Do black swans and grey rhinos mean anything to you? The former is a term used to describe an unpredictable event that has potentially severe consequences and the latter to describe a big, scary and obvious event that’s coming towards you.

For hospitality, the pandemic has been a gargantuan black swan and, as the chancellor rose to his feet on Wednesday, we were poised to see how his Budget would help us emerge from its dark shadow.

Now we’ve had time to pore over the detail, it’s fair to say that while the chancellor delivered (in part) on our headline asks, the sector will need continued support to allow us to regenerate and help deliver the economic renaissance the country needs.

We welcome the extension of the furlough scheme, the apprentice bonus, additional business grants, the VAT cut extension and the business rates relief to next March, though it should be recognised there are significant issues to address if businesses of all sizes are to fully benefit from this.

All of these measures will be crucial in helping operators get back on their feet but will be rendered largely pointless if businesses are not able to reopen in full and without restrictions on 21 June, as promised in the PM’s roadmap. The government must stick to this date because any delay will mean yet more businesses will fail, more jobs will be lost and the support the government has poured into the sector thus far will be completely wasted.

Even if the country is able to celebrate this summer – together with all the bartenders, baristas, chefs, servers, hosts and hotel receptionists that can finally do their jobs again – for hospitality to be able to fully recover, the government needs to address some glaring omissions from its package of support. 

Outstanding rent debt, for example, which is currently a £2bn millstone around the neck of the industry. To bring down this particular grey rhino, we need the government to announce an extension of the rent moratoria at the earliest possible opportunity, particularly because the caps put on grants and rates relief will limit meaningful support to many businesses in the sector. The government must lead on this critical issue and work with landlords, tenants and banks to find a workable solution for all parties. Hugh Osmond’s comment this week that rent debt is an “existential threat” to the future of the sector is not an exaggeration, and is a point I have put to political audiences for some months.

We will also keep pushing for a permanent reduced rate of VAT for hospitality in 2022 – this would be a positive legacy of what has otherwise been a nightmare year. Ideally, we would have liked to have seen the chancellor leave VAT lower for longer but we now have a strong platform to lobby for lower VAT as a permanent feature for our sector and to demonstrate the benefits it can bring to the economy in terms of increased investment, job creation and affordable prices. We can also look at widening the reduction to other parts of the hospitality sector.

Beyond this, we also need the government to grasp this opportunity for root-and-branch reform of several areas that have been slowly strangling the sector for years, including an overhaul of business rates that so unfairly penalise hospitality businesses (hospitality makes up 11% of all business rates payments, despite contributing just 3% of eligible income).

This week’s Budget was broadly positive and it’s a significant achievement to secure the measures, thanks to our strong voice and campaigning at the highest levels of government along with the supportive voices of many members. We hope hospitality is now on a path for a successful reopening, recovery and revival, while recognising there are some more rhinos rumbling toward us that need dealing with.

This is not an easy time to be in government. “Damned if he does, damned if he doesn’t” is the ineluctable dilemma for the chancellor trying to navigate the public finances as we emerge from the pandemic and survey the economic fallout. This article is not an attempt to analyse the measures the chancellor has adopted – although I obviously welcome the help he has provided to the hospitality industry and its related sectors. Rather, I want to offer a brief thought-piece on where this leads us.

 

Firstly, let’s look at debt and deficit. The TV and newspaper pundits have been busy telling us the debt the government has incurred to support people and businesses during the pandemic will all have to be paid back and higher tax will be needed to “pay back the borrowing sooner or later”. This is economic nonsense and a missed opportunity by the mainstream media to educate the public about the difference between private debt (households/individuals) and public debt (money owed by a state).

 

There are two consequential differences between private and public debt. Firstly, most people settle their debts in their lifetime or upon their death – either they have the assets needed to do so upon their demise or they don’t and it’s written-off. But a nation state doesn’t have a natural end, in theory it continues in perpetuity. 

 

Secondly, individual borrowing is limited by the individual’s ability to repay the loan. That is not the limiting factor for government. For 50 years, successive British governments have not repaid debt. Governments deal with debt in three ways: they roll it over (old loans are repaid by taking out new ones); they inflate it away so that it falls in real terms while remaining the same in nominal terms; or they monetise debt – the central bank creates digital money out of nothing to retrieve debt from the private banking sector so that it is held by the government’s own bank, thus reducing interest charges. This is called “quantitative easing” (QE). 

 

So, what limits the government’s ability to borrow money is not its ability to repay debt but its ability to service the stock of debt it owns. In other words, interest payments. Tax rises – both the obvious ones and the disguised ones – will be needed for two purposes: to pay interest on our national debt, and to control inflation. The chancellor has rightly expressed concern about our ongoing ability to service our stock of debt – currently at approximately £2.2tn. Which is why we have seen so much QE. The Bank of England will soon hold 50% of the government’s stock of debt. If you owe a large amount of money to a bank you own – do you actually owe that money in any real sense at all? An essay question for A-level economics students, perhaps.

