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Hospitality -

What happens in the sector moving forward?

July 2020

Introduction 

The outbreak of Covid-19 and the global lockdown to curb the spread of the virus are not impacting every business sector to the same degree. For instance, e-commerce giant Amazon is, in fact, benefiting from the stay-at-home economy. Conversely, the hospitality sector is at the opposite end of the spectrum. Restaurants, nightclubs, bars, and hotels form the backbone of this business sector, and all these businesses have been advised by governments across the world to remain closed in a bid to implement social distancing policies and prevent exponential spread of the virus. This, in return, has pushed many of the companies operating in this sector to the brink of bankruptcy. There are, however, a few silver linings amidst these dark clouds.

 

The numbers are truly unprecedented

The numbers reported by various national and international travel agencies are truly unprecedented. International travel drives the success of the hospitality sector and the data below from the World Tourism Organization illustrates the extent of the impact of the virus on this industry: 

  • International tourist arrivals are expected to decline between 58% to 78% in 2020, in comparison to the previous year.

  • The economic impact of this decline is projected to be $80 billion, and the bulk of the losses will be born by the hospitality sector.

  • The decline in global travel is expected to lead to the loss of around 100 million jobs in the tourism and hospitality sector on a global scale.

  • The Covid-19 pandemic is the worst hit on international tourism since World War II.

The decline in global travel activities in March alone serves as the harbinger of a disappointing second and third quarters too. To put things into perspective, the virus had not reached its peak in the United States and many other western countries by March, but travel activities still declined dramatically.

Source: World Tourism Organization

Even the largest hotel chains in the world are finding Covid-19 a profound challenge. For instance, Marriott International recently projected a 90% loss of revenue in April and May, which will make it difficult for the company to honour its debt repayments in a timely manner as well. The American Hotel & Lodging Association estimates that 44% of hotel workers will lose their jobs in the coming weeks and months as the industry contracts in an effort to survive. Leading hotels including Marriott, Hilton, and Hyatt have already furloughed and laid-off tens of thousands of employees to preserve much-needed cash. 

 

The situation facing restaurants across the globe is not markedly different either. The below is an illustration of the year-over-year daily change in seated restaurant diners from February 24 to May 26, which exhibits a steep and sustained decline in diners since the outbreak of the virus.

Source: Statista

 

There is enough data to suggest that the hospitality sector and all the sub-sectors in this industry will be in a fight to survive in the coming months.

 

The recovery will be slow but there are promising signs

Even when mobility restrictions are lifted, social distancing policies are likely to remain in place in the absence of a vaccine to fight Covid-19. A science journal published by researchers from Harvard University projects that the virus will spread over the next few years and some sort of social distancing will be required at least through 2022. This is bad news for the hospitality sector as all the companies representing this business sector will be required to operate at reduced occupancy levels. Therefore, the optimism surrounding the reopening of the economy is premature, as operating costs are likely to remain elevated for a few years until things return to normality. 

What happened in South Korea when authorities decided to reopen bars and nightclubs in Seoul, the capital of the country, brings to light the long-term nature of the threat to the industry. 

Another factor that could deliver a punch in the gut for the hospitality sector is a second wave of the pandemic: according to data from the CDC, the second wave of Spanish Flu in 1918 was deadlier than the first, and many epidemiologists have warned that things could take a similar turn this time around as well.

There were 3 different waves of illness during the pandemic, starting in March 1918 and subsiding by summer of 1919. The pandemic peaked in the U.S. during the second wave, in the fall of 1918. This highly fatal second wave was responsible for most of the U.S. deaths attributed to the pandemic. 

 Source: CDC

If the risk of a second wave of Covid-19 materializes, the hospitality sector stands to lose billions of dollars more, and a wave of bankruptcy filings will be difficult to avoid.

Even though the near-term outlook is not promising, there are some early signs of recovery. For instance, The Wall Street Journal reported on May 19 that U.S. airline bookings are gathering pace, and cancellations are declining steadily. This does not come as a surprise as many countries in the world are gradually opening up their economies and the majority of European and Middle Eastern countries expect to welcome tourists as early as August. Carnival Corporation, one of the hardest-hit cruise line operators, reported that bookings for the latter half of this year are gaining traction, which highlights that the travel and tourism sector is slowly but steadily gaining momentum. This is good news for the hospitality sector, and the second half of this year could see some recovery. 

 

Not every company is created equal. This creates opportunities for prudent investors.

There is no denying that every company within the hospitality sector would have been better without COVID-19. However, some companies in this space have realigned their business models to thrive even under these difficult macro-economic conditions. The key to investing in this troubled sector is to identify companies in strong financial health. Restaurant Brands International (QSR), the company that operates Burger King, Tim Hortons, and Popeyes, is a classic example of a company that has positioned itself to weather the storm better than most of its peers. For instance, the company had expanded its drive-through offering across all the three brands;

 

Tim Hortons had never operated a drive-through before the pandemic. The company was quick to identify that dine-in sales would remain subdued for the remainder of this year. Additionally, Restaurant Brands has partnered with Uber Eats to expand its delivery operations as well. The company has introduced a separate plan to reduce operating costs to preserve cash. The company has what it takes to recover before many of its peers, which should lead to stellar investment returns. 

Conclusion

The global hospitality sector is one of the hardest-hit business sectors by Covid-19. In the immediate term, recovery does not seem possible. However, there are some early signs of recovery but it will take many quarters, if not years, for the industry to return to the pre-coronavirus level. Even though the outlook is bleak, there are opportunities for prudent investors who are keen to analyse company fundamentals.

About the author(s)

Harold Alby is a managing director and chief operating officer at Inova Capital. Justin Inniss is a managing director at Inova Capital.For more details on our insights please get in touch with us at Inova Capital AG on +41 415616905. Inquire about our ideas and nowcasting capabilities.