Food Industry

One year on: signs of optimism and the need for an economic recovery that tackles society’s global and local challenges

As the UK approaches a full year since the first lockdown in March 2020, the government has published its roadmap for lifting restrictions during the spring and summer.  With the budget announcement coming hot on the heels of this and UK Hospitality publishing a recommendation for the sector’s economic recovery, for the first time since we began tracking these developments in the food industry, we see some optimism creeping in. 

Our share price tracker indicates renewed optimism for both high street and pub/restaurant chains and caterers, who have tended to be hit harder by the pandemic (both in the UK and abroad for those with global operations).  The cost of the pandemic has been less severe on more ‘take-away friendly’ businesses such as the quick service restaurants and, of course, supermarkets who have remained open.  The actual impact is less clear-cut than just winners and losers however and the expectations of many, that supermarkets would simply be pandemic beneficiaries, has not necessarily played out with Morrison’s recent announcement of an actual profit loss in 2020 due to covid-related cost increases and the loss of fuel and food-to-go revenues. 

Forecasting what an economic recovery might look like is a risky business but one area we expect to see a greater focus is the role the food industry has in contributing to positive health outcomes, on wages and working conditions for food industry workers (both in direct operations and supply chains) and, with the UN Food Systems Summit and COP26 both being held in the second half of the year, sustainability.   

In recent weeks we have seen Tesco, under pressure from shareholders to set targets around sales of healthy food, responding with a target to increase healthy food sales to 65% of total sales.  Morrison’s have committed to pay all staff at least £10 per hour (roughly in line with the Living Wage Foundation’s recommended wage), and are focusing on sustainable farming practices in their supply chain, aiming to only source from net zero farmers by 2030.  In the high street, despite a tough year, Greggs have launched the Greggs Pledge with a series of commitments that cut across health, community and environmental concerns.   

The big opportunity may be in ensuring that capital, either provided by government or raised by companies themselves (the most recent being a £175 million share issue by Restaurant Group) comes with the right outcomes attached to it.  Currently this remains only an emerging approach in the food industry.  Assuming we do slowly come out of the current lockdown, the manner of economy recovery, and the direction it takes across social issues such as health, livelihoods, and the environment will probably be the measure of our longer-term response to the last twelve months. 

Update w/c 08.02: Hospitality sector losses top £570 million, Ocado sales increase by 35% and UK supermarkets come under scrutiny from investors.

Research by accountancy group UHY Hacker Young shows that losses in top-earning restaurants topped £570 million last year, an increase of 117% from before the lockdown. This has lead to a number of Company Voluntary Arrangements (CVAs) to restructure company finances in an attempt to stay in business, including The Restaurant Group (owner of Wagamama and Frankie & Bennie’s), Leon, PizzaExpress and Yo!.

As we have reported before here, site closures and job losses have been widespread. Yet again the contrast between the food hospitality and food retail sector was underlined when Ocado reported a 35% increase in sales for the last 12 months. The company is however still loss-making due to heavy investments in increasing its capacity to meet ongoing demand for online delivery. The growth of online during the pandemic seems to have prompted a response from other retailers, including Tesco, Asda and Morrisons, who have signed a letter to the Treasury calling for a review of business rates for bricks and mortar retailers. The letter also calls for a 1% online sales tax in order to rebalance the costs of doing business on the high street versus online.

Beyond the hard business realities of the pandemic, Tesco have recently reported that sales of fruit and vegetables increased during the pandemic. Many products have seen a 50% increase in sales year on year, notably Maris Piper potato sales (60%), limes (60%), leeks (40%), red onions (30%) and apples (10%). Interestingly this comes in the same week as a group of institutional investors, led by the NGO ShareAction, have filed a resolution calling on Tesco to disclose targets for an increase in the proportion of its sales that come from healthy products. This initiative also references the Food Foundation’s own work Plating Up Progress which found most supermarkets to be stronger on their environmental commitments than their health and nutrition commitments.

At a time when food businesses are under increasing scrutiny about their role in people’s health and wellbeing, this week also saw supermarkets’ wage rates exposed. Several have awarded staff bonuses during the pandemic, although Morrisons stands with a planned wage rate of £10 per hour in April 2021, 50p higher than the voluntary Living Wage Foundation rate. Looking to more environmental issues, in the year that the UK will host the climate change talks (COP26) in Glasgow, Sainsbury’s have announced a goal to reduce their scope 3 greenhouse gas emissions (including food-related emissions from their supply chain) by 30% by 2030. We expect even more attention to be paid to food businesses regarding nutrition, social and environmental issues with both COP26 and the UN Food Systems Summit scheduled for later in 2021.

