Pubs and restaurants post-COVID 19: recovery will need government intervention and rising consumer confidence

As pubs and restaurants across the UK reopen – or prepare to reopen – their doors, they’re emerging into a very different world from the one they operated in before the lockdown. More than three months with limited or no trade has put many hospitality businesses under severe financial strain. While reopening should ease this pressure to a degree, an immediate return to business as usual is unlikely – with consumers still anxious about the health risks of dining out and strict social distancing measures limiting capacity.

Without a vaccine, there’s no definite timeline for when things will return to normal. But there are grounds for cautious optimism amid the apparent gloom. At the heart of Chancellor Rishi Sunak’s Summer Statement were a number of measures designed to accelerate the recovery of the hospitality sector and stimulate consumer confidence. However, even as the Government looks to prioritise the industry, there remains a great deal of uncertainty over the timing and profile of its recovery.

Assessing the current mood

 It was to clarify some of this uncertainty that we hosted our recent industry webinar Pubs and restaurants: what’s the shape of the recovery? To discuss this question, we brought in two of EY’s leading voices on government policy and consumer trends: Mats Persson and David Larsson. Mats is an associate partner at EY and former Chief of Staff to the Chancellor Sajid Javid and Special Advisor to the Prime Minister. His work focuses on business strategy during times of uncertainty. David is a partner from our strategy consultancy business EY-Parthenon, and covers the hospitality and leisure sector. Rachel Savage, an assurance partner at EY, hosted the discussion.

What did we hear? The consensus was that whatever form the recovery takes, pubs and restaurants face a drawn-out and potentially bumpy return to normal operations. There was broad agreement that government intervention will be crucial to seeing the hospitality sector through the crisis, and that an improving consumer outlook will be just as important in shaping the recovery. While as it stands that outlook doesn’t appear especially positive, there was a shared sense that current consumer anxiety could start to lift in the coming months.  

Two key discussion areas

The webinar focused on two closely related areas. The first discussion, led by Mats Persson, concerned the UK Government’s stimulus plans for the next 18 months, looking closely at the Chancellor’s summer statement and how that might indicate the shape of the Government’s plans moving forward. The second, led by David Larsson, addressed the current state of consumer sentiment in the UK, as well as the prospects in the coming months and further ahead.  

Mats’s response to the question in our webinar’s title covered both the immediate implications of the Chancellor Rishi Sunak’s summer statement issued on 8 July, and also how these should in turn shape businesses’ responses and planning for the future. Throughout his analysis, Mats stressed that regardless of the efficacy of the Government’s measures, being aware of and understanding government action and policy will be absolutely key for business owners planning for the future.

It was with this in mind that Mats provided a detailed assessment of the Chancellor’s announcement. Encouragingly, the hospitality sector was at the heart of the Chancellor’s new measures to aid recovery, and Mats emphasised that this in itself should be a source of reassurance for pubs and restaurants. Yet the feeling was that the new employment measures designed to partly offset the ending of the furlough scheme – confirmed for October – were perhaps spread too thin to have a major impact on employment.

This sentiment was reinforced by a live poll of participants, with 74% saying that the Chancellor’s announcement had not changed their plans for their employees. And specific questions were raised about the ￡1,000 per employee retention “bonus” – with some participants querying whether this should have been more targeted at SMEs, or perhaps used to further stimulate demand rather than reducing costs.

In conjunction with announcements designed to incentivise employment, the Chancellor also outlined measures to stimulate demand at pubs and restaurants, including a reduction in VAT on food and non-alcoholic drinks and an Eat Out to Help Out discount voucher. However, the exclusion of alcohol from the VAT cut – while consistent with the Government’s “healthy lifestyle” policy – means that wet-led pubs, which still constitute a large segment of the pub sector, are getting comparatively little direct support.

There was also concern that by offering a financial solution to a psychological issue, these measures risked addressing the wrong problem. After all, present anxiety about dining out is not solely or even predominantly caused by affordability – it’s also fueled by fear of catching and spreading COVID-19. Indeed, both speakers were keen to reiterate that government policy and the consumer outlook are closely intertwined, with each shaping the other. 

To address the second area – of consumer outlook – David Larson took us through the research that EY has been conducting on consumer sentiment during the pandemic. Our Future Consumer Index is run every month in 18 countries, surveying the attitudes and feelings of around 1,000 consumers in each.

Perhaps the most striking – if not surprising – insight is that although consumer sentiment in the UK is improving overall, there remains considerable anxiety about returning to pubs and restaurants. Some 64% of UK consumers surveyed were uncomfortable with the idea of eating in a restaurant, and 55% felt it would be months before they would feel comfortable doing so.

Within this rather bleak picture, however, there are some bright spots. The proportion of consumers uncomfortable with eating in restaurants has declined noticeably since the previous month and younger people and those in higher income segments are generally more comfortable with the idea of going to the pub or eating out. Most likely these trends will continue as the economy move through its reopening phases. By flagging consumer anxiety, the survey also suggests the shape of a possible solution. Restaurants and pubs need to work to relieve these anxieties. This could mean creating more space between tables and introducing digital ordering supplemented by contactless payment.

Setting the scene for our next webcast...?

The overall message? There’s no doubt that pubs and restaurants face a difficult road to recovery. Yet despite this disruption, there are indications, both from the Government and improving consumer outlook, that the sector can look forward to better days.

Looking across the debate during the webinar, two specific positive points stand out. First, the sector’s profitability has been adversely impacted in recent years by a lack of labor supply and resulting labor cost pressure. This is likely to end. And second, we’re likely to see a move away from quarterly rents in advance and upward-only rent reviews, and toward monthly rents and turnover-based rents – although many larger restaurants in particular appear resistant to this change.

However, any optimism should be tempered by some countervailing negative forces. In particular, supply and demand in casual dining were already out of balance before COVID-19 – and one of its results is likely to be an acceleration in the rate of outlet closures that were already in prospect. Indeed, this effect is manifesting itself in the increased level of restructuring already seen across the branded restaurant sector since lockdown.

Five actions to take today

Here are five critical actions that the industry will need to continue to give relentless focus on in the weeks and months ahead until such time as we reach some form of normality again:

1.     Conduct site-by-site review and planning – it’s critical to understand the local catchment in terms of demand and competition.

2.     Review your whole operating model to make customers comfortable and optimise business profitability – digital ordering, contactless payments, labor scheduling, etc.

3.     Actively target more accessible consumer groups – in particular those more willing to emerge from social lockdown.

4.     Assess short-term/medium-term cash requirements – including under a ‘second wave’ scenario – and consider the need to approach lenders for support/waivers.

5.     Look to negotiate key lease terms – in particular moving from quarterly to monthly payments and turnover-linked payments.

As the UK’s pub and restaurant businesses assess their next steps, they’re facing a fine balance of threats and opportunities. Let’s hope the upside is to the fore when we reconvene for our next industry webinar in a few months’ time. Stay tuned.