than others. Until the spectre of social distancing has completely lifted.
Mark Wingett is Propel insights editor

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