Update w/c 25.01: As the hospitality sector seeks support and finance to offset combined losses of £200 million per day, the supermarket sector see its first corporate bond linked to climate change targets.

Confirming what many already suspected, The Caterer resports on UKHospitality and CGA’s Quarterly Tracker showing a 54% drop in sales for the hospitality sector in 2020 (from £133.5 billion in 2019 to £61.7 billion in 2020), a loss in revenue equivalent to nearly £200 million per day. Whilst there has been a level of support from the government through the pandemic, UK Hospitality chief executive Kate Nicholls is calling for a clear exit strategy from lockdown, emphasising that an “extension of the VAT cut and business rates holiday must be top of the menu.”

Beyond public sector financial support, businesses are also turning to private capital both in response to the pandemic and to fund their recovery. Alice Hancock from FT.com reports that Wetherspoons is the latest to turn to investors, hoping to raise around £93 million. This seems, at least in part, to be targeted at future expansion of the business as other struggling hospitality sites potentially become available and affordable in 2021.

The food industry’s engagement with the finance sector also made a splash recently for very different reasons with Tesco becoming the first supermarket to issue a sustainability-linked bond, to the tune of £750 million. The bond is linked to targets for scope 1 & 2 emissions reductions (but not scope 3 / supply chain food-related emissions) and could signal the emergence of a new approach to financing sustainable transitions in the food industry aligned with those called for by the Food Foundation in our Plating Up Progress 2020 report. Similar approaches for the hospitality sector could potentially lead to a healthy, just and sustainable recovery from the pandemic, especially for businesses with ambitious goals for change.

Update w/c 11.01: Hospitality covid-related woes continue, supermarkets see strong sales over Christmas, and the UK starts 2021 with a new EU trade deal

The new year of course saw the UK back in lockdown as the new trade deal with the EU became a reality. 2020 saw 30,000 job losses in the restaurant sector and, as if to emphasise the differing fortunes across food sector, supermarkets saw healthy Christmas sales with hospitality once again reduced to delivery sales only.  Morrisons‘ strong Christmas sales stand in stark contrast to a warning from Greggs that profits will not recover until 2022.  The government has responded with an additional grant of £9,000 for the hospitality sector and a public petition has forced a parliamentary debate on the need for a “minister for hospitality“, however unlikely that outcome may be in reality.   

The breaking covid-related news this week concerned the poor standard of some of the food parcels being provided under the Free School Meals scheme, with Chartwells (owned by Compass Group) particularly exposed, resulting in government condemnation, a media storm, and letters being written by investors to the group CEO. 

There have been mixed responses to the EU trade deal, with some of the concerns about supply of fresh food seemingly eased and Tesco chairman John Allan stating that he expects “very modest” impact on food prices.  Academics are less relaxed, with a number warning that increased bureaucracy and the ‘just in time’ nature of our food supply chains could in the longer-term lead to increased prices and greater impacts on those who are more economically vulnerable to food price rises. 

Update w/c 30.11: Contrasting fortunes continue across the food industry with Mitchells & Butlers announcing £123 million in losses while Tesco repays £585 million of business rates relief to the government

As the UK enters new tier-level restrictions, with most regions being in either tier 2 or 3 with strict rules for the hospitality sector, pub and restaurant chain operator Mitchells & Butlers has announced annual losses of £123 million for the year leading up to September 2020.  The company has had to make 1,300 redundancies in response to the negative financial impacts of the pandemic.

In contrast to the ongoing problems faced by the hospitality industry, the UK’s biggest food retailer Tesco announced it will be repaying the business rates relief it received from the government (valued at £585 million).  CEO Ken Murphy said that while there have been financial challenges in responding to the pandemic, “some of the potential risks we faced are now behind us”. Tesco chairman John Allan also added that “We are financially strong enough to be able to return this to the public, and we are conscious of our responsibilities to society.” By the end of the week the list of supermarkets due to repay business rates relief included Sainsbury’s, Asda, Morrisons, Aldi and B&M, representing £1.8 billion in repayments.

Looking ahead to 2021 with a trade agreement with the EU still not in place, the BBC discusses the risks to food supply in the new year.  Around 30% of food consumed in the UK is imported from the EU, and fruit and vegetables are even more dependent on imports during the winter months.  Despite the uncertainty, chief executive of the Food and Drink Federation, Ian Wright, said “Some gaps are possible but we’re not going to run out of food – that’s not going to happen.” However, logistical challenges could be significant with “the biggest imposition of red tape that businesses have had to deal with in 50 years”, according to William Bain from the British Retail Consortium.

