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Fri 2nd Oct 2020 - Friday Opinion
Subjects: Stirrings in the shire, seeking a leaner model, diminishing probability of serendipity, fill your tank with data
Authors: Paul Chase, Graeme Smith, Glynn Davis, Al Henderson
 

Stirrings in the shires by Paul Chase

I’d forgotten there were MPs such as Sir Desmond Swayne in the Conservative party. An authentic eccentric and dandy, with leonine head, full main of silver hair, immaculately tailored and sporting a foppish silk, blue hanky. When Sir Desmond stood up recently in the House of Commons and delivered his barnstorming, libertarian broadside against the coronavirus restrictions, he can only have done so safe in the knowledge that his days of ministerial office are behind him – so why not tell it like it is?
 
For all the flamboyance of delivery there were some serious points made. He was speaking in the aftermath of the now notorious broadcast from Downing Street by chief medical officer Professor Chris Whitty and the government’s chief scientific adviser Sir Patrick Vallance. Readers will recall this was the broadcast that featured the graph with covid-19 infections doubling every seven days and leading in short order to 50,000 new infections per day by mid-October. 

Sir Desmond pointed out: “Not once, not on one day since March have there been infections on that day that were double that of the day of the week preceding. Not once. Where did this doubling come from? What was the purpose in presenting such a graph?
 
“It was the purpose of the Fat Boy in Pickwick Papers, ‘I want to make yer flesh creep’. It was project fear, it was an attempt to terrify the British people, as if they hadn’t been terrified enough.”
 
Sir Desmond stopped short of calling for Whitty and Vallance to be taken out and shot, but he did suggest their scaremongering should be a sacking offence.
 
It was this broadcast that preceded the government’s decision to close pubs, bars and restaurants at 10pm – the so-called curfew. It was the beginning of the brakes being slammed on in an entirely avoidable over-reaction. What is missing here is any coherent strategy about what the government wants its various lock-down regulations and restrictions to achieve. In March, it was about flattening the curve and buying time to flex-up NHS critical care capacity. But now it seems to veer between keeping the “R number” below 1 and a policy of virus elimination pending the cavalry (in the shape of an effective vaccination) coming over the hill. So, only another six months of misery folks.
 
The inability of parliament to hold the government to account and the absence of any coherent alternative narrative from the Labour opposition means that, for the past five months, we have ceased to function like a proper, parliamentary democracy. A return to constitutional government is sorely needed. Regarding the opposition, far from articulating an alternative narrative based on what the Swedes have done, the Labour Welsh Assembly government and the SNP government in Scotland seem determined to distinguish themselves from Westminster only insofar as they’re always willing to go that one step further, be that little bit more draconian.
 
I sense Rishi Sunak would like to rebalance our response to covid-19 much more in favour of opening up the economy and they are getting restless on the back benches, but I don’t see a change of leadership anytime soon. But things are shifting. The return of students to universities, and particularly of “freshers” there for the first time, may well have been in the government’s mind when they imposed the 10pm curfew – the behaviour of young people is always a source of moral panic. But the fact the government didn’t foresee what would happen when everyone was chucked out onto the street at the same time with the street parties that ensued in towns and cities across the country testifies to how out of touch they are.
 
The locking up of students in halls of residence; the threat they may not make it home for Christmas; the payment of expensive course fees for online learning and zoom meetings is not the university experience they signed up for – or that their parents expected them to receive. The middle-class is getting restive. As the plethora of regulations increases in its complexity, the penalties get bigger, the chance of most of these regulations being enforced evermore unlikely, consent is gradually slipping away.
 
We cannot go on like this for another six months. The government needs to manage infections on the basis of its original intention – to keep them below the level that would overwhelm the health service. Let’s not forget the central truth that has emerged since March: lock-downs only reduce the velocity of transmission, they don’t reduce the volume of it – they just push that volume further down the line and put off the day when the population gains some level of herd immunity – the only long-term way out of this.
Paul Chase is director of Chase Consultancy and a leading industry commentator on alcohol and health
 

Seeking a leaner model by Graeme Smith

It may be a wistful mistake to look back at the start of this year, but entering 2020, there were plenty of predictions (from myself included) stating that the sector was looking forward to a period of stability after more than three years dealing with the uncertainty Brexit had thrown up. There was even a feeling that the pent-up investment demand generated through those years was set to be unleashed, resulting in a relatively buoyant period for mergers and acquisitions. There were a number of businesses set to come to market and, more importantly, set themselves up for their next phase of growth under new ownership. Of course, the outbreak and continuing impact of covid-19 has radically changed that picture. 
 
However, despite the headwinds, there remains a desire among investors to seek out new deals and take advantage of the dislocation in the market. Over the past few months, there have been many examples to highlight that there are still funds out there interested in the hospitality sector and are willing to take a risk at the right price; from the new backers of Azzurri Group and The Big Table, to Byron and Cote. Of course, that price takes into account the need to fund a war chest to cover the cash they may need to spend between now and when we might get back to more normalised trading levels, including the need to cover the risk of further lock-downs. 
 
