Restructuring in the leisure sector: what does the future hold?
Restructuring in the leisure sector
What hurdles will leisure businesses need to face in the coming six months?
What is the current state of play?
It is estimated that UK gyms alone have lost more than £3.1 billion since the onset of the pandemic, according to a study by Pharma Nord, after their doors remained largely closed. For British cinemas, revenue fell by 76 per cent in 2020, from £1.25 billion to £297 million. Both perception and location are challenges that businesses will need to contend with in the months to come and factors that could affect different businesses differently during the next phase of recovery. It remains to be seen how quickly individuals will feel comfortable returning to certain leisure activities that feature elements of mass participation or close contact, even as the vaccination programme continues at pace. We are yet to see the degree to which current work from home patterns continue post-lockdown. A long-term shift away from city-centre, office-based work could mean that some facilities will need to rethink their operating models. The persistence of a more localised existence with individuals concentrating their work and play in the immediate vicinity of their homes could be a benefit to leisure businesses located in more residential areas. Another area where businesses will have seen change is with regards to subscriptions. For firms in the leisure sector – particularly the likes of gyms or golf clubs, but also cinemas, with monthly ‘film passes’ – subscriptions offer real benefits by providing a regular income that management teams can plan around with confidence, and providing an attractive degree of income certainty for investors. Operators have proactively sought out new revenue streams to capitalise on this trend. However, with customers unable to access facilities and spending towards more home-based leisure activities, some will be more likely to cancel existing subscriptions and not re-subscribe. Additionally, with subscriptions being a more fixed model, consumers may be keen to vary their leisure activities more regularly and therefore move away from this model. While this will undoubtedly serve as a setback to revenue streams, it will give firms the opportunity to reset their subscription baselines building a new membership base of active customers that could, in turn, support efforts to attract new investment or secure new lending.
With the UK now on a path out of lockdown, businesses in the leisure sector – from gyms, to pools, bingo halls and bowling alleys – are focused on the opportunities of the restart. After being denied access to leisure throughout periods of lockdown, there is an increased demand for leisure services, which could lead to an initial surge in activity as restrictions continue to ease. This demand could be further amplified with consumers likely to spend significantly more on leisure activities, with the additional savings gained as a result of lockdown. Businesses are wary, however, that this initial surge might not last as consumers reduce spending over the long-term in the face of what could be ongoing economic uncertainty. And, as they look to the months ahead, firms are also carefully considering how they can fund a restart and manage ongoing liabilities. When this working capital requirement is added to the financial challenges generated by the Government funding support schemes, HMRC Time to Pay (TTP) agreements and legacy arrears of liabilities, the scale of these funding challenges could be intensified.
The immediate challenges for businesses will be funding the working capital they need to re-open while managing ongoing liabilities. While some businesses in this sector will see a spike in demand, it will likely take some time for customer, membership and subscription levels to return to pre-pandemic levels. Leisure firms will face the disadvantage of not being able to easily scale their operations to closely match demand. The nature of businesses, such as swimming pools, means they have certain fixed costs that are essential to them being open and that they will need to meet, regardless of customer volume. Over the coming months, companies that have taken on government support such as the Coronavirus Business Interruption Loan Scheme (CBILS) may need to start making repayments, and securing Recovery Loan Scheme (RLS) finance could be challenging without a track record or a revenue profile that can be easily underwritten. While measures protecting commercial tenants from being evicted for non-payment of rent were recently extended by the government, some businesses have already agreed payment plans for outstanding rent on commercial properties. There remains widespread uncertainty over when support measures will be fully lifted, and how much businesses will eventually pay. This has posed a significant challenge for landlords and key suppliers with arrears have been stretched. In the absence of a clear path to unwind liabilities, we could see stakeholders begin to look at alternative recovery options. This uncertainty will make it difficult for businesses to plan their working capital needs with clarity, and could be a factor that inform lenders’ decision-making when considering new or additional backing.
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Million pounds estimated revenue loss for leisure facilities per week in lockdown 3.1 Billion pounds estimated total revenue loss for gyms since March 2020 Per cent drop in UK box office revenue during 2020 76
How has COVID-19 impacted the sector?
COVID-19 has unsurprisingly brought significant challenges for the UK’s leisure industry. With the stop-start nature of the lockdown restrictions, many businesses have been forced to close their doors entirely, while those that have been able to re-open during temporary lifts have often had to operate below normal capacity, often without an ability to reduce running costs commensurately. The nature of some leisure facilities – particularly gyms or fitness centres, where many individuals may be concentrated in enclosed spaces and sharing equipment – means they have faced a challenge of public perception as areas of risk when it comes to viral transmission. Meanwhile, the shift to homeworking has significantly reduced footfall, and consequently customer flow in town and city centres, even during short periods of re-opening between full lockdowns. This is an issue that has been particularly felt by businesses in major urban areas, where a buoyant after-work market that traditionally helped to fuel the industry disappeared almost overnight.
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