- Omicron's emergence causing industry uncertainty
- Demographic, balance sheet, and labour trends will be key for Christmas and trading
The hospitality sector looked set to build upon its post-lockdown recovery with the crucial Christmas trading period. But now, with governments introducing restrictions in response to the emergence of the Omicron coronavirus variant, uncertainty stalks the industry.
Pub, restaurant and hotel shares plunged at the tail end of last week as the variant news came out of South Africa. Airline and travel stocks were also hit, with restrictions on international movement announced. Equities have been jittery this week as work proceeds on determining the seriousness of the variant, with no new explicit hospitality restrictions introduced yet in the UK.
The government will review the situation on 21 December. Christian Mole, EY’s UK and Ireland head of hospitality and leisure, warned that “no one has priced in new restrictions” and the potential reintroduction of masks and social distancing in hospitality settings would have a deleterious impact on the sector.
While the market waits to see how the situation develops, demand is building for Christmas hospitality bookings. Andrew Andrea, chief executive of pub and hotel operator Marston’s (MARS), said that bookings have held up against 2019 and he “hasn’t seen a surge in cancellations”.
But market data suggests bookings are for smaller groups due to consumer caution. Panmure Gordon analyst Alex Chatterton said that reticence among older punters is noticeable. This was flagged in JD Wetherspoon's (JDW) latest trading update, which revealed that older customers staying away contributed to a 30 per cent drop in traditional ale sales. Younger people have returned in force, the company said, shown by cocktail and spirit sales climbing strongly compared with 2019.
There is also a split between city and suburban hospitality site prospects. “Sites that are more reliant on younger customers, have an affluent customer base and are located in more suburban areas” will recover faster, Chatterton said. Whitbread’s (WTB) accommodation sales in London were down by 44 per cent against pre-pandemic levels in its latest quarter.
Labour shortages and supply chain issues have also not gone away. EY’s Mole said that hospitality’s “biggest challenge is keeping up with demand” amidst these headwinds.
Sector debt levels is another concern, although several pub companies strengthened their balance sheets via the equity markets after confidence rose over the summer. These included Wetherspoon's, Youngs (YNGA), and Fuller Smith & Turner (FSTA). Smaller operators which have taken on debt and have relied heavily on government support schemes are likely to struggle in the new year.
“The combination of the rent moratorium ending, VAT increasing to 20 per cent and business rates returning to normal is expected to cause distress,” said Numis analyst Tim Barrett.
Until we know more about Omicron, such existing trends will underpin performance in the months ahead.