The hallmark of the transactions that have completed to date is that these businesses were did not have the solvency to deal with the liabilities that had built up over the pandemic, meaning they were effectively forced sellers. While many companies still face these challenges – and we expect to see further deals of this type, particularly in the wet-led or late-night sector – some businesses are beginning to see light at the end of the tunnel and are planning for the future. 
 
Given the current environment, any deals of this type will likely have to incorporate some earn-out structure over a period of time to reflect the fact that historical Ebitda, right now, is not reflective of the underlying earning potential of the business. It is also not yet clear when trading will return to pre-pandemic levels. This enables buyers to offset some risk but also enables a seller to realise value at a time when the market is uncertain. 
 
If valuation can be agreed, the focus can shift to what needs to be invested to ensure the business is in the right shape. What does the business want to do – what is the ambition? Is there opportunity to strengthen its position in the market and capitalise when we emerge from the crisis. Might it look at the opportunity to go down the expansion route because competitors are going to be weaker? Landlords will likely be desperate to get anybody in their sites who is willing to pay some form of rent so there is opportunity for those agreements to be more flexible and lower than they were, which can also add to the positive deal dynamics for all parties. These are uncertain times but I am sure some will look it as a great opportunity to expand, take the listing of Hugh Osmond’s Various Eateries for example – a vehicle specifically set up to take advantage of the current buying conditions in the market. 
 
A lot will depend on what part of the sector you are focusing on. New restrictions and the threat of further lock-downs mean investors will need to understand the potential impact of these on the business model. Stronger trading in earlier dayparts will be looked on more favourably. It will depend on the individual business and its key drivers, with some more impacted by a late-night curfew than others. The closer you get to late-night or vertical drinking, it is a more difficult market, especially given some are still without a reopening date. 
 
With government support starting to taper off, further insolvency and company voluntary arrangement activity is likely. Cash remains king and operators will continue to seek ways to run as efficiently as they can. What will life look like when the furlough scheme ends later this month? Businesses will be leaner, with support functions and head offices resized. Everyone should now have a view across how many people they need to operate their business and these new structures and operating models will inevitably lead to permanent job losses.
 
What will be worrying management teams is the impact on consumer confidence from government messaging and restrictions and the long-term impact of the reintroduced work-from-home message on those over-indexed in city centres. Our Market Recovery Monitor, produced with CGA Insights, shows cities lagging behind on openings. Our view remains if sites aren’t open by the end of this month, they are unlikely to reopen at all under their current ownership unless they are part of a larger group. 
 
The sector is steeling itself for tough times ahead as we head into the autumn and winter months. Those that have taken on additional debt to survive this crisis will have a focus on how quickly profits can recover in order to pay this back and return to shareholder value. Of course, there is pain to come but the net result will be a set of leaner and more agile companies; those that tackle the coming period with pragmatism and innovation will be in the best position to emerge on the other side and take advantage of the growth opportunities that arise.
Graeme Smith is a managing director and head of corporate finance at AlixPartners
 

Diminishing probability of serendipity by Glynn Davis

“The occurrence and development of events by chance in a happy or beneficial way.” You might not have experienced much of this over the past six months because it’s the definition of serendipity and it’s become a bit of a scarce resource.

Over the years it’s fair to say that my personal circumstances and work-related activities have enjoyed incredible upside from that ephemeral commodity: serendipity. You never know when it will strike, whether it is in a bar, or a coffee shop, or at a conference or an event. But when it does the outcomes can be joyous, uplifting and sometimes unexpectedly beneficial financially.

Sadly, it is becoming ever more rare as each new diktat imposed upon society by the government is impacting increasingly negatively on our ability to interact – across all aspects of our lives. The negative consequences of ill-thought-out measures like curfews and the imposition of a myriad of other confusing rules is tough to measure but undeniably enormous.

The combination of enforced working from home and the growing restrictions on the hospitality sector is certainly a killer cocktail. Right now, the point where social and business intersects is where we are seeing the most damage inflicted. The immense pressure on, and growing failure of, businesses around office blocks and travel hubs is becoming all too apparent. But it is not just these businesses that we are losing, it is also the part they have played in being host to engendering business relationships and serendipity around the workplace.

I found it incredible to read that The Creamery café in San Francisco – that was frequented by Silicon Valley types – was forced to close in August through a lack of business after operating since 2008. Despite this area being the hotbed for non-physical developments like apps and social media, it has been in the physical, real-world places like The Creamery that the real deals have, ultimately, been consumed and people have unexpectedly bumped into others in their orbit and relationships subsequently formed. Much of this is now at risk of being lost. 

This death of physical networking and the strangulation of serendipity is also being felt in many cities across the UK and particularly in the City of London. It was in the coffee shops that business was originally done in London’s Square Mile and this has continued up until today. Jonathan’s Coffee House of 1680 to 1778 might have been replaced by a Costa or a Pret but the principle remains the same – these are venues that provide the platform for fruitful personal relationships and physical connections. 

