The future for leisure firms is likely to be “tough but stable”, with “little appetite” for M&A and no "excitement" in the sector for three to four years until consumer spending rises, says a new report from KPMG.
Meanwhile, consumers are becoming “professional bargain and discount hunters” when eating out, with four in 10 now making their choice based on offers and discounts available, KPMG said.
The report, Sector Foresight - The UK leisure market, says UK leisure businesses are facing a tough summer, with the Olympics providing only a temporary lift. The estimated value of the leisure market is expected to dip further this year after falling £4bn between 2007 and 2011 – with the effect of inflation removed, the decline is even greater, at 22% between 2006 and 2011.
The climate means there’s “little appetite” for M&A activity among operators, says KPMG.
The report says many operators have become to rely on discounting, including the issue and redemption of vouchers such as Groupon, “to combat fluctuations in trade”.
“For many businesses the habit is difficult to relinquish,” KPMG said.
Justin Zatouroff, European head of leisure at KPMG, said: “The prospects for the sector are not exactly rosy and the war for the discretionary consumer pound will continue. The good news is that for many UK consumers a base level of expenditure on leisure is now part of everyday life and eating out especially remains an ‘affordable treat’ for many. London continues to be a market in its own right and businesses in the capital are expected to outperform those in the rest of the country.
“Therefore with little organic growth for the economy in sight, the future for leisure businesses is likely to remain tough but stable and largely unexciting in terms of the potential to implement grand visions and pursue acquisition strategies.”
Pubs
Despite rising costs and more at-home drinking, the pub sector “appears to have stabilised, with most of the weaker businesses having fallen by the wayside already”.
“However, as a caveat to that, ‘on-trade’ drinking is in decline with more consumers drinking at home and drinking low to moderate levels in pubs.”
The report says that pub operators are looking to maximise returns from all aspects of operations and to increase overall revenue against a rising cost base and significant tax impacts.
Substantial numbers of operators are having to service relatively high levels of debt. But KPMG pointed out, most of this is in the form of securitised loans and bonds and therefore “relatively efficient forms of leverage”.
“There will continue to be issues arising from poor loan-to-value ratios for operations using property for security and continued reliance on tied contracts with major brewers to increase cash flow and optimise costs,” KPMG said.
“Although the demographics of each pub’s territory typically override other factors, the specific efforts made by local pub managers to achieve a differentiating focus are also a key determinant of whether revenue will increase, decrease or plateau.”
Restaurants
“Despite the recent downturn, spend in this segment continues and restaurateurs can forecast trade,” KPMG said.
“However, would-be diners are looking for better value from their dining experiences and are increasingly less tolerant of poor quality product or service. Growth will be hard to come by but the segment is comparatively stable by retail standards.”
KPMG said there’s evidence that ‘at home’ dining has reduced restaurant visits, but this has had more impact on smaller, independent operators than larger chains and on regional business rather than within the M25 and south east.
“Larger, familiar brands which can establish an emotional connection with the diner are expected to do better.”
Nightclubs
The report predicts that the slight decline in the nightclub market will continue as sites are again hit by a “double blow” – “a poorer, more discerning consumer and a rise in business costs.”
KPMG says some multiple sites in good locations with strong catchment areas, such as near a university, are doing “steady business”. But 18-24 year-olds “continue to feel the squeeze” with higher unemployment than any other age group and student loans “stretching cash to the limit”.
Dangers and inestors
KPMG says that overall the sector “appears rather static” and there will continue to be “danger at the margins”. In an economic environment with negligible growth, businesses need to take turnover from others to survive, it added.
Jane Moriarty, restructuring partner at KPMG, said: “For those operators operating at or near to the envelope for survival, competitive pressure could tip a surviving business into distress. Likewise, if management quality or focus is below that of the competition then income and margins could dip, creating financial uncertainty leading to an inability to service debt as it falls due.”
KPMG says that those businesses that have enough “headroom” and those with “agile leadership” will provide “more comfort” to lenders than those with “fragile balance sheets and inferior management processes and practices”.
“If the economic outlook remains shaky, this approach to portfolio management for lenders may need to be in place for a further three to four years until some excitement returns to the market and consumer spend increases.”
Olympics, Jubilee, Euro 2012
The report says that “on the whole”, landmark events such as the Olympic Games, the Jubilee and Euro 2012 will provide additional leisure traffic to pubs and restaurants.
“But the bounce effect from these events is not expected to change the underlying trend significantly and, in the case of the Olympics, business owners are concerned that the logistical hangover may actually impair business outturns,” says KPMG.
