Can UK hospitality stocks weather winter gloom?
By Jenni Reid
08:53, 22 December 2021
Equity markets around the world are seeing rises and falls in the run-up to the year’s end under a spectre of uncertainty.
The Omicron variant of the Covid-19 virus is tearing through countries, and news reports on studies into its severity emerge daily, with no definitive picture yet established. In the UK, Omicron is now the dominant strain of the virus and has sent new daily Covid cases to record highs.
Confirmation on Tuesday that the UK would hold off introducing further lockdown measures until after Christmas saw Monday’s FTSE 100 and 250 index losses reversed. Measures that are currently in place include mask mandates, Covid passes for large venues and advice to work from home where possible
Hospitality stocks got a slight boost on the news, with Young’s closing up 2.70%, JD Wetherspoon up 3.14%, Mitchells & Butlers up 3.57%, Marstons up 4.88%, and the Restaurant Group up 6.30%. Premier Inn owner Whitbread was up 3.37%, while hotel giant IHG was up 2.48%%.
But these firms are far from toasting an end to nearly two years of pandemic woes.
Sector struggles
Travel and Leisure stocks in the FTSE 350 index are currently down 99% on a year ago, when many UK hospitality venues had been forced to close and overseas and domestic travel was severely restricted, while the full index is up 13%.
Most hospitality stocks have recovered from the lows of spring 2020 but are still trailing their pre-pandemic levels.
Even with no new lockdown restrictions over Christmas 2021 itself, trade body UK Hospitality has forecast that under the current rules and with the public avoiding crowds, takings may be down by 40% in December, and yesterday said that one in five businesses saw sales fall by 60% last weekend.
It has also forecast that 10% of pubs and 14% of restaurants are “very likely” to collapse in the new year as cash reserves dry up, with four in five operators already seeing cancellations in the first quarter of 2022.
Tuesday’s announcement of a £1bn support package for the hospitality industry, with the offer of up to £6,000 cash support per premises, was praised by some industry spokespeople, but slammed as “bordering on insulting” by others with businesses to run.
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Heading for lockdown?
Prime Minister Boris Johnson remains caught between scientific advisers urging tougher restrictions, and a bloc of members of his Conservative party who vigorously oppose them.
Johnson’s team only sets the rules for England, and if more measures are introduced they could include anything from simple guidance against meeting up with friends (rather than legally-enforced regulations) to rules decreeing outdoor meet-ups only, limits on the number of households allowed to meet, or even the full closure of hospitality and leisure. At this point, little is clear and the government says it is waiting for more data.
Elsewhere in the UK, Scotland has already announced it will place limits on the size of live public events from three weeks from 26 December, and from 27 December will require pubs, bars and other hospitality venues to do table service. One-metre social distancing and three-household mixing only has been advised.
Wales is shutting down live sports and nightclubs just after Christmas and will reintroduce social distancing rules in public spaces, while Northern Ireland has placed a limit on 30 people from different households mixing in homes.
Light on the horizon?
Little may be certain, but the outlook for hospitality over the remainder of the winter is certainly downbeat as long as Omicron fears remain.
Beyond that, however, are signs of light. Following England’s ‘Freedom Day’ on 19 July this year, when all Covid restrictions were lifted, UK pub, bar and restaurant sales were up 35% year-on-year and up 5% over 2019.
In its 2022 outlook for hospitality report, Moody’s forecasts hospitality earnings will be 35%-45% higher globally than in 2021 as consumer demand for leisure activities continues to strengthen.
It says that large companies will be more successful at weathering the coming challenges, and specifically notes that UK pub companies have been performing well despite staffing issues this year. Moody’s forecasts higher profits in 2022 if there are no more lengthy full lockdowns – but that’s a big ‘if’.
“There is a long tunnel of uncertainty ahead given the threat of fresh lockdown restrictions, but given how quickly hospitality bounced back following previous lockdowns, there is a glimmer of light at the end of the tunnel,” Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, told Capital.com.
“The sector has proved incredibly resilient and consumers incredibly amenable to embracing the good life when they are given the go-ahead to live it,” agreed Danni Hewson, financial analyst at AJ Bell. “Businesses that have weathered the last 18 months have mostly taken the time to get their ducks in a row, to streamline where possible and to secure financial backing to support them through lean times.”
A clouded picture
However, both analysts noted challenges ahead, beyond the possibility of further lockdowns or restrictions.
“A potential issue when it comes to another bounce back is the squeeze on living standards. If people are being forced to make tough choices, the nice-to-haves, the experiences, will be the first things to go,” said Hewson.
Meanwhile, Streeter said: “For many companies, prospects for 2022 will very much depend on the amount of cash they have as a buffer to see them through weeks or even months more turbulence. The government grants of £6,000 will be a drop in the ocean for large firms, and even for smaller firms cash burn is likely to be intense.”
“The hospitality industry is also facing other headwinds, not least cost inflation of food and drink, and higher labour costs as the fight for staff continues,” she added.
Read more: UK hospitality, travel scene boosted by easing of lockdown
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