Archived article

Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.

There is significant pent-up demand to get out of the house and start enjoying life as we used to know it
Thursday 15 Apr 2021 Author: Ian Conway

We’re getting a distinct feeling of déjà vu as the hospitality sector starts to reopen. Indeed, just 10 months ago we were doing more or less the same thing, although this time round the economy looks in much better shape and the rollout of vaccinations has given consumer confidence a shot in the arm.

After a third lockdown, there is no doubt a large part of the population is ready – not to say desperate – to get out and enjoy themselves. Last month’s GfK consumer confidence survey beat expectations, and even though the reading is still negative the trend is clearly positive, which bodes well for growth.


Research from suggests nearly a quarter of over-18s surveyed expect to hit the pub by the end of this week with a total of nearly £450 million being spent in the first four days – equivalent to more than £50 per person surveyed.

Anecdotal evidence gathered by Shares suggests spaces at some of the more popular outdoor venues are already booked up for weeks to come and weekend slots have been pre-booked well into the summer.

All of which bodes well for a pub sector which has been decimated by the pandemic. According to industry analysts CGA, January and February were the toughest two months that the hospitality industry has seen.

In just the first two months of the year, the UK lost over 2,700 licensed premises, taking the total number of premises shut in the last year to 7,600, with an attendant loss in jobs.

It is also worth noting that only 40% of pubs have outside areas, according to the British Beer & Pub Association, so a big chunk of the sector won’t be reopening their doors this week.

However, in CGA’s Business Leaders survey those at the top of the industry are more bullish now than at any point during the crisis and for the first time some are planning new openings rather than more closures.

In fact, some savvy operators believe this is the ideal time to invest. RedCat Pub Company, headed by former Greene King chief executive Rooney Anand and backed by Howard Marks’s Oaktree Capital Management to the tune of more than £200 million, has just acquired an estate of 42 premises from Stonegate.

Anand described the deal as ‘the first step in our plan to build a differentiated pub company, to serve the local community and add value to the neighbourhoods that we invest in, as we play our part in rebuilding the sector’.


In the restaurant sector, which was already in trouble before the pandemic with well-known brands such as Carluccio’s and Jamie’s Italian shutting down, there has been as much as a 30% contraction in capacity in the last year according to some accounts.

That has encouraged old hands such as Hugh Osmond, founder of Various Eateries (VARE:AIM) and Punch Taverns, to have another swing of the bat. Floated last September, Various Eateries owns the Southern England-focused restaurant brand Coppa Club and Italian restaurant Tavolino in London.

Having raised £25 million to accompany its stock market debut in September 2020, the firm says it is ready to take advantage of the current market backdrop, which offers increased availability of good sites and reduced competition.


While pubs, and restaurants to a lesser extent, are likely to be mobbed in the first few weeks of reopening, with only outdoor spaces open and with a reduced ‘take’, profits are likely to be some way off as the sector remains in ‘cash burn’ mode for a while.

In addition, many hospitality firms have taken on debt to get through the crisis, and most have taken advantage of the Government’s deferred business rates and VAT schemes, which means at some point they are eventually going to have to cough up what they owe for last year as well as this year.

Yet, as analyst Greg Johnson at Shore Capital points out, valuation metrics for many hospitality stocks ‘have moved beyond historic metrics, implying the market is discounting a rapid recovery in profitability to at least pre-Covid levels, if not beyond, and/or that higher valuation metrics can be supported following the return to normality’, which seems unlikely to us.

While the unleashing of pent-up demand and the lack of competition could support margins initially, the long-term winners are likely to be those firms which are well-capitalised and are able to ‘stay in the
game’ while assessing the various options to grow their market share.


The reduction of capacity and more attractive rental terms have created an opportunity for some hospitality firms to accelerate their growth plans.

Gym Group (GYM)

Price: 246.5p – Market Cap: £407 million

Low-cost fitness firm Gym Group (GYM) believes retail closures have increased the availability of high-quality sites which were out of reach pre-pandemic.

For example, the company plans to open gyms in Oxford, York and Cambridge, attractive locations it has targeted for years without finding suitable sites at acceptable rents.

