Rebuilding retail, hospitality and manufacturing

The retail sector has been one of the most exposed to the impact of COVID-19. That is due to its dependence on Chinese manufacturing, complex global supply chains and distribution networks, widespread reliance on a large workforce and the fact that so much depends on dealing directly with customers.

According to the UK’s Office for National Statistics, retail sales across predominantly non-food stores country-wide fell by 53.8% (seasonally adjusted) in April 2020 compared to the same month in the previous year, representing an average weekly drop from £2.7bn in March 2020 to £1.6bn in April.

The reopening of some physical stores against a backdrop of strict social distancing rules and an uncertain economic climate has offered little in the way of respite, prompting Helen Dickinson, Chief Executive Officer of the British Retail Consortium, to warn that many retailers will remain in a fight for survival for months to come.

Catherine Kelly, Head of Retail and a partner at accountants Cooper Parry, says the headline figures belie huge variations. On the whole, those retailers with an existing online presence have been in a better position to tackle the negative economic effects, although overall online sales haven’t offset plunging in-store purchases.

The pandemic has spawned some interesting (if not entirely unpredictable) trends. An Accenture survey of over 3,000 consumers in 15 countries in April found that many changes in consumer behaviour are likely to continue long after the pandemic.

In addition, the crisis is causing consumers to consider more seriously the health and environmental impacts of their choices. “The scale of the changes suggests that this is a long-term shift,” says Oliver Wright, Managing Director and head of Accenture’s Consumer Goods practice.

Supermarkets and convenience stores selling essentials did excellent business throughout lockdown. Demand for home entertainment and technology to help with home-working, exercising, DIY and gardening has also been high.

Francesca Spence, Retail Performance Manager at online retailer and financial services group The Very Group says: “We’d assumed that lockdown would have a negative impact, but it was much more nuanced. Because you don’t need as much of certain products, you need to manage those supply chain relationships in a responsible way.”

She adds that being in control of the numbers has never been more important. “The nature of consumer purchases changed significantly when lockdown was announced, meaning forecasts needed significant revision. That’s a lot of work, and finance teams are critical in guiding the business through that,” says Spence, who is also ICAEW’s business representative for Manchester.

Advisers are using in-depth data and analysis to help target future investments and identify, quantify and mitigate the risks associated with business interruption and lost revenue. “There’s lots of data out there. There’s a huge role for accountants to help their clients make sense of it,” Kelly says.

Manufacturing came to a swift halt in March, and although companies in the sector have been gradually returning to work, a report published by Accenture in May into the sector’s prospects suggested little to engender confidence. 

It warned that the severe operational, social and financial consequences of the pandemic are forcing employers to rethink risk management and contingency plans, workforce safety protocols and manufacturing operations, all at the same time.

“On many levels and for most manufacturers it’s as bad as it can get,” warns Johnathan Dudley, Midlands & South West Managing Partner at Crowe UK LLP and head of the firm’s manufacturing business. “It’s a perfect storm on the back of Brexit. 

“The automotive industry is going back to 30% of capacity, the yellow truck market is at around 50%. Aerospace is dead and the news I’m hearing is that they’re not expecting any uptick for around five years.”

Blockages in the supply chain due to the pandemic are prompting enthusiasm for reshoring away from countries such as China to guarantee supply. “This will help to sustain the manufacturing sector in the UK, but the sector needs critical investment in new equipment. Even before COVID-19, our robot count in the UK was appallingly low and that was affecting our productivity,” Dudley explains. Germany’s robotics manufacturing technology, for example, is well advanced compared to the UK.

The government’s business interruption loan facilities recognise there is no playbook for what the future may hold by not requiring specific proof of future viability. The temptation for businesses is to take the money and carry on, but Dudley stresses that advisers have a vital role to play in helping manufacturing companies plan ahead.

“If everyone ramps up gearing, their ability to borrow for new kit against their shot-to-bits balance sheets could be limited,” he says. To survive, businesses need to plan to adapt, be agile, be lean and be ready, he adds. 

In practical terms, accountants are resorting more than ever to flexible financial models and analytics that allow decision-makers to keep track of how a business is faring in such tumultuous times. “A lot of what I’ve been doing is talking to people and sharing knowledge and information as best we can,” says Dudley. 

Atul Kariya, a partner and manufacturing lead at Macintyre Hudson, says volatility in demand makes planning for production and inventories impossible. While big companies are sophisticated in the way they manage their supply chains, understanding the provenance of components in sufficient detail to pre-empt your exposure to bottlenecks around the globe remains a challenge for the mid-market.

The market conditions are triggering the need for urgent advice on how companies can diversify to new products and markets. Kariya says his firm is helping clients to understand the business impact of the pandemic by modelling demand and cash flow cycles. “We’ve moved from survival phase to looking at how we can exploit opportunities – from whether it’s as fundamental as what you’re manufacturing to how you sell it.”

The combination of enforced closures, travel bans and mandatory stay-at-home orders has had a devastating impact on the hospitality sector around the world. Global hospitality data company STR gathered data from 68,000 properties around the world. This showed that, compared to 2019 figures, occupancy was down 96% in Italy, 68% down in China, 67% down in the UK, 59% down in the US and 48% down in Singapore.

Andreas Scriven, Deloitte’s lead partner for hospitality and leisure in the UK, admits that the unprecedented nature of the COVID-19 crisis makes comparisons with recovery data from previous black swan events such as the 2003 SARS pandemic and the aftermath of 9/11 meaningless. “Most people believe that it will take two years to bounce back,” Scriven says.

In the short term, the focus is on ensuring liquidity and cash management: cutting costs, taking advantage of government schemes including furloughing, and negotiating with stakeholders including landlords to ease the financial pressure. “We’re offering advice on restructuring, and working with lenders who are worried about the going concerns of businesses,” Scriven adds.

In anticipation of any sustained consumer behavioural shifts, low occupancy rates in hotels and a ramping up of cover numbers in restaurants and cafes present an opportunity for businesses to rethink some parts of their model to prepare for a more digital future. They can then put in place the necessary changes that are so difficult to implement when a business is busy fighting fire.

Developing a greater understanding of demand, booking and cancellation patterns will be increasingly important. Given that global macroeconomic indicators are still predicting a positive story (higher disposable incomes, growth in casual dining and holidays as a must-have, rather than nice-to-have) companies are still keen on digital transformation.

Jane Pendlebury, CEO of professional association HOSPA, says the support of accountants across the sector, particularly on cash flow forecasting and renegotiating supplier contracts, has been critical. She is optimistic that a huge rise in staycations, combined with the resilient and entrepreneurial nature of the sector, will stand it in good stead. “Around 90% of hospitality sector businesses are SMEs and many of them will adapt, but the reality is that some have already thrown in the towel.”

Kelly adds: “There’s a huge role to make sense of management information and how to pull out the impact of COVID-19 on your underlying performance. I’m also having more conversations outside of my area – companies looking at tax as a means to maximise relief and how investments might qualify for R&D tax credits, for example. That’s been massively underused.”