Interview

Luke Johnson: ‘This lockdown has been incredibly harmful. We can’t allow it to happen again’

By James McAllister

- Last updated on GMT

Investor Luke Johnson lockdown hospitality restaurants pubs bars landlords social distancing coronavirus

Related tags: Coronavirus, Luke johnson, Gails bakery, Restaurant, Casual dining

As restaurants, pubs and cafes set about preparing to reopen on 4 July, entrepreneur and investor Luke Johnson discusses what the future of the hospitality sector may look like.

Luke Johnson has been a high-profile critic of the government’s lockdown policy from the start. The chairman of private equity firm Risk Capital Partners and backer of restaurant and leisure groups including Gail’s Bakery, All Star Lanes and Lussmanns Sustainable Fish & Grill has not minced his words about the impact of the lockdown on the economy, saying he believes it will eventually lead to more deaths than the virus itself.

As a champion of a return to business, he has taken the lead with his own businesses, with a Gail’s bakery opening in Windsor during lockdown, accompanied by the rallying tweet: “Bugger the crisis - we advance! Onwards!"

With many restaurant and pubs having been given the green light to reopen on 4 July following yesterday’s announcement by the Prime Minister, Johnson has got his wish. But, he warns, reopening will not mark the end of the sector’s struggles.

How do you view hospitality’s ability to recover from lockdown?

It’s a bleak time. Pubs, restaurants and hotels have been shut for more than three months and have amassed significant debts in that period. Inevitably we face a tough recession and, as a discretionary item, restaurants and pubs will bear the brunt of it, which will compound the problems operators face as they try to persuade the public to come out again, and convince them of the joys that hospitality has to offer. The large chains are already beginning to downsize, and I suspect virtually all the major quoted or unquoted casual dining groups will reduce their portfolios through some form of insolvency process. This will lead to hundreds of empty sites.

But then, less publicised, will be the many independent and smaller operators not having funding. Come 4 July, every single restaurant would have accumulated arrears of rent and other costs for the last three or four months, and very few will comfortably have the reserves to pay it back. And those liabilities will crush a lot of operators, which is bound to result in a lot of surplus space. It may get absorbed, but I doubt it. Combined with an anxious public, everyone having to trade under social distancing rules, and having to deal with a recession, it feels like a perfect storm. It's inevitable that come the winter, the industry would have shrunk materially.

Do you think there’s any weight to the suggestions that there will be a surge in demand when restaurants and pubs do reopen?

It’s unlikely there’ll be a sudden, dramatic bounce back. The one, slight hope on the immediate horizon is that, because this Government in its madness has introduced two-week quarantines on everyone flying into the UK, people may look to holiday at home this year. They’ll have some more money in their pockets, and they’ll want to go out. So, takings in July and August may theoretically be better than we expect.

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What more needs to be done by Government to support the sector as it tries to rebuild?

Ideally, they’ll eventually scrap social distancing altogether in the coming months. Modern life, and society as a whole, cannot function on a long-term basis with social distancing. And I don’t just mean the contact gap, I mean wearing masks. We need to get this period behind us, resume being humans, and get back to meeting people face-to-face. In terms of targeted support for the sector, we should copy other European countries and lower VAT; take it from 20% to either 5% or 10%, which would certainly be helpful as we try to lure customers back.

Does more also need to be done to address the impasse between commercial tenants and landlords?

Landlords are taking their time to adjust to the new reality, and it will take more businesses like The Restaurant Group handing back more than 100 sites through a CVA for them to wake up and realise the world is different. The old assumptions of upwards-only rent reviews, and the entire system-basis of rent is falling apart. Businesses that are on the expansion trail will likely expect bigger contributions from landlords, and with so many sites likely to be available in the months ahead, they’ll have the option to walk away from those who behave ignorantly. That correction in the relationship between landlord and tenant is long overdue: historically landlords have had the upper hand, and I believe that era is coming to an end. But it will take time, and in the meantime a lot of operators will go broke unless there is a strong intervention from Government, which I fear there won’t be. 

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In the coming months, do you expect we will see a churn on empty sites?

Perhaps, but who’s going to have the confidence and the capital to invest? Banks are currently facing a load of write-offs from businesses that have failed as a result of this crisis, so they will not be interested in lending to those within the sector. For the foreseeable future private equity isn’t queueing up to invest in it either. The hospitality industry is one of the biggest victims of this lockdown, and as such is not going to be a favourite among investors in the months ahead. 

Prior to the pandemic, Gail’s was on the expansion trail; does this remain the case?

We opened a new location in Windsor earlier this month, and we have a couple more scheduled to open in the near future. Since the virus hit, we haven’t spent time looking at new sites because of the uncertainty, and a need to focus on adjusting our operations. However, as we see the situation hopefully steady itself in the weeks and months ahead, and we get into the autumn, we will begin exploring our future options again. Expansion will depend a lot on the contributions landlords are willing to make; as well as our appetite for risk, combined with how we are continuing to trade in our current portfolio. Businesses like Gail’s can compensate for some losses through a takeaway offer. In fact, we’ve seen some sites continue to post like-for-like growth during the lockdown because of this. And though we’re beginning to see this ease as more of our rivals reopen, we remain confident that with an adjusted but nonetheless resilient model, the brand will be close to full strength in terms of trading within three to six months. And then, I would hope, we’ll be on the expansion trail again. We had planned to open 10 sites this year, but we won’t open anywhere near that amount. Next year, though, it is certainly a possibility. 

You’ve also said you’re currently considering investment in other businesses, what is it you’re looking for?

I’m not looking to invest in one-off ventures or start-ups, I’m looking for established businesses that have run out of money and need some sort of support, either through a pre-pack sale or some other form of restructuring. I want to come in as either a minority or majority investor, and take on a brand that has a sustainable, underlying business but is temporarily - because of the lockdown - stumbling and requires some working capital in order to rebuild.

What threat does a second wave pose to the industry?

The fact is we can’t afford a second lockdown, so we’re just going to have to cope with it if there is a second wave. We’ve changed our priorities as a society in response to this crisis and that’s all very well, but there’s the prospect of enormous collateral damage should it happen again. What we must do, very soon, is tot up the true economic cost of lockdown, and make sure everyone is aware of it, so that next time we are not panicked into making such a dramatic and damaging intervention. This lockdown has been incredibly harmful, and we can’t allow or afford for it to happen for a second time.

At the same time, we’re also seeing the country move closer towards a possible no deal Brexit scenario; does this also concern you?

Not compared to the impact of Covid-19. Some of the most apocalyptic projections that have arisen as a result of Brexit don’t even begin to reflect to what I fear will be the devastating financial outcome of this lockdown. I hope we can come to a pragmatic arrangement with the EU and enjoy reciprocal trading arrangements that are mutually beneficial. If we do have a no deal, it won’t be good news, but I’m sure we will cope. It won’t be ideal, but so be it. 

 

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