This too shall pass – hospitality sector investor and advisor, Maurice Abboudi’s, view.

RENT MORATORIUM AND BUSINESS RATES REVIEW

One ‘good’ thing happened during Covid. Landlords and tenants now better understand that the rent/rates model was broken. Most landlords have become much more sensible about the viability of their tenants, and they understand that if they don’t have tenants, there is no rent and within three months they will liable for the rates.

The end of the rent moratorium means that landlords and tenants now must agree on a way forward. If they don’t agree, the tenant will lose the site.

There is now a legally binding arbitration process that you can go through. The arbitration process will only be applicable to those operators who were forced to close (for example, the grocers and convenience stores didn’t have to pay their rents but didn’t have to close, so it is going to be very interesting to see what happens there).

One sensible solution is to come to an agreement with the landlord where 50% of the rent owed is paid over the remaining term of the lease - assuming, of course, that the business can afford that. If cash is really tight and your business has not rebounded, it’s going to be a very difficult negotiation with the landlord.

If your cash position is strong enough to pay off this debt that’s great. If not, it is very easy for someone to say go out and get a loan. Not so easy to do. The banks have got to give you a loan. Assuming you get the loan, can you afford to repay it, especially with rising interest rates? With all the current increase in on-going costs, you have to really work out your cash and ask, “will this work?” Is your business model viable, or are you just going to be working to pay off debt, the rent and all the increased costs? After all, you are in business to make a profit. Tough decisions lie ahead.

Business rates are another significant issue within our sector. Businesses have been paying one third of their rates last year. This will rise to 50% in 2022/23. From April 2023, the full payment of rates will return. There is to be a reassessment of how the rates are calculated in April 2023 – something which is usually carried out every five years or so, the last time being 2015.

Every single property will have to be reassessed. The government has to look at what the rateable value is for each premises based on a variety of things such as transport links, the current rent value and the property value itself.

At a pivotal time for many in the sector, Maurice Abboudi - experienced board member, operator, investor and advisor to the hospitality and leisure sector, recipient of PAPA’s Lifetime Achievement Award 2020 for contributions to the sector and judge on BBC2’s series two of Million Pound Menu – shares his views on rates, rents and the deluge of other factors now combining to impact hospitality businesses.

It is an enormous task. It should not be delayed. If rates go back to where they were back in 2019, many city centre sites are just not going to survive.

I am aware of an absurd example where the rent on the property was £140,000. It’s been reduced by the landlord to £30,000, but the rates payable are still £75,000. The landlord doesn’t want to pay those rates for the next couple of years, thinking ‘we will rent the site at whatever we can get.’ The tenant still has to pay the rates. This is no doubt a London-centric issue, but nevertheless it gives an example of what the current situation is like. It’s at a point where any city centre restaurant, anywhere in the country is going to be suffering.

I do not know what the solution is but it’s certainly not viable to carry on as we are; it’s just not sustainable.

PERFECT STORM

The sector has been very grateful for the support the government has given it so far in terms of furlough, rates relief, grants, Eat Out to Help Out and the like, but we are now in a new situation that needs addressing urgently.

I believe the crunch time could come sooner than later, within the next six to nine months, because the sector’s challenges are all coming together at the same time making for a perfect storm; Nick Varney, who runs Merlin Leisure (Legoland, Madame Tussauds) summed it up very well in a recent FT article saying that the government ending of relief schemes was “making a mockery of the sector’s hard-fought recovery and wrenching defeat from the jaws of victory.”

As mentioned, the government has been brilliant at supporting the industry – no-one can deny that – but you can’t pull the rug out under the industry in one go, and this seems to be what’s happening.

There are eight critical things that are hitting us right now - the VAT increase, inflation (both food and energy costs), the rates increase (going up to 50% initially, then 100% in 12 months’ time), National Insurance contributions, minimum wage increases, the end of the rent moratorium, the end of insolvency protection for retail, leisure and hospitality businesses, and a lack of labour availability meaning a lack of the right skill sets.

VAT is one of the most fundamental challenges facing our sector. In relative terms, it would have cost the government very little to keep VAT at 12.5% for the sector for another year. That would mean the difference between survival and going under for many businesses.

SURVIVAL

We had a mantra in our business of “let’s survive, revive and then thrive,” but all that has changed. It is now all about conserving cash. The cash we planned to invest in new sites is now being used to combat rising costs.

These are found in every part of the business – food, labour, utilities, cleaning materials, maintenance, stationary – every single part of the business. There are also supply chain issues where there is little or no supply available. Sunflower oil being just the latest example.

Some commentators have said that poor operators will suffer and may close as consumers become more aware of quality and value. This is undoubtably true. There are, however, some fantastic small businesses that just don’t have the resources to survive the coming challenges. Unless businesses have strong balance sheets they will struggle to survive - even if they are good operators.

In the past, during a ‘normal’ recession, when there was a downturn in sales, you could cut costs where possible. There may have been shortages of one or two items, but it was manageable. All of sudden, we’ve got everything coming together. It really is a perfect storm, a potential disaster for the sector.

FUTURE LANDSCAPE

Things are bleak and what I have outlined above is not great. However, at the maximum moment of bleakness there are some tremendous opportunities.

There will be people who go out of business. In time inflation will settle down, business rates will be revised, rents will be agreed, we will manage with the new higher level of VAT. There will be a reset and we will all be used to the new normal.

At this point, small operators will start up again. There will be a more stable environment.

It is almost like biblical times - seven years of great times and seven years of tough times. We will get through it. Look back at the 1960’s and 1970’s. We got through those disastrous times when the UK was almost bankrupt and had to borrow money from the IMF. We survived those times and we will get through it now. It’s just that there will be lots of pain to go through in the meantime.

Fortunately, we are still a wealthy country, we still have great services (well mostly…). We have challenges but we will get through.

NOW OR NEVER?

If you have got a compelling offer – if you do great food with great service - there’s always going to be a market and there will always be people who pay for that. If you are just going to open up a me-too type of operation that just sells another pizza or another burger, why should the customer come to you? Ask yourself that question, and make sure you’ve got a point of real difference. Don’t kid yourself you’ve got the best whatever; make sure it really is good.

If you’ve got something that really is special, it could well be a great time to open because rents should be more affordable and you can get a fully fitted site for little or no premium.

My advice is to make sure that you have really looked at your operation properly and be careful on how much you spend on your fit out. Make sure that it looks great but keep your fit out costs under control. If you establish something and you are successful now, during these challenging times, then the opportunities should be huge.

Look at every little detail of your business now; the easy days when people had plenty of money in their pockets are past. Consumers are going to be tight on spending and they are going to be picky and chose the best food/value/service there is out there.

Amongst all the doom and gloom, there is hope, there is light at the end of the tunnel, we will get out of this, we always do!

This time will pass, and we will come back to good times again.