The big picture
Theresa May announced at the recent Conservative Party Conference in Birmingham that she expects that formal talks will take place with leaders of EU countries before March 2017 – meaning that the UK could leave the EU by March 2019. We are clearly along for the ride on Phillip Hammonds’ Brexit rollercoaster, the question is how hairy is it going to be?
Mrs May’s announcement sent Sterling tumbling to its lowest level against the US Dollar since 1985 and to a three-year low against the Euro. The FTSE 100 (this is the share index that tends to be populated by companies with a more international reach) has risen above 7,000 for the first time since May 2015 and there is a distinct possibility at the time of writing this note that it could reach record levels. One of the reasons that stocks of FTSE 100 companies are doing comparatively well is that the profits that they make, when converted to Sterling, for the purposes of their reporting are worth more to them - which causes their stock to increase in value.
Curiously enough, however, shares in the more UK-focussed FTSE 250 companies are also performing relatively strongly. How can this be? If we are honest with ourselves there has probably been more economic good news so far as the domestic economy is concerned than bad – for example the latest figures from the Purchasing Managers Index show the construction sector returning to growth, consumer spending has returned to pre-referendum levels and the housing market, which underpins consumer confidence, remains strong. While the savers among us may not be earning huge sums in interest, the borrowers are not – for the time being – suffering harsh interest rates.
How do we see this translating to independent operators within the leisure and hospitality sector?
In our view, those businesses which are most likely to be adversely affected by Brexit will be those which import or export a large proportion of their supplies or product, those which rely on EU grants or funding and those which employ significant numbers of EU nationals. Happily, we believe that most of our clients within this sector will therefore be relatively well insulated from the perceived threats and could, in fact, benefit from the whole situation.
Data from the Visa/Market survey of consumer spending for July 2016 showed that the leisure and hospitality sector showed the strongest growth levels - up 8.9% year on year. Consumers are apparently happier to spend on experiences, rather than on material things. For the reasons set out above this may well continue – for some time at least – as there is no immediate reason for consumers to reign back. We are aware that some hoteliers have been reporting that their non-corporate occupancy rates have held up well and pub and restaurant operators have also reported strong sales. If Sterling continues to struggle against the Dollar and the Euro then it would seem logical to assume that this will encourage some to look to domestic shores for their next holiday or short break. Added to all of this is the fact that business from international visitors remains exceptionally strong and should continue to do so if Sterling remains under pressure.
Operators who employ significant numbers of EU nationals could, depending on the outcome of the Brexit negotiations, find it more difficult to recruit staff with the same skills and at the same rates as they may currently. In an extreme worst case scenario it is possible – we suspect unlikely – that EU workers could be required to return to their home states. It is clear that operators in countries such as Switzerland and Norway have managed their staff despite not being paid up members of the EU and so there is no reason to suggest to us that Brexit will cause insurmountable issues here in the UK. Our advice to operators, therefore, would be to simply bear this employment risk factor in mind when formulating medium and longer-term plans and to be especially mindful when considering senior appointments in the run up to March 2019.
To come back to the original question, admittedly we are only a short way into the rollercoaster ride so far but our conclusion at this stage is that we can see little reason for panic or pessimism and we look forward to supporting our clients in the sector.
For more information about the issues in this article or to find out more about how the Leisure and Hospitality sector can help you please contact the team on 0118 952 7711 or email leisure&[email protected].
Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.