WeeklyWatch – The uncertain future of the hospitality industry

04 August 2020

Stock Take

Diners fill their (discounted) plates

Are you planning to ‘Eat Out to Help Out’ in August? Yesterday marked the start of the new government scheme designed to support the hospitality trade, whereby customers can get half-price meals (with up to £10 off) at over 72,000 participating restaurants across the country. The scheme runs from Monday to Wednesday throughout the month – so if you’re planning on a “McDonald’s Monday” next week, you might pause to reflect on how the hospitality industry is faring.

Perhaps the existence of the Eat Out to Help Out scheme tells us all we need to know. Restaurants, bars and cafes have been hurt badly by COVID-19. Customers have stayed at home since the pandemic took hold, therefore reducing the amount they spend on non-grocery food and drink.

Despite venues reopening in June, diners are still reluctant to venture out, having been strictly following the government’s “stay at home” protocol for several months. Chancellor Rishi Sunak hopes the scheme will help boost the industry, but whether it will be successful remains to be seen – a recent BBC article stated:

“But with the offer only available on 13 days during the month, is it too little, too late to save an industry already ravaged by a devastating wave of closures and job losses?”

McDonald’s and Starbucks reveal COVID challenges

And talking of McDonald’s, the hospitality giant has shown what a challenging time it’s been by publishing its earnings results last week, along with Starbucks. The companies – which are both held in the St. James’s Place International Equity fund – both saw losses. McDonald’s saw a drop in its earnings and has had to spend tens of millions of dollars supporting its franchisees, while Starbucks made a loss for the quarter after earning $3.1 billion less than it had expected to before the pandemic.

However, both companies are also adapting quickly. “You can tell that Starbucks is really hustling,” notes Rosie Malcolm of Magellan, which manages the International Equity fund. The coffee chain has responded by tweaking its loyalty programme and introducing measures like curb-side pickups. It also seems that the coffee fix often trumped coronavirus fears – Malcolm adds:

“Starbucks also benefits from being a trusted brand with very loyal customers. People were still queuing for coffees at the height of the pandemic – when people were given the option of risking death or missing out on their Starbucks coffee, they said: ‘Well, we’ll risk dying, thanks.’”

Even so, it’s likely that customer demand will remain unpredictable for some time. It’s far from certain that workers will resume their normal routines in the future, which means that businesses must find new ways of reaching them and encouraging them to keep spending.

The most successful companies will be those that adapt effectively. Unfortunately, for smaller hospitality businesses with less cash to spend, some of these adaptations require deep pockets, says Malcolm:

“It’s been an extremely difficult period. And to come out the other side well, you need drive-throughs, you need deliveries, you need digital investments, you need loyalty programmes. Smaller operators don’t have the money to do that.”

To be frank, many businesses will struggle to survive – but those best placed to take advantage of the changes in customer behaviour are likely to be large companies with strong brands.

From “The Golden Arches” to solid gold

While the quarter contained mixed messages from McDonald’s golden arches, the price of gold itself reached an all-time high last week, breaking $1,988 per troy ounce on Monday. The metal is known as a ‘safe haven’ asset – meaning that investors are likely to buy it during times of market turmoil, because its value tends not to fluctuate a great deal. That said, its price has risen from around $1,700 per ounce to its current position in a mere three months, with experts predicting that it will soar even higher – analysts at Goldman Sachs recently raised their target for gold to $2,300.

However, it’s worth remembering that over the long term, stocks and shares have performed better as investments than gold or other ‘safe haven’ assets. Since the 1970s, for example, the value of gold is up about seven times in real terms – whereas the S&P500 stock index in the US is up 22 times in that same period. Still, Capital Economics believes the price of gold is likely to remain high for the foreseeable future because other investments are seen as too risky.

US economy suffers sharpest drop since records began

The week ended with some startling numbers from across the pond, with the US revealing that its economy shrank by nearly 33% in the second quarter compared to the same period last year – the sharpest such contraction in records dating to 1947.

The news overshadowed a reassuring announcement on Wednesday from the US Central Bank (the Federal Reserve), which said it will step up with extra measures if it thinks that the economy is tilting downwards again.

Coronavirus cases creep back up

Finally, data from various countries last week suggested that COVID-19 case numbers are beginning to rise again. Case numbers are increasing steadily in Western Europe, while new cases in Japan and Australia are occurring at higher levels than during the first wave, although new restrictions may cause them to peak soon, says Pantheon Macroeconomics.

Meanwhile, in the UK, lockdown was tightened suddenly on Friday across a large part of northern England after data showed a rise in cases. Yesterday, a major incident was declared by authorities in Greater Manchester following recent rises in coronavirus infection rates. The new rules state that restaurants and bars can continue to accept customers because most transmissions in the locked-down areas appear to be taking place in family homes. A small blessing, then, for the region’s struggling hospitality sector!

Wealth Check

Annual Inheritance Tax (IHT) receipts have fallen for the first time in a decade. HMRC figures released last week showed that it raked in £5.2 billion in IHT in 2019/20, down 4% (£223m) on the previous record year.1 This ends the decade-long trend of annual increases to the amount paid in IHT.

HMRC says the decline is due to the ‘residence nil-rate band’ – an extra tax-free allowance for family homes introduced by former Chancellor George Osborne in 2017. Essentially, the allowance increases how much of an estate can be passed on to a direct descendant before IHT is levied. It started at £100,000 in April 2017 and has increased by £25,000 a year until it reached £175,000 in April 2020.

This has effectively increased the IHT threshold for individual homeowners to £500,000 (£325,000, plus £175,000 residence nil-rate band) and £1 million for married couples. HMRC says the policy has taken 3,900 estates out of IHT entirely.

But the allowance has attracted criticism that it could push up house prices and discourage older people from downsizing. And as the government looks at ways to help cover the costs of its pandemic response, there has been speculation that the Chancellor could be eyeing up the allowance.

Rishi Sunak has already ordered a review of Capital Gains Tax and has faced calls for new property taxes. The huge wealth and ‘unearned gains’ tied up in residential property could yet prove too tempting for a government that needs to fill a big hole in its finances.

Click here for our top tips on beating Inheritance Tax.

1HMRC Tax and NIC Receipts, July 2020

The levels and bases of taxation, and reliefs from taxation, can change at any time and are dependent on individual circumstances.

In the picture

What did July hold for markets? In this video, Lauren Smith, Investment Communications Specialist at St. James’s Place, reviews recent events, and also looks ahead to what’s in store in August.

The Last Word

“Mr Bezos, I believe you’re on mute.”

US lawmakers prompted Amazon’s CEO Jeff Bezos during a digital hearing in Congress last week. Court hearings are another type of “interaction” that has moved to video chat since coronavirus – this widely used “user error” catchphrase is especially ironic given Bezos’s prowess in the technology sector!

The information contained is correct as at the date of the article.

Magellan is a fund manager for St. James’s Place.

The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place or Wellesley Wealth Advisory.

FTSE International Limited (“FTSE”) © FTSE 2020. “FTSE®” is a trademark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

© S&P Dow Jones LLC 2020; all rights reserved.

Back to news