A “Tale of Two Cities”, the vivid metaphor of Dickens novel juxtaposes the red wine flowing in the streets before, to the red blood that will flow tomorrow. Could this be an apt analogy on the challenges confronting the hospitality industry in Australia today?
As the immense challenges affecting the hospitality industry play out during the disruptions caused by the Covid 19 pandemic, it is worth analysing the factors that are impacting this vibrant and economically important industry and how business brokers continue to play an increasingly important role in realising opportunities for sellers and buyers.
This business sector, even before Covid 19, was being severely disrupted by technology ( ie UBER), increasing costs particularly in wages, occupancy, utilities and cost of goods, a shortage of highly skilled hospitality professionals and with a price ceiling imposed by massive competition. Covid 19 has exacerbated further these challenges by disrupting and changing the very way we live.
- Working from home has had a devastating impact on city centre hospitality outlets whose sales have seen dramatic falls. Commensurately, outlets in the suburbs have experienced significant growth in sales. This change may partially permanent.
- Wage cost will continue of rise and will force business owners to re evaluate their business models. This will come about through greater use of technology at the point of order and through menu engineering and labour-saving technology in the kitchen. 30% or less wages can be realised, it requires a different mindset. I have seen a restaurant that has reduced its trading days from 7 days to 5 days reengineered its menu offering. Achieving, no reduction in sales, wage cost reduced by $250k per annum and a doubling of profits! Offering takeaway services to expand the reach of their products and services is now almost essential for many restaurants.
- Occupancy costs. In many cities across Australia many hospitality businesses have been paying rents on the upper end of the rent cycle with rents in excess of 10% of turnover. This is a very important benchmark, with compounding annal increases this cost can compromise the viability of a business without increases in sales to compensate for an increase in this fixed cost. Many businesses have received deferred or reduced rents to assist through lockdowns or reduced trading as a consequence of Covid 19.
- Utility costs and have seen significant increases, with even the humblest cut of meat reaching prime cut costs
- The shortage of qualified (or unqualified) staff has reached a crisis point. There is approximately a 30% vacancy rate for all hospitality staff across Australia. The industry has historically relied on backpackers and foreign students to fill many hospitality positions and that source has currently been extinguished.
- High levels of competition. It has been estimated that between 5% and 10% of all hospitality business across Australia will not reopen. This reduction in competition should ultimately benefit trading businesses.
- Australia has historically spent more than $50billion per annum on overseas travel. A portion of the money is now being spent internally within the hospitality sector. I know of restaurants whose sales and profits have increased significantly.
Using a skilled and knowledgeable business broker with an intimate knowledge of the industry, who can provide sound advisory services, who have a broad understanding of the industry, who have the confidence and knowledge to be able to provide a valuation based on an intimate knowledge of the market and is capable of factoring in the variances caused by Covid 19, is key to achieving a successful sale in the current market. I believe that it is advisable to look for a Business Broker who is a Registered Business Valuer (RBV) when choosing a Business Broker.
Sellers who have responded positively to the challenges posed by Covid 19, will undoubtedly be in much stronger position to sell their businesses.
The hospitality industry is in the lifeblood of Australia. It is an industry that satisfies the creative flair and instincts in many people, it has dynamism, it offers fun and an excellent platform for securing an income for a whole family. Consequently, we are seeing many active buyers in the marketplace.
The questions posed was, “is your hospitality business sellable?”, well the answer can be a resounding “Yes”.