 

But, as well as servicing our stock of debt, tax rises will be needed to control inflation. It may seem counter-intuitive to talk of inflation in the context of the biggest recession this country has experienced for 300 years, but I think it is what we will see in 12 to 18 months’ time. The old adage “there’s no survival in the long term if we don’t survive the short term” was the chancellor’s dilemma. This was a budget to get us through the short term – and the fear was immediate tax increases would strangle the economic recovery. The chancellor has made the right decision in putting them off. But putting them off will have consequences. 

 

An economist might define inflation thus: “Inflation is where an increase in the units of money is needed to facilitate the same volume of transactions”. We have seen a vast expansion of broad money aggregates over the past year – with the government’s annual budget deficit rising to £394bn – that equates to 17% of our national income in one year. This was the right thing to do – people and businesses can’t survive on thin air in a government-mandated lockdown. But such a vast increase in broad money happening in the context of a 9.9% fall in GDP is a classic ingredient of inflation. And here is the problem for the chancellor: there are time lags between excessive monetary stimulation and the inflationary response – typically around 12 to 18 months. When the chancellor’s tax rises do kick in, a certain level of inflation will have been baked in by not acting now.

 

The government must decide how much stock of debt it can afford to service. The inflation level in 12 months’ time will be a measure of how much it is not prepared to service. Inflation is a disguised form of tax increase. If government raises taxes consumers have less money to spend. If instead they allow inflation to rise then consumers have the same nominal amount of money to spend but it will buy them less. The outcome is the same. 

 

The Office for Budget Responsibility’s forecast is that inflation will remain within the 2% target for the next five years. When that turns out to be wrong, the Bank of England will invoke the myth of cost-push inflation and say it was down to factors beyond its control. Inflation is the tax that dare not speak its name.

 

For the trade, the focus must be on the short term – getting open with as few restrictions as possible. The unintended consequences of short-termism will become the next set of problems the government and the trade have to solve.

While reopening may not be happening as fast as many in the sector would have liked, at the very least, hospitality businesses have clarity on dates to work towards and plan for. With the government’s roadmap in place and a widely anticipated budget presented to the nation, management teams have swung into action, contacting suppliers, calculating cash burn and forecasting possible trading levels for the rest of the year. As businesses lift the shutters, having the capital to get through and beyond those reopening dates will be key, particularly with the issue of rent debt casting a huge shadow across the sector.

The latest data from our Market Recovery Monitor, published in partnership with CGA, demonstrates just how perilous the situation currently is. Licensed premises have been closing at a rate of 30 a day (or more than one an hour) since Christmas 2019, showing the terrible toll of covid-19 and lockdowns on hospitality. The sector-specific support announced in this week’s Budget provides some cheer with lower VAT in place for another year and significant relief on business rates over the same period to help firms repair their balance sheets.

With this support announced, what should be the focus for management teams in the run-up to reopening and while the market is undergoing significant flux? The latest round of grants and the furlough extension are welcome but nowhere near enough to cover costs for the majority as cash burn across the sector is at unprecedented levels, reinforced just before Budget day by Nick Mackenzie, chief executive of Greene King, who stated lockdown is costing its managed business an eye-watering £7m per week. The need to replenish cash reserves will be pressing. 

The first question is: what is the right target size and shape of your estate? Do you need to shrink to grow? Do you have sites in the right locations? The latest Market Recovery Monitor found town centres had experienced a slightly sharper decline in licensed premises than cities during the pandemic. While the sudden end to inbound tourism and leisure travel and the closure of offices has emptied many major city centres, and the surge in people working from home has pulled many consumers back into suburban areas and towns, so far at least, cities have proved more resilient. 

This may indicate the success of many city centre operators in pivoting towards takeaway, delivery and retail offers. It could also reflect a historic saturation of restaurants, pubs and bars in some provincial towns and the need to reduce capacity. But it also suggests larger operators – which, admittedly, have larger cash reserves than smaller independents with many already tapping the capital markets for additional capital – might be taking a long-term view to the crisis and, like the prime minister remarked in a recent briefing, betting on city centres bouncing back fastest later this year.

If change is required, the question is whether this is achieved through general churn or if a more fundamental restructuring required? The sector has seen a swathe of restructurings over the past year, most recently with Prezzo shedding some 22 sites as part of a pre-pack administration, allowing many companies to remould their estates and secure more flexible terms with landlords. As we move through the reopening phase and into recovery, attention will turn to expansion and the fact that new sites will be available on far more favourable terms with greater incentives to open.

