No sector has been left untouched by Covid, but within the food sector, that impact (both negative and positive) has been as varied as the business models operated. Some have generated large profits, while others have slipped into loss-making territory. Supermarkets continue to be the big winners, even with the latest Omicron variant, as they were once again able to capture the trade that the hospitality sector lost out on.
However, this boon was dampened somewhat by a freer, but still relatively restricted, Christmas period. This is the time when hospitality businesses generate the cash they need to sustain them through the traditionally quiet early months of the year, but with many consumers staying away, staff absences mounting, and costs rising; many companies face a very tough start to the year.
In recognition of this, the Government has offered a £6,000 per unit grant to compensate for lost sales. It has been estimated that up to 200,000 businesses could take advantage of the scheme, but fears that this won’t be enough to offset the damage caused persist. However, it is looking more and more likely that no further support will be forthcoming.
As society gets increasingly familiar with Covid and the restrictions it has brought to our lives, the strong performances of both Aldi and Lidl over the Christmas period (both with limited online presence) point to a resurgent confidence to shop in person. This has caused a decrease in online food orders for all the supermarkets, except Ocado which experienced sales growth over the 12-week Christmas period, of 8.4%, according to The Grocer.
The supermarkets haven’t had it all their own way though; Boots reported a good Christmas period with footfall increasing by 33%, as stated in Walgreens Q1 2022 update. B&M issued a profit upgrade on the back of its strong festive performance, and similar brands such as Home Bargains, The Range and Poundland will do well throughout 2022 as inflation starts to nip at consumer wallets and purses.
So enough about the winners. Who has been struggling?
C&C, the drink distributor, issued a trading update stating that on-trade business had been significantly impacted by renewed Government restrictions across the UK and Ireland. However, the group still managed to turn a modest profit in December.
A decline in sales in December will be a disappointing end to the year for a number of players across the hospitality sector, and C&C will not be alone in revising expectations downwards. The half-full reading of this is a bump on the continued road to recovery, the half-empty reading an assumption that ‘normality’ is a little further away than we had hoped.
We believe that 2022 is going to throw up a number of challenges that will affect most, if not all, companies.
Labour availability – 2021 was titled the Great Resignation/Retirement. Following Covid, millions of people had time out from their jobs whilst on furlough, which has led to life/career-changing decisions.
KPMG commented recently that the UK jobs market rocketed to near historic levels as New Year approached. Employers in all sectors haven’t lost their appetite to hire, but many will be frustrated by the pressure that competitive conditions are creating.
Staff turnover has been a massive issue within most sectors, but this has been acutely felt in hospitality.
On top of this has been the isolation issue, although this should become less of a problem as the isolation period has been decreased to five full days in England and is likely to be reduced further.
Supply chain issues – we understand that sourcing the products is becoming less of a problem. However, delivery claims are much higher than normal, and the additional work to reconcile invoices and delivery notes is proving difficult. With more UK HGV drivers being approved, the lack of drivers is no longer making the headlines; hopefully, this will help to stem the Proof of Deliveries claims we believe are being created by the hauliers lack of staff. With the pay rises needed to keep and attract new drivers, costs are up and likely to increase further.
Brexit - the new border checks came into force on 1st January with Make UK, the trade body, commenting that due to ongoing delays and disruption caused by Brexit, we may be seeing the possible death of the just-in-time supply chain business model. This would lead to businesses having to hold higher stock levels. Many have done just that temporarily, but the true effect of the changes will become clear later on this year.
Inflation – we have seen a number of energy suppliers fail in late 2021 due to increases in the wholesale gas price. Companies have quoted that energy costs are up 500%. Staff costs are up and will increase further as minimum wage increases apply from April, and CO2 cost prices are up and likely to increase further when the Government support deal concludes.
Rising costs for consumers – consumers are being hit hard by energy prices, but they will also be hit by retailers passing their own increased costs on to consumers. This is already being seen in supermarkets, with Asda increasing prices across 8.5% of its range, according to The Grocer. A cost-of-living increase is on the cards, and with it, there will be less money to spend on eating out, traveling and the like, which is not good news for hospitality.
Interest rate increases – the only way is up! The inflationary pressures are such that the Bank of England will be forced to raise interest rates—three times in 2022 is the most common estimate.
Working from home (WFH) – attracting people to the high street will continue to be an issue, although footfall at retail parks is predicted to continue to be more resilient. Hospitality will continue to be negatively impacted by the WFH culture, with Kantar estimating that the cost of eating at home is 9% higher than in 2019. The industry has a tough road ahead to entice customers back (made significantly more difficult by the need to increase prices to cover increased costs).
VAT - the VAT charge on hospitality food is currently at 12.5% and will revert back to 20% from 1st April. Whilst the original VAT decrease was a lifeline to some companies, if it had been largely passed on to consumers, then the effect of this return to 2019 VAT levels would be less impactful. The fear is that those who did not, will now have to increase prices when people have less money to spend.
Rent - the rent moratorium is due to end on 31st March, allowing landlord evictions to recommence. While it’s unclear how big an issue this is, we have built the question about deferred rents into our risk meetings, and seemingly most companies are on top of this. However, there will be some that simply do not have the cash to cover the rent arrears. Hopefully the companies managing rent arrears will find the support needed when The Commercial Rent (Coronavirus) Bill 2021-22 is passed. This is due to come into action by 25th March 2022. The Bill will set out and establish a binding arbitration system to resolve disputes where landlords and tenants could not agree on a solution to deferred rent. Finally, the winding up debt threshold is currently £10,000, and this is due to be reduced back to £750 from 31st March. We could see an uptick in insolvencies from this, which is very depressing, but not all challenges are negative. For example, staycations are expected to remain popular, which will benefit holiday companies, food outlets, supermarkets and, in turn, food-to-go manufacturers.
There is plenty to be positive about in this sector with some companies making huge growth and profit leaps. For those who struggled more, the fact that we appear to have made it through this winter without a lockdown suggests that something akin to normality may not be too far into the future.
Written by Laura Devoir, Senior Underwriter – Credit.
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