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One in four hospitality firms at risk if 2008 crash repeated

Beehive Inn pub Grassmarket

A severe downturn could see many bars and restaurants shut (pic: Terry Murden)

More than one in four hospitality businesses in Scotland could go bust, with 58,000 jobs lost if the Covid-19 economic downturn is as severe as the financial crash of 2008.

The warning emerges in a new report which aims to help governments and business managers decide where to focus support.

Academics at the University of Edinburgh Business School in collaboration with Wiserfunding, a London-based fintech specialised in credit risk assessment for SMEs, looked at the financial statements of 5,000 Scottish companies in the tourism and hospitality sectors, and considered their profitability and levels of debt. These sectors employed 209,000 people in 2019.

To predict how these businesses might be affected, the last 20 years of financial accounts for Scottish tourism and hospitality were considered against previous crises such as the Global Financial Crisis of 2008, the European debt crisis of 2009-2011 and swine flu in 2009-2010.

A “mild stress” scenario – equivalent to the 2008 crash with some downward adjustments by industry experts  – resulted in 28% of firms defaulting, costing around 58,520 jobs. 

In a more severe situation, assuming a second prolonged lockdown, the level of default rose to 43% – almost half of all hospitality businesses and around 89,870 jobs.

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The study was funded by the university’s Data-Driven Innovation initiative, part of the Edinburgh and South East Scotland City Region Deal.

Dr Galina Andreeva, senior lecturer in management science at the Business School, said: “We hope that the results of our study will be useful to governments and business managers to decide where to focus support during the next phase.

“Our results confirm that the current government efforts to support the sector are going in the right direction.

“However, we would recommend support tailored to company size to maximise impact. Firms that show the highest level of adaptability should be rewarded and offered additional support to overcome the crisis.

“The withdrawal of current borrowing schemes should be carefully planned in order not to create additional shocks to companies with high debt levels.

“Even once the economy starts to reopen, measures will likely be put in place that curtail economic activity to some degree. People and business will need to accept this new status quo and adapt. This is the only way to ensure a faster recovery.”

Dr Gabriele Sabato, co-founder and CEO of Wiserfunding, added: “The picture that comes out of our models is providing a frightening, but also encouraging message for SMEs.

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“Although, they have been severely affected by this terrible pandemic, they are also the ones that can adapt faster and lead the recovery. 

“The financial industry should carefully consider the results of this study when setting their lending criteria in the post CBILS (Coronavirus Business Interruption Loan Scheme) world in order to target the allocation of their funds at boosting the UK recovery.”

The study follows an earlier report by the University of Edinburgh Business School, which recommended that Scottish tourism businesses should aim their marketing at UK and German visitors as they are most likely to visit and spend money in the immediate future.

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