The company has a strong pipeline of new openings for 2021 and beyond as it continues to execute its growth strategy.

A study by consultancy PwC estimates there is plenty of headroom for low-cost gyms to increase their market share with the 10 largest brands only accounting for around 16% of the market compared with 68% in Germany.

A survey last year by Sport England found 87% of gym members were likely to resume their memberships while interestingly, 27% of people who were not members said they were likely to join.

Loungers (LGRS:AIM)

Price: 272.99p – Market Cap: £279 million

All-day trading operator Loungers (LGRS:AIM) experienced strong like-for-like growth, 45% ahead of the pub and restaurant sector, when its sites were allowed to open temporarily last year.

This highlights the popularity of the company’s hybrid café/bar/restaurant format and its relevance to local in suburban and market towns.

As well as food and drink, the company’s flexible format offers an alternative workspace and a meeting spot for friends and family in a convivial, friendly atmosphere.

Like Gym Group, Loungers sees more opportunities to open sites in prime locations on great rental terms in the aftermath of the pandemic.

The ‘tenant-friendly’ property market will allow the company to open sites that generate higher levels of revenue and profit. The company recently extended its banking facilities, allowing it to resume its pre-Covid plan to roll out 25 new sites per year.

 The Fulham Shore (FUL:AIM)

Price: 15p – Market Cap: £92 million

Franco Manca and The Real Greek owner The Fulham Shore (FUL:AIM) said in a recent trading update that difficulties in the property and restaurant sectors were providing the group with opportunities to acquire new sites at much reduced rents and lower capital costs per site.

The company recently opened two restaurants which cost less than half what they would have a year ago, meaning it should enjoy higher returns on capital than achieved historically.

The firm is agreeing terms on further sites due to open in 2021 for both of its brands, in London and around the UK.

The Fulham Shore operates a differentiated business model whereby it directly sources food and drinks from suppliers in Italy and Greece, guaranteeing authenticity and quality of ingredients.

Cost savings from cutting out wholesalers are passed directly onto customers providing them with a high-quality yet value-for-money proposition.

Provenance and sustainability are increasingly important considerations for diners which makes the company’s restaurants attractive places to visit.


The pandemic presents long-term challenges for some parts of the leisure sector. Cinema groups could find it harder to attract audiences in the future as film studios have changed their marketing strategies during lockdown.

In July 2020, Universal Studios signed a deal with cinema group AMC enabling it to release movies to streaming platforms within 17 days of theatre release compared with the historical norm of 75 days.

In December, Warner Brothers said it would release all its 2021 movies simultaneously at the cinema and streaming channel HBO Max which includes The Suicide Squad, Matrix 4 and Godzilla vs. Kong. The latter has been a big hit at the cinema, at least in relative terms for the pandemic, suggesting that the silver screen isn’t entirely dead.

Meanwhile, Disney released Mulan exclusively on Disney Plus for $30 in September 2020. Even before the pandemic, theatre attendance was flagging with 2019 showing the fewest visits since 2002 according to Bloomberg.

We are not suggesting blockbuster movies won’t continue to play in theatres once allowed, but we think there is a real risk that competition from better quality home cinema equipment and earlier (or simultaneous) releases via streaming platforms might
have permanently lessened the attractions of going to the cinema.

For these reasons we would avoid investing in Cineworld (CINE), especially given the 282% gain in the shares over the last six months while its theatres have been closed and given its heavy debt load which raises its risk profile.

On the other hand, food delivery has seen a huge boost during lockdown and while long-term attractions remain, in the short term we think that horse has run its race.

We would steer clear of Domino’s Pizza (DOM) on the basis that the pent-up demand for visiting restaurants and bars
will result in fewer people ordering in pizzas.

As the weather improves, normal patterns of behaviour such as people visiting pub gardens or barbecuing in their own gardens are likely to be re-established quickly, presenting a more challenging backdrop for Domino’s.

In addition, the long running spat with its franchisees is still unresolved with the cost of any new agreement unknown. The new strategic direction to increase the UK footprint by over 200 stores and double the firm’s share of the collection market remain
key risks for now. 

‹ Previous2021-04-15Next ›