Luke Johnson is the Chairman of private equity house Risk Capital Partners LLP and former Chairman of Channel 4 Television. Amongst many other things, he is Chairman and part-owner of Bread Ltd (the firm behind the Gail’s Artisan Bakery chain) and owns All Star Lanes, London’s leading tenpin bowling business. Luke is also accountable for taking Pizza Express from 12 owned restaurants to over 150, and the share price from 40p to over 900p during his 6-year tenure as Chairman. Kathryn Gill, Consultant in our Leisure & Hospitality practice, recently spoke with Luke about his opinion on the Government response to the pandemic, how this affects the industry, and the industry’s relationship with Private Equity (PE).
What is your view on the UK Government’s response to the current pandemic, relating specifically to the leisure and hospitality sector?
The UK Government has extended a large amount of support to commerce. There are clearly issues with qualifying for this support for some businesses however, the furlough scheme is excellent. I would go as far as to say that for some industries, it is over generous. For the hospitality sector, the scheme has provided a vital lifeline given that labour costs surmount most others.
Another successful olive branch that the government has extended is the ‘rates holiday’ – an easy, but powerful offering. The pressing task is to solve the tensions between landlords and business owners – landlords remain reluctant despite the government supporting rent reductions or deferring.
However, the CBIL and CLBILS schemes are a very different proposition. Whilst I appreciate that some businesses have no other choice, I would be very dubious about taking loans, increasing debt and becoming even more highly geared – I would likely be asking myself some bigger questions. Retaining some sort of equity is far more important and whilst it remains to be seen, loans store-up issues rather than solve them.
How do you think the pandemic has and will shape the relationship between Private Equity & Hospitality?
Clearly the vast majority of funds already carry significant debt, especially those that have completed leveraged buy-outs.
PE firms are very unsentimental owners and that is an approach which does not gel particularly well with the situation we find ourselves in. PE firms with a heavy hospitality portfolio will be far happier to walk away from an investment with a loss, than ‘go bust’. Despite it not being the desired outcome, a fund will always be prepared for the possibility of a failed investment; the risk is mitigated via other purchases. The issue with the failures is that there is always a destruction of equity and, given the current situation, that is not something that hospitality businesses can survive in the short to mid-term.
It’s very easy to say that PE firms should, given the unprecedented circumstances, think slightly longer term and increase investment to weather this storm. However, the follow-on equity into an investment or fund may well have been closed and any ‘limited partner’ will be very unenthusiastic about reopening the possibility, let alone the fund.
Ultimately, the COVID-19 pandemic will not have helped hospitality valuations and unfortunately because of this, businesses in the sector may not command the multiples required to be lucrative investments in the future. That being said, I imagine that the London economy will cope better than the regions, which may help to mitigate this situation. Equally, ‘staycationing’ could become a rising trend over the next few years and perhaps offers opportunities to PE firms. The future of PE & Hospitality certainly isn’t as bright as it once was, but it isn’t dead.
What is your prediction for the industry, both midterm and longer?
My concern is that we aren’t addressing the fact that the biggest challenges are yet to come. We will face these when the world re-opens. If we look at the support mechanisms currently in place, the furlough scheme, rates relief, CLBILS/CBILS – these cash injections/cost relieving initiatives will stop. HMRC will come knocking. Meanwhile, revenue will not recover at the same rate because our world will look very different. This is attributable to two things; guidelines and sentiment. We know that social distancing guidelines will likely remain in place for some time – on a more relaxed scale, yes. The sentiment of customers is also going to feel different for a while - individual nervousness will amount to a collective nervousness. The tall and short of it is that hospitality and leisure customers will not bounce-back as quickly as the support stops.
Therefore, I have no doubt that there will be an unfortunate wave of insolvencies further down the line because the industry is very operationally geared and most businesses in the sector need to be operating at 70% to break-even. Throw into the mix that National Living Wage has increased in the meantime, and things become even more difficult. I am, however, of the view that those businesses who cater to younger generations will be able to bridge the gap faster and recover more comfortably.
Equally, there’s talk of ‘falling out of the habit’ and consumer behaviour changing forever; I don’t buy into this. I do not buy into the fact that things have changed forever. Medium term, yes. Forever, no.
Longer term, could local and single site ventures surpass the hospitality giants?
The importance of buying locally and supporting your local business community has no doubt increased. But for how long? I believe long term, there is still huge potential in large scale hospitality and leisure businesses. Big companies have the benefit of being able to borrow from the banks far more cheaply. Yes, they often have blander and less innovative offerings but that comes back to CEOs using this time to ask themselves hard questions about their businesses.
What would be your advice to CEOs in the hospitality industry?
- Tackle the simple things first and don’t underestimate them: preserve cash, cut costs and ensure you have a team that are all focused on retaining morale whilst doing so. It’s also important to look after your own wellbeing during this period.
- Next, you need to be considering ALL the available options. Now is the time for blue sky-thinking and exploring all possibilities. Assess and then reassess and remain focused on your priorities.
- Ask yourself difficult questions; do we really have a quality offering? Because if you don’t, you will not survive long term. Bland and tired will not survive.
- Keep your key suppliers close – on a human level as well as a business level. This will be critical to a more comfortable re-emergence.
- Maximise the government help available but be mindful of the consequences of CBIL and CLBILS.
- Remember that we will recover from this as an industry. Zoom video calls will never replace face to face interactions; something we are/will all be craving. For me, this will outweigh any nervousness.