Alistair McAlinden: Pubs and restaurants need to manage costs and demand to make a success of reopening

Alistair McAlinden

Alistair McAlinden, managing director and head of the hospitality and leisure sector team for Interpath Advisory in Scotland discusses how operators across the hospitality sector in Scotland should beware of financial pitfalls as they fully reopen.

With Scottish pubs and restaurants welcoming customers back through their doors, and the past month bringing images of beer gardens and high streets starting to get busier, it finally feels like things are on the up for one of the hardest hit sectors of the COVID crisis.

Indeed, the surge in pent-up demand as customers flock back to hospitality has already made an impact across the supply chain with many brewers, from the multinationals through to local craft producers, already applying order limits to ensure reduced supplies can be sustained throughout the summer months - a far cry from only a few months ago when the contents of beer cellars were being poured down drains for the second time in less than twelve months.

But whilst the initial reopening has been a welcome shot in the arm for the sector, the picture on the ground is perhaps more nuanced.

It’s certainly unclear at this stage whether the initial enthusiasm to return to the pub or dine out will be sustained through the summer months. Pub and restaurant operators need to be mindful of potential pitfalls in order to make the most of any post-lockdown bounce.

Although images of overflowing beer gardens depict a sector in rude health, it was recently reported that only 40% of the UK’s 37,500 pubs were able to reopen in April, with many restaurants remaining closed or providing takeaway only service.

In most cases, this prolonged closure was due to either insufficient outdoor space, or where passing trade has reduced drastically, for instance at transport or employment hubs.

Those that are open and appear busy are not necessarily generating significant returns, as new COVID-related overheads and capacity limits place pressure on the bottom line. Even with indoor dining now open, custom remains highly weather-dependent, resulting in uneven and unpredictable trade.

The requirement for customers in many places to book tables and place deposits further hampers spontaneous get-togethers and regular custom.

Meanwhile, for the sites that are mostly or totally indoors, the costs of reopening and operating with social distancing measures is significant.

With continued transmission and risk of new COVID-19 variants, it’s likely that a proportion of customers may still feel anxious about visiting relatively crowded indoor environments.

This may be particularly prevalent in smaller spaces, or where alcohol may impact the ability or willingness of patrons to ‘social distance’ effectively. Demand could be slower to return to these locations, whilst staffing and operating costs remain.

It therefore comes as little surprise that the British Beer & Pub Association anticipate around 2,000 pubs, or 5% of the total, will remain closed over the weeks ahead. Drinks sales are expected to be around 65% of pre-pandemic levels, below the break-even level for many operators.

Of course, no two sites are quite the same and each will face their own challenges and opportunities during the remainder of 2021.

For those in more difficult locations, liquidity and working capital problems are likely to come to a head. This is especially true for those who entered the pandemic on a difficult financial footing.

Operators must invest a significant amount to open their doors, especially if food plays a material part of the offering, whilst the volume of trade is dependent on a vast array of factors outside operators’ control.

As the summer months roll by, an increase in VAT rates to 12.5% will join the repayment of rent arrears and CBILS loans as further cash outflows. At the same time, the Job Retention Scheme is set to come to a close, creating the potential to dampen customer demand going into the autumn.

Recruitment is also an issue facing many operators. The combined effects of the pandemic and Brexit has caused a significant skill shortage across the sector, with the number of vacancies increasing dramatically, particularly in back-of-house roles. This will drive inflationary pressures as the costs of recruiting staff rises.

Monitoring trade over the summer and taking a prudent approach to cash forecasting is going to be critical to help manage liquidity requirements and take necessary early action.

Meanwhile there may be gains to be made for those operators who remain nimble to shifts in consumer behaviours. A more permanent shift between working from the office and working from home may lead to increased demand for eating out in the evenings, compared to lunch times. Others, who have had success with takeaway or dine-in meal kit options, may choose to continue with these offerings.

Most of all, those that have invested in their proposition, maintain a reputation for good value, and can ensure a safe environment for patrons will stand in good stead.

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