Reasons to be cheerful: UK Leisure ready and waiting

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At the third and hopefully final time of asking after lockdown, the UK domestic leisure sector appears primed for meaningful recovery, assuming a properly managed relaxation of COVID-19 restrictions.

Industry confidence, newly confirmed in company updates and front-line surveys, is driven by lessons learned during the pandemic, notably pent-up demand on 2020 reopenings and the benefits of technology.

It is also driven by the prospect of a benign structural environment after COVID-19 and positive consumer behavioural shifts, led by delivery uptake as a growth channel for hospitality.

Likely continued curbs on UK residents’ foreign travel, which may be reinforced by the very success of the UK vaccination rollout, are another positive for domestic leisure.

While stock market valuations may no longer be highly discounted, for the victors in this brave new leisure world the earnings spoils may yet be startling.

The pandemic’s silver lining

There is a grim irony that COVID-19’s exacerbation of longstanding structural difficulties in UK hospitality has thrown up undeniable growth opportunity for well-funded businesses.

Increasing availability of prime sites at ever cheaper prices and on more flexible terms and the erosion of competition (estimated loss of up to 30% of restaurants) with the consequent increased supply of high-quality staff stand in marked contrast to pre-pandemic chronic overcapacity, frequency of ‘me too’ product, intense cost pressures and narrow margins, compounded by Brexit-led economic uncertainty.

To this end, surviving companies have strengthened finances and accelerated implementation of initiatives, such as the use of technology in managing labour costs and driving customer loyalty. Delivery has predictably excelled, offering scope for operators with the right scale and brands.

Pushing at an open door

In addition to the boost to domestic leisure from persisting uncertainty about foreign holidays in 2021, there is welcome industry consensus ahead of reopening about pent-up consumer demand and a treat mentality, as shown by buoyant trading after the spring 2020 lockdown and despite subsequent and frustrating restrictions.

Since the start of the pandemic, household savings have increased and household debt remains mostly unchanged, largely owing to a fall in spending on non-essential items over lockdown (the Q220 household savings ratio was the highest ever).

For those who have suffered financially, low-ticket domestic leisure may well be an attractive option. Potential beneficiaries (see page 7) cover a mix of activities from family entertainment centres and escape rooms to gyms and hospitality.

The value of vaccination

The UK has pushed ahead with a world-leading vaccination programme and looks set to emerge at the head of the pack from the pandemic.

As social distancing and lockdowns give way to social spending, the leisure entertainment and travel sectors may be set for an earnings-based recovery.

Valuations may have recovered but this relative earnings momentum may point to further outperformance in the months ahead.

See the full report here >