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Medium term history

The leisure and hospitality industry embraces a wide range of significant sub-sector components including casual dining, hotels, travel and tourism, creative arts and sports/leisure. Whilst we have seen restructuring activity as a recurring theme throughout the sector, some of these segments have been particularly active in more recent years.

The sector in general is particularly reliant on discretionary consumer spending and has continued to face ongoing pressures from high levels of personal debt and a general tightening of purse strings in the wake of wider economic and political uncertainty. The National Living Wage has pushed labour costs upward and rising business rates have added to the cost burden. However there has been positive structural change in the sector driven by increasing consumer appetite for ‘experience’ purchases, often winning out at the expense of material goods purchases across other consumer markets.

Technology has played a significant role in the fortunes of businesses in the sector. For example the growth in online food delivery brands (Deliveroo, Ubereats and Just Eat) with a convenience / choice proposition has become a compelling alternative to a restaurant visit. Success in the casual dining market now appears predicated on more unique offerings and some significant chains such as Jamie’s Italian, Giraffe, Ed’s Easy Diner, Gaucho (Cauo) and Carluccio’s have all entered insolvency processes, having seemingly been unable to differentiate themselves in a crowded market.

Technology has also played a part in pressuring parts of the travel and tourism sector with long established tour operators such as Thomas Cook finding their local store portfolios unable to compete with global platforms. A similar theme has been played out in the gambling segment where bookmakers have seen younger millennial customers opting to engage online rather than in local high street shops. This structural shift combined with the FOBT stake reduction enforced in 2019 has reduced shop footfall and prompted many in the sector to rationalise their estate portfolio. The gambling sector is also bracing itself for further regulatory changes, many of which may be restrictive, including a full review of the 2005 Gambling Act expected in the Autumn of 2020.

The hotel segment, which has enjoyed several years of exceptional growth, has started to see sales slow and profits fall and this is a concern given asset values have become unsustainably high and much of the expansion has been debt-fuelled.

Current outlook and challenges

The leisure and hospitality sector has, unsurprisingly, been one of the worst affected by COVID-19, with its very raison d’etre – meeting people – at odds with the overriding public health requirement to socially distance. Key issues include:

  • Visibility over the recovery trajectory is challenging. Even with reduced social distancing restrictions, many venues will struggle to break even for quite some time. Secondary or local lockdowns are also likely to disproportionately impact the leisure sector. Consumer behaviour is uncertain, with many likely to remain wary of non-essential social contact. Modelling demand will prove a challenging and critical action involving both financial and operational teams.
  • Operational challenges increasing expense. The cost of COVID-19 measures – from increased hygiene standards to staff screening and absenteeism – will impact on the bottom line.
  • As government support is tapered away, a strategic review of many businesses will need to take place in order to ensure businesses can operate sustainably.
  • Impact will vary by geography and hospitality type – attractions and amenities catering for international tourists likely to see a prolonged fall in demand. Local independent restaurants, by contrast, may see a relatively quick recovery, whilst hotels with significant wedding businesses may see revenue deferred rather than lost completely.

We expect restructuring activity in the casual dining sector to accelerate. We also anticipate a number of businesses who undertook CVA processes in recent years to become in need of yet further restructuring.

The slowdown in the hotels segment is particularly interesting. Many businesses are sitting with significant debt burdens and are trying hard to lower their cost of capital. Even prior to COVID-19, RevPar trajectories had moved into decline in the regions and were slowing in London. With COVID-19 slowing international travel and tourism for the foreseeable period, some will be questioning the viability of their business model. Overall uncertainty about the recovery trajectory and additional costs required to adapt to a COVID environment will weigh most heavily on those businesses with higher fixed costs (such as leases or debt). They may not have the funding, or indeed the appetite, to trade through a potentially long period until they have repaid downturn funding and are cash flow positive.  We therefore expect to see significant potential for lease negotiations, debt restructurings, CVAs and forced M&A activity, with asset valuations almost certain to decline.


Stress and distress temperature rating

Leisure and Hospitality sector temperature assessment as at 1 June 2020, covering medium term history and outlook:

Graphic showing the Leisure and hospitality sector stress and distress temperature rating

Key trends across the sector right now

  • COVID-19 – managing liquidity and resumption of ‘new reality’ operations. Uncertain and variable consumer demand, which could be impacted by any secondary lockdown phases.
  • High debt burdens across sector – attracting new finance may be difficult.
  • Prolonged economic downturn may result in decline in consumer spending.
  • Some CVAs may start to unravel if fundamental strategic issues within businesses have not been fully addressed.
  • Bookmakers impacted by FOBT cap and restriction of sporting events, as well as growing regulation/scrutiny.
  • Continued pressure on casual dining brands to innovate and invest.

Case studies

Giraffe / Ed’s Easy Diner, CVA

KPMG implemented a CVA for a restaurant chain, with all voting creditors choosing to approve the CVA, and surpassing the 75% total required to pass the resolution.

This was a critical step for the business, allowing them to complete their financial restructuring plan and embark on a comprehensive operational transformation program.

Thomas Cook

KPMG were appointed to manage the liquidation of travel agency Thomas Cook following the firm’s failure.

This included the closure of the 555 stores, and the sale of airport landing slots.

A sale was agreed for the stores to Hays Travel, with the re-opening of stores and many jobs saved.


Insights



KPMG UK's national sector teams

Contacts on this page are specific to KPMG Restructuring sector capability. Our Restructuring sector contacts also work as part of KPMG’s national sector teams that comprise members from across our wide range of practice disciplines, e.g. Deals, Consulting, Tax and Audit. To find out more about KPMG’s wider views in this sector, click here.

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