Weekly update w/c 16.11: Hospitality sector sees lockdown continue to impact revenues in the traditional boom season while concerns are raised about food supply in early 2021

With the devolved nations in various states of country-wide lockdown, restaurant and pub chain Mitchells & Butlers have announced the permanent closure of 20 sites.  The company owns pub chain All Bar One as well as Toby Carvery and Harvester restaurants and, despite seeing a sales boost in August during the Eat Out To Help Out scheme, blames the pandemic for the closure. July sales were down 32.4% year-on-year and fears of a second wave of infections has seen sales fall again (down 6.4% in the first three weeks of September year-on-year). 

Job cut announcements in the restaurant sector have become a common feature of the pandemic with major chains such as Pizza Express recently announcing 1,300 losses, although Whitbread recently halved it’s September prediction of 6,000 internal job losses, citing the furlough extension and positive vaccine developments as reasons for some renewed optimism.

UKHospitality has called for greater clarity on the support that will be made available to the sector over the winter. Lockdowns and restrictions between Halloween and January will result in significant business losses for pubs and restaurants, in a year where annual turnover for the hospitality sector has fallen by 40% already. A recent survey by trade bodies the British Beer & Pub Association (BBPA), the British Institute of Innkeeping (BII) and UKHospitality has found that 72% of hospitality businesses expect to become unviable and close in 2021 depending on the level of restrictions place by the government. 

Beyond the immediate concerns of the pandemic, and with the deadline for a trade agreement with the EU looming, concerns about UK food supply into the UK have been raised by the Guardian.  The combination of potential border delays and limited warehouse capacity due to Covid-19 could, claims the newspaper, lead to significant food shortages after December. While a great deal of uncertainty exists around any projections made for the combined impacts of Covid-19 and future trade deals, this to some extent echos comments from within the food retail sector (Tesco, Morrisons) on food supply and prices.

Weekly update w/c 02.11: More pressure on the hospitality sector with lockdowns returning across the UK.

Supermarkets continue to adapt to the pandemic and changing consumer habits, with Co–op partnering with delivery company Gohpr in Scotland and introducing new pricing strategies aimed at a more affordable shopping basket.  The unpredictable nature of the business environment does not look like ending any time soon with the Welsh government restricting supermarkets to selling essential items only in a bid to protect smaller more specialist retailers forced to close in the recent “circuit break” lockdown in Wales.

Meanwhile, the hospitality industry is arguing that low actual transmission rates from within the sector make the restrictions placed on restaurants unfair.  A UKHospitality survey of 568 businesses (with a combined workforce of 358,000 people) reported 1,728 infections among the workforce, at a time when  about 20 million shifts were worked.  Restrictions such as the 10pm curfew has hit revenues, according to the industry, and poor financial results continue with Whitbread announcing a £725 million loss due to the restrictions placed in 2020.

Weekly update w/c 05.10: A tale of two sectors, retailers enjoy positive financial returns while fears of job losses continue for the hospitality sector

Six months after lockdown began in the UK, Ocado has seen revenues increase by 52% in the third quarter of 2020 and share price more than double since March (a trend that we have been following on our covid-19 share price tracker since May). 

Tesco has also reported good financial results with pre-tax profits up 28.7% in the six months leading up to September (compared to 2019) as its own capacity for online ordering and delivery services has doubled in response to the pandemic.  

In contrast, the hospitality sector’s woes continue with Greene King the latest to announce job losses (800) and closures (79 pubs and restaurants), blaming the end of the furlough scheme and the 10pm pub closure ruling in England. 

More bad news for the sector has come from Scotland with a temporary 6pm closure rule introduced this week and the possibility of further temporary local closures in England. 

With obesity now clearly linked to the severity of illness from Covid-19, the government has released the latest results from the voluntary sugar reduction programme for supermarkets and the hospitality sector.  An overall reduction of 3%, against a target of 20%, has led to calls from some for stronger regulation similar to the sugar drinks industry levy.

Weekly update w/c 21.09: Job loss announcements continue in the hospitality sector and supermarkets ask shoppers not to stockpile as the government brings in new covid-19 restrictions

Whitbread and Wetherspoons are the latest major hospitality businesses to acknowledge the risk of redundancies, with Whitbread warning of 6,000 job losses due to both the slump in hotel trade and drop in dining numbers across their restaurants and Wetherspoons due to cut 450 jobs from it’s airport pubs.

In the same week, governments across the four nations have announced new restrictions including reductions in the numbers of people allowed in a social gathering and early closing in the hospitality sector.  With local lockdowns increasing, supermarkets have made a plea for people to not stockpile or panic buy amid speculation that a wider lockdown could be looming.