The second question for many management teams is on-site operations and central functions. Looking through the lens of a zero base is something many have been doing over the past few months – it’s easier to build up than to cut down to an optimum size. What can be simplified from an operational perspective? What can be bought in compared with prepared fresh on-site? How can you use data and insights to plan staff rotas and procurement more efficiently? A shift towards long-term remote working may reduce physical head office requirements. Equally, a significant increase in sales via delivery and/or click and collect channels requires systems and process fulfilment as well as operational efficiency to maximise the opportunity.

On the theme of using technology, many operators are diverting towards digital investment. With the customer journey and behaviours shifting, these tools are developing rapidly and customers will undoubtedly expect you to keep pace. Table service and app ordering are likely to be here to stay – can pub operators, for example, cope with this alongside traditional bar service and a burgeoning multichannel model?

Finally, and critically, businesses need to have the liquidity and flexibility to survive and grow. This will come down to what level of investment they may need, particularly if it’s to fill a funding gap. It’s fair to say that if one was thinking of a time to value a business, the middle of a global pandemic – with business trading at losses while various rent and other liabilities piling up on the balance sheet – wouldn’t be ideal. But as we approach the reopening of the market and given the level of pent-up demand that is expected, forward-thinking investors may be willing to look to the future in agreeing pricing and valuation today. You only have to look at the recovery in the share prices of the listed companies in this sector to see that optimism appears to be winning out. 

Of course, public companies have greater means to raise capital, as seen by the recent rights issue by Mitchells & Butlers, but their valuations have an important influence on private companies by building investor confidence. New entrants to the market are appearing, unencumbered by historic levels of debt with fresh funds to invest, for example, Rooney Anand’s new RedCat vehicle. These new entrants will all be fighting to find platforms to invest in. This all demonstrates investors remain attracted to the sector. With a roadmap to freedom in now place, we expect more interested parties to run the rule over the sector and deal activity to increase. It’s imperative your business is ready to be part of that conversation. 

As the sun blazed down outside the Café Hegeraad in the Jordaan district of Amsterdam, my wife led me straight past the crowds drinking on the market square and around a spare pair of seats to instead sit at a rickety table in the completely empty dark-wood interior of the compact front bar.

 

Although the barman was rather taken aback to see people actually choosing to sit inside rather than in the warming sun, my wife was more than aware of my penchant for sitting in low-lit bars soaking up both the history of the buildings as well as the local beers.

 

However, from 12 April, I’m going to be more than happy to discard my vampire-like habit (carefully developed over a drinking lifetime) and join everybody else outside. I’ll be more than happy taking advantage of the opportunity to finally return to pubs and restaurants – albeit alfresco-only until 17 May when I can then dust down my red-lined black cape again. 

 

There is no escaping the fact many businesses are massively constrained by this ruling. The British Beer & Pub Association predicts as many as three in five pubs are unlikely to open in April because they lack a garden or do not believe they will be able to trade profitably under such restrictions. The extensions to the business rates holiday, VAT cut, and furlough as well as £400m of grants for pubs announced in the budget will help for sure, but the uncertainty for so many businesses remains incredibly worrying.

 

What will make life easier for many operators in April and make it possible for them to reopen – even if they have zero outside space – is the decision by councils to again close certain streets to traffic and enable the space to be converted for outdoor dining and drinking. This was a major feature in London when 60 roads were closed between July and October and laid out with tables reminiscent of a street party. The alfresco bonanza will return again – running from April through to the end of September. 

 

More than 560 Westminster premises were previously issued with pavement licences to allow them to place seating outside their venues. There will, no doubt, be just as many businesses taking part this time – from the 3,700 registered in the local authority area – because there is an incredible level of pent-up demand from people wanting to venture back out again as evidenced by the avalanche of bookings many restaurants and pubs have received since opening up their booking lines.

 

Places in London such as Soho – with its many restaurants and bars – are prime locations for street closures but, like last summer, there will no doubt be other similar schemes introduced around the country in order to breathe life into what have become ghost towns rather than bustling city centres over recent months.

 

There will also be lots of examples of greater use of outdoor space that is all too often shamefully lacking in a country renowned for its gardening capability. Marquees constructed in pub gardens will again be a frequent feature no doubt. Others will look to implement more long-lasting structures that will serve them well into the future. This will sit well with the overall trend of people seated outside all year round that was initially fuelled by the smoking ban, and has since been adopted beyond smokers through improved seating and widespread use of outdoor heaters as well as milder winters courtesy of global warming. 

 

The Jolly Cricketers freehouse in Beaconsfield, Buckinghamshire, is one such business investing in its garden space through the construction of an outdoor kitchen that will help it boost cover numbers. Such a move was considered pre-covid-19 but such was the increase in alfresco dining this summer, combined with the success of its new external bar, management felt confident committing to the permanent supplementary kitchen.

 

Such confidence does thankfully highlight that there is finally light at the end of the tunnel for pubs and restaurants after a torrid period. Although I’m still more likely to enjoy my beer in the dimly lit surroundings of the inside of a pub like Café Hegeraad than in a bright sunlit garden.