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Leisure and hospitality sector faces labour and cost headwinds

While revenues have grown against pre-pandemic comparators, the sector is facing a sustained period of economic pressures
October 21, 2021
  • Labour shortage the key issue for operators
  • Consumers likely to face higher prices

Revenues in the leisure and hospitality sector have risen above pre-pandemic levels after a difficult trading period during lockdowns, but labour shortages, price rises and the inflation environment indicate an uncertain period ahead.

Revenues have slowly recovered against like-for-like 2019 figures since the resumption of indoor dining in May. The Coffer Peach Business Tracker, an industry monitor of pub, bar and restaurant sales, recorded 8 per cent revenue growth for September. This was a second consecutive month of growth against 2019, helped by the ‘staycation’ trend and improving consumer confidence. The buoyant impact of staycations on accommodation sales was highlighted in last week’s trading update from pub and hotel operator Marston’s (MARS).

Christian Mole, head of hospitality and leisure for the UK and Ireland at EY, told Investors’ Chronicle that there is a geographic split in how the sector is recovering. There is a “big shortfall in demand in London” due to a lack of commuters and international tourists, and the capital is being hit by a downturn in business travel that isn’t expected to recover significantly until 2024. September sales for the sector were 1 per cent lower in London against 2019, compared with growth of 12 per cent for the rest of the country. Hotel occupancy rates in London are lagging significantly behind the regions.

Mole said of the headwinds facing the sector that “supply chain issues are an aggravation – the big problem is labour”. Hospitality has an “image problem in the UK that we don’t see in the rest of Europe”, with a reputation for relatively poor pay and working conditions that make it difficult to attract labour. The tap of immigrant labour has been turned off and pay rates must rise to attract staff. This will lead to a sustained period of price increases as inflationary pressures bite, but it is unclear how willing customers will be to stomach these.

The relationship between price rises and volumes will be “the biggest challenge for 2022” for the sector in the context of the reversal of the VAT cut on food and non-alcoholic drinks and the end of the business rates holiday and commercial property rent moratorium in March next year. Labour and supply chain issues are worsening the cost pressures businesses face.

“The cost environment has started to deteriorate for all UK hospitality businesses,” Numis Securities analysts said in a note.

In terms of government policy, next week's Autumn Budget should provide more clarity around the VAT position. The rate was reduced from 20 per cent to 5 per cent in July 2020 to help support the industry, but this went up to 12.5 per cent earlier this month and is due to return to 20 per cent from April 2022. The industry is lobbying to prevent this, with the most recent increase coinciding with the end of the furlough scheme. Owen Shirley, an analyst at Berenberg, is confident that the sector can deal with a higher VAT environment.

"Volumes will need to continue to recover to maintain sales levels about 2019, but the upward trend has been clear, and we don’t doubt that this will happen”, he said.

Despite the pressures facing the sector, restaurant chain operator Hostmore – owner of the American restaurant group Fridays, which has 86 sites in the UK – plans to demerge from parent Electra Private Equity (ELTA) and list on the main market in London in November. The valuation is estimated to be in the range of £275m. Hostmore’s announcement cited the “recovery of the market and consumer confidence as we emerge from the Covid-19 pandemic” as one of the justifications for the IPO timing.

Current market conditions have led other companies to delay or reassess listing plans. Inflationary pressures in the sector are causing wide-ranging concern. Ian Wright, chief executive of the Food and Drink Federation, told the Business, Energy and Industrial parliamentary select committee this week that “in hospitality, which is a precursor of retail, inflation is currently running somewhere between 14 per cent and 18 per cent”.

Hostmore’s listing prospectus mentions “food inflation, including fluctuations in the price of raw materials and ingredients” as a key risk along with labour market issues that “may impair the group’s ability to recruit and retain well-qualified personnel”.

Recent trading updates and analyses of the sector have been mixed. The Marston’s update reported sales growth above 2019 levels, no major concerns regarding the labour market and only limited disruption in its supply chain. The gambling company Rank Group (RNK) announced last week that the Grosvenor business, its main revenue driver, was running at 80 per cent of pre-Covid levels and highlighted a volatile cost environment and supply chain concerns. Loungers (LGRS), a hospitality operator, released an update which recorded “significant outperformance of the market” and sales growth of 27 per cent against 2019. A Panmure Gordon research note on pub company JD Wetherspoon (JDW), meanwhile, argued that the chain is in a good position to grow its market share with scope for 100-200 new pubs: it is “smaller operators which aren’t as well funded that are likely to struggle” in the current climate.

Moving into winter, with higher infection rates, analysts highlight the possibility of renewed government restrictions impacting the sector. This would hit companies that are showing signs of revenue recovery, but face the triple whammy of labour shortages, supply chain issues and significant cost pressures. While Berenberg's Shirley thinks that cost rises “can ultimately be managed with efficiencies and select price increases where necessary”, operators face a testing year ahead.