The Government’s roadmap out of lockdown could save UK hospitality from £3bn in losses, according to analysis by the UK’s No.1 insolvency score, Red Flag Alert.
Prior to the roadmap announcement on Monday 22 February, Government data* showed that around a third (33.2%) of hospitality businesses had ‘low or no confidence’ that their businesses would survive the next three months.
This meant that about 53,683 hospitality businesses were facing the prospect of failure. Red Flag Alert analysis of corporate insolvencies in 2020 shows the average company going out of business leaves behind £55,949 in unpaid debt. The failure of a third of hospitality businesses could have triggered losses of £3bn throughout the sector.
Managing director of Red Flag Alert, Mark Halstead, said: “The prospect of reopening and serving people inside from 17 May provides confidence-sapped hospitality businesses with a lifeline. This is boosted further with the potential of a lucrative summer from 21 June, when so-called normality returns, and people are keen to get out to socialise and enjoy themselves. The opportunity to trade outdoors earlier than this has given some the chance to innovate and make plans with outdoor space or food vans.
“This near-term ability to boost takings and restore cashflow could prove enough to keep some struggling operators away from the brink of failure in the coming weeks. However, this will require cooperation throughout the also pressured supply chain, from breweries, suppliers and commercial landlords, to effectively manage existing financial liabilities before trading bounces back.”
Halstead points to Government plans due in next week’s Budget 2021, which are likely to see an extension to the business rates holiday and moratorium on evictions, as a signal that struggling operators will be able to survive in the short-term. The sector is also urging Chancellor Rishi Sunak to extend the VAT cut far beyond its current end date on 1 April 2021, given the fact many of businesses have been closed completely throughout the period it has been in place.
However, he advises caution and that businesses must start thinking now about the challenges of the future.
He explains: “Having reopening targets to work towards is a step in the right direction but there are, unfortunately, challenges still to come.
“The return of more prosperous times will also bring with it the expectation for operators to start settling arrears and paying-back debts. A spring and summer of fortune will not be quite enough for all operators to bail themselves out of trouble in the long-term and survival will become more challenging when the post-lockdown excitement starts to evaporate amongst the public. Operators need to ensure they have the cashflow for the quieter autumn and winter months, when revenue falls and they’re still facing the costs of the past year.”
Continued uncertainty will also see a wave of change in the sector, driven by restructuring and M&A.
Halstead concludes: “In the past few days we’ve seen reports about Mitchells & Butlers raising significant funds as they potentially set out on an acquisition trail. They won’t be alone, and as in previous times after economic recession and uncertainty, we can expect larger operators to look for opportunities to buy struggling businesses. Many will be already undertaking financial due diligence and closely monitoring insolvency scores as they consider strengthening their positions in the future.”