These places are incredibly valuable in oiling the wheels of finance and work more broadly. It’s generally accepted that personal contact is absolutely critical to important deals and City types have been champing at the bit to be able to look people in the eye again. This is sadly lost when the only alternative is Zoom, Microsoft Teams or Google Groups.

It’s a similar scenario in London’s Soho except the finance types are replaced by the creatives. What’s the first thing these people do when they want to brainstorm ideas or to plan some strategic initiatives? They meet up in a favourite coffee shop or a bar. There is arguably nothing as effective as batting ideas back and forth across the table with a coffee or beer in hand. 

It’s clear that as the impetus to promote a return to the office by the government recedes ever further over the horizon, and working from home becomes increasingly ingrained, the death of the physical meeting and the potential for serendipity greatly diminishes.

Although we can see this is already having a massively detrimental effect on the leisure and hospitality industry, the full damage it will inflict is difficult to measure across the broader economy and on the mental wellbeing of people who are increasingly cut off from physical interactions. Serendipity has been felled by the most unexpected and unhappy of occurrences.
Glynn Davis is a leading commentator on retail trends

Fill your tank with data By Al Henderson

Now more than ever, finding new and innovative ways to drive frequency of visit and customer loyalty will be the difference between surviving and thriving. I was struck by CGA’s recent consumer stats following the government’s announcement of curfew restrictions: two in five (40%) respondents said they will go out less often as a result of the measures – nearly three times as many as those who will go out more frequently. It lays bare one of the big challenges facing the sector.
 
There has been a good deal of comment in recent weeks about Pret’s game-changing in-store coffee subscription service, YourPret Barista. For us, it goes without saying (but I’ll say it anyway) that we at Eagle Eye are extremely proud to have helped one of the sector’s stand-out operators develop and launch this digital initiative. When they approached us about plans for this new service, it was a real thrill because, for several years now, I’ve felt that subscription, whether it’s a high frequency or habitual occasion, offers a massive opportunity for brands within the hospitality sector.
 
Someone commented to me the other day that we increasingly live in a subscription economy; in my world it’s Netflix, Pasta Evangelists, Peloton and Psycle, so why would coffee be any different? Where Pret has trodden, others in the sector will now surely follow. They have first-mover advantage but there is no reason why every brand shouldn’t be thinking about how the model might work for their business. Of course, you’d expect me to agree and looking to the future, personally, I would love it if, for example, All Bar One offered a subscription for cocktails or Nando’s for chicken and fries.
 
The ability to tie sales analysis to a single view of where and who your most frequent customers are, will mean businesses begin to develop new and increasingly sophisticated ways of fostering greater loyalty during these uncertain times. This is where you need to ask yourself “how much do we really know about our customers?” We should all be motivated to understand more about those that visit our venues, in order to turn anonymous consumers into known customers. 
 
You would have heard the phrase that “data is the new oil”. It’s a simple comparison to make. Just like oil, raw data isn’t valuable when unrefined, the value is generated when it is gathered accurately and timely and connected to other relevant data. When properly refined, it then quickly becomes a vital decision-making tool, providing a range of actionable insights to help you better understand customers, learn more about their habits and ultimately deliver a more personalised experience. 
 
Before the pandemic, some of our casual dining clients estimated customer frequency at around one visit every 12 weeks. But tracking this was difficult to do without the ability to tie sales to customer identities. Operators typically only capture the data of only a fraction of their footfall, meaning assumptions around frequency and recentness are exactly that – assumptions. Imagine how powerful accurately knowing this would be, along with what individual customers ordered most often and how much they spend? Delivery aggregators such as the likes of Deliveroo and Just Eat have just exacerbated the problem, gaining huge volumes of customer data, just by virtue of knowing who each one is online. So the customer visiting your venue once every 12 weeks could be hugely loyal, ordering via a delivery service twice a week, you just wouldn’t know it.
 
The retail and grocery sectors own the multi-channel customer, they know who we are whether the purchase is in-store or online. Hospitality is traditionally an in-venue experience only so there hasn’t been an omni or multi-channel experience – until relatively recently. Operators are starting to move online but haven’t embraced technology at any meaningful pace. Take order and payment and click and collect – these services have been around for several years but are only starting to gain traction now. It’s taken covid for everyone to grasp the opportunity and become adopters.
 
Gathering more data means greater personalisation and, in theory, more engaged customers and increased frequency and spend. This should spell the death knell for blanket, mass-market promotions and a new age of targeted, granular campaigns specific to what appeals to each customer segment – all of which positively impact sales in the long term. It enables clever personalisation as, in the Pret example, they know whether I’m ordering a decaf coffee or a frappe or a smoothie, and how often. Then, mapping this trend over time, generates the insight that I tend not to drink caffeine, so what other relevant products might I be interested in purchasing? In the grocery world, this level of customer insight has been in play for years.
 
So, while data may well be the new oil, like oil it requires extracting, refinement and consolidation. Done in the right way, in light of the ongoing uncertainty the sector faces, data can fuel greater personalisation and customer engagement to help capture next generation loyalty.
Al Henderson is chief sales officer at Eagle Eye Solutions

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