Hospitality taking on water?

Like the iceberg that sank the RMS Titanic, the Covid-19 pandemic is threatening to sink the hospitality industry. Small and well-established businesses alike are scrambling for the lifeboats.

Sink or swim?

Over the second quarter of 2020, UK hospitality sales fell by 87% as, first the lockdown and then a continuing desire  to avoid large crowds, battered the sector’s prospects. As the adage goes, however, “necessity is the mother of invention” – or, in this case, adaptation. During the lockdown, restaurants had to be creative to keep their businesses afloat, with many offering home cooking meal kits or food delivery options. In the near term, dining-in is likely to be the preferred option for those who are more cautious.

The UK government’s furlough scheme kept a lot of hospitality workers in their jobs. However, its ending will inevitably put pressure on employers and staff alike, with the longer term prospects for the hospitality industry looking bleak. Although the ‘Eat Out to Help Out’ scheme provided some relief, in the medium term, reduced restaurant capacity and fewer customers will cut restaurants’ profitability, and many establishments will need to increase prices to stay open.

A romantic meal, behind Perspex

There’s also the question of the experience. Sitting at a restaurant booth that’s screened off by Perspex, while being served by someone in a surgical-style mask, does not necessarily make for a relaxing ambience. This is one of the reasons why cruise lines have been so badly affected – their luxury offering is unrecognisable from that prior to Covid-19 restrictions being imposed. Potential passengers are also wary of a second wave of the virus, which gives cabin fever a more disturbing new meaning.

The money flows…

The lifelines that governments are throwing at the economy to keep it going have the potential, longer term, to revive inflation. Furlough schemes, VAT deferment plans, additional unemployment benefits and the considerable monetary policies enacted by central banks have flooded the world with money. Unlike in 2008, the cash from the authorities is largely being directed to consumers, with the hope that it goes back into the economy via spending. When we return to normality, there will be more money chasing fewer goods and services. This in itself is likely to be inflationary but it will be doubly so when the upward pressure on pricing from moving manufacturing of other goods closer to home is factored in.

The hospitality sector is undergoing a massive shake-up and there will be losers as well as winners along the way. While the prospect of an effective vaccine remains uncertain, an important catalyst for recovery will be the consumer’s instinctive desire to get back to normal; hospitality may well prove to be unsinkable.

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Please note that SIT Savings Ltd is not authorised to provide advice to individual investors and nothing in this article should be considered to be or relied upon as constituting investment advice. If you are unsure about the suitability of an investment, you should contact your financial advisor.