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As we enter the next phase of the Covid-19 pandemic, beyond lockdown and government funding and look ahead to “the new normal”, it cannot be underestimated that the most critical requirement for businesses at this time is the need to continually review and plan for the road ahead and adapt where necessary. Shauna McStravick of CavanaghKelly examines some of the considerations below.

The pandemic has affected businesses and individuals in every industry and so it’s understandable to feel overwhelmed by the health and economic challenges posed.  However, in order to survive and move onwards and upwards, it’s important that businesses now focus on the things they can control.

Undeniably, the hospitality and tourism sector has been amongst the worst impacted by the pandemic.  However good news is on the horizon, with the Government this week announcing the conditional reopening of the sector from 3^rd July 2020.

There is no doubt there will be challenges ahead for businesses within these sectors, however with careful planning, willingness to adapt and being resolute in the monitoring of business performance and financial position, there is every reason to be hopeful that these sectors will be as resilient as they have always been and bounce back.

 

Planning and Understanding the Business Position

It is likely that when businesses reopen on 3rd July 2020, many will experience an initial reduction in demand and therefore revenue.  In many cases when revenue reduces, costs must follow if the business is to survive. 

And so, the first step for all businesses should be to examine their cost base to establish its new breakeven point. For the foreseeable future, businesses should be in “cash conservation mode.” A review of the businesses fixed and variable costs should be undertaken to see if any reductions can be made.  On-going investment in PPE may also need to be considered. In relation to fixed costs, typically there may be little that can be done to reduce these and the business may already have availed of forbearance from banks and/or landlords as well as rates relief. 

There may however be more opportunity to take advantage of cost savings when reviewing variable costs.  These costs will depend very much on the type of business but typical examples are labour, food and beverage orders, house keeping supplies, guest amenities, and sales promotional costs.

Subsequent to the cost base review and establishing an understanding of the new break event point, it’s highly recommended that businesses regularly and continually monitor their financial position to ensure they’re equipped with the information necessary to enable them to make strategic decisions as and when required.

The purpose of compiling this management information is not to try to guess exactly how things will pan out for the business, but instead to prepare for all reasonable possibilities. By continuously monitoring and evaluating performance the business can remain agile and be proactive in implementing measures that may be needed in order to trade through this difficult period.

In order to survive, businesses should be prepared to be ruthless when the circumstances require.  The reality is that fairly soon some employers will need to make difficult decisions on whether adjustments are required to staffing levels and if so, to what extent.  It is anyone’s guess as to how long it will take for the economy to recover from the effects of Covid-19 or how far the Government can and will go to stimulate recovery. 

Based on statistics released by the Northern Ireland Statistics and Research Agency this week, the number of proposed redundancies in Northern Ireland since the start of March 2020 is now over 3,000.  Due to the long lead times on redundancy programmes, some large employers are now progressing with the announcement of redundancies whilst the Government’s Job Retention Scheme is still in operation so that some of the statutory notice costs of the redundancy can be absorbed.

 

To survive businesses must be willing to adapt

Businesses need to be willing to adapt and in some cases go beyond their comfort zones. If the Government hold steadfast on the two metre social distancing rule as opposed to the one metre currently being lobbied, the industry bodies are of the opinion that this could see revenue being reduced to c.30% of pre Covid turnover. 

Even at one metre, it is estimated that sales could reduce to c.70% of pre Covid turnover.  With the Government guidance around reopening making clear that a café licence will be required for additional seating on public spaces or an occasional licence required for additional ground owned by the business, there are already obstacles in the way for the industry.  And so for some businesses in the sector, adapting and implementing new strategies will be the main method of survival. 

It’s likely that Government restrictions will relax quicker for smaller events where group numbers are limited and so social distancing measures can be adhered to.  Businesses may wish to consider shifting their focus to smaller events/groups, if it’s possible to partition large function rooms into small rooms and therefore cater for more events. 

For those businesses who operate in hospitality, focusing on economies of scale and branching into new territories may be advisable.  Some of the options that may be open to these businesses include the following:

• Scaling down menus to reduce costs (and waste) and potentially increase the overall gross margin.
• Offering a takeaway menu, perhaps at a reduced rate in addition to the in-dining option to increase overall sales.             
• Implementing an app for ordering food and drink for in-house dining, therefore reducing time spent on the premises and at the same time potentially increasing table turnover rate.
• If the business offers in-room dining/drinks, it may wish to consider removing any surcharge payable.                                                          
• Businesses may wish to review their online presence and the promotion of offers to encourage consumer uptake. At the same time the business could promote the efforts being made to comply with social distancing and its responsibility to avoid spread of the virus.

With the new normal being heavily centred around social distancing, businesses will need to look at what sanitation and health and safety procedures should be implemented in order to safely reopen, encourage customers to engage, as well as ensuring the health and safety of their staff. Consumers may even be willing to place more of a premium on their health and safety than service quality. However there will need to be a balance found between reducing unnecessary expense in order to improve profitability and the moral responsibility to ensure the health and safety of customers and employees.

 

The Future…

The hospitality and tourism sectors are likely to continue to face disruption over the coming months as a direct result of the pandemic and there are no doubt challenges ahead.  However these sectors have weathered tough periods in the past and with a focus now on proactivity and planning for the challenges that lie ahead, they can look forward to healthier happier times.

 

Shauna McStravick is a Restructuring & Business Advisory Manager with CavanaghKelly. She can be contacted on 02887752990 or via email at Shauna.mcstravick@cavanaghkelly.com.