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The long road to recovery for pubs

4 December 2020: This year has been tough for hospitality, and the first half of 2021 won’t be easy either. But Shepherd Neame’s CEO sees reasons to be optimistic.

Shepherd Neame’s 2019/20 was gearing up to be a record year, coming off a strong 2018/19. The business had made exciting plans for 2020. Then came the coronavirus. Hospitality had one of the longest lockdown of any sector at 105 days. “As Wuhan was 76 days, I think we'd all bet on 76 days initially,” says Shepherd Neame’s CEO Jonathan Neame, who is part of a panel at ICAEW’s London and South East Economic Summit on 7 December. “So 105 days was pretty hard to bear.”

At the same time, pubs were working to find a way to reopen safely. This involved a lot of planning and cost. “Then we opened, and I think we were all very pleasantly surprised at the response of the Great British public. Almost from the first hour, we knew it was going to be okay.”

The positivity and enthusiasm from pub-goers gave the sector, and Shepherd Neame, a much-needed boost, which lasted until early October. There was some hope that the worst would be over by the end of the year.

“We incurred additional liabilities of £12m in the 15 weeks in which we were locked down; that's around £1m a week,” Neame explains. “We made a loss of £12m in the year, having expected to make a rough record profit of about the same amount. We thought: we’re a very cash generative business, so we stood a good chance of clearing those liabilities by Christmas or early 2021. Until of course, the new restrictions came in.”

Since then, the hospitality industry has had an exceedingly difficult time. With so much effort to make their environments safe, there is a feeling across the sector that pubs and restaurants have been unfairly scapegoated and penalised. Neame laments the lack of clarity in the government’s strategy since restrictions started to come in. “Pubs aren't inanimate objects, they are run by real people. You’ve got to change terms and conditions, furlough some, de-furlough others, change the offer, retrain people –  there are costs there. So it becomes harder and harder to achieve the revenues.”

The second lockdown, in particular, hit hospitality particularly hard. The fact that we are now back under tiered restrictions has put the following six months under a shadow. “We've got 320 pubs, two-thirds of which are in Kent. If we're lucky, we'll open 20% of our pubs by between now and the end of January.”

Neame calls for an extension of measures such as the 5% VAT rate for hospitality businesses and cancellation of business rates through to the end of 2021 and early 2022. It will be exceedingly tough for the industry, and job losses and insolvencies are likely. 

In Shepherd Neame’s case, it is an old business with mainly freehold pubs, so it started with a strong balance sheet. “The issue is not really debt or asset cover,” says Neame. “The issue is leverage. Leverage is all about EBITDA and you can't get EBITDA if you can’t open. The issue for us is how quickly we can get up and running to achieve those same levels of EBITDA and therefore the same level of leverage as we had before.”

The company’s brewery is still operational and is still selling to grocers and export customers. “It is not the highest margin, but it does defray other costs.”

While the business made progress in the summer to reduce its liabilities, it has lost some ground in the past few months. “We have zero investment going on. We're just spending on compliance, with health and safety compliance as a priority. All of that, of course, means that any desire to get back to normal levels of investment, where we spend £15m a year on Cap-Ex, are quite a long way off. We'll probably start a bit in 2022 and hopefully resume to a degree of normality in 23. It's quite a long road ahead. I think the economic crisis will last far longer than the health crisis.”

Though the tunnel looks dark, there is a light at the end of it. The successful creation of coronavirus vaccines has raised hopes of an end to the virus early next year. The expectation is that, once restrictions ease, people will want to go out and socialise, and hospitality businesses will be ready for them. 

“From a sort of staycation point of view, people will probably stay in the UK for a couple of years, so next summer holds a lot of good prospects. Getting from A to B is not going to be easy. Clearly, we do rely on government support, which is not enough. It's not as much as it was in lockdown one, we need more.” 

Online sales are also strong, and the company has done a lot of work to build its profile and build a reputation among new customers. “No question that when we did reopen in the summer, we were attracting customers that we hadn't seen before. All of this gives me optimism.” 

Shepherd Neame won new business during the first lockdown because of this reputation-building work. All of these things are positive signs. There are also parallels with the economic crisis, where hospitality businesses were some of the first to start recovering. “Pubs and hospitality are quite elastic sectors. When there is a pickup, you get a period of staycations, and you do get people wanting to go out because they get cabin fever. We were one of the first sectors out of the blocks in 2009.”

After the previous crisis, there came an economic ‘sweet spot’ between 2012 and 2016, with a contraction in the market for suppliers and retailers and an increase in demand. Neame expects to see a similar phenomenon this decade, between 2023 and 2027. “That's what we're betting on. I think if you overlay that the most likely government response is investment in infrastructure and housing – in this part of the world, there's an awful lot of work that’s planned and has permission. If we get an increase in population, an increase in GDP per capita, and a contraction in the market, you get a virtuous circle. So our medium- and long-term view of the business is very positive.”