OakNorth: '2024 set to be interesting year for sector'

OakNorth senior director of debt finance Mohith Sondhi told The Morning Advertiser​ 2023 had been a “transitional year” for a number of businesses as they grappled with high inflation, cost increases across the board and a changing consumer environment.  

While inflation ​is now “stabilising”, food inflation​ “remains stubborn”, which will impact the hospitality sector more than other industries, Sondhi explained, meaning operators will have to find different ways to stay profitable.

He said: “The cost-effective cases [in hospitality] are very different to other sectors potentially.

“Every sector has different inflation statistics, but if inflation goes down to 3.9%, I think hospitality will run ahead of that.

“A lot of people have been predicting that base rates will start falling potentially this year.

Changing consumer environments 

“My personal view is rates will come down, to what number, I don’t know. But I think we will see them come down from June onwards and I think we’ll see inflation coming on the control.”

In addition, the financier stated labour shortages, which he claimed had been caused by high inflation, were still “very tight” across the sector, which also causes different challenges for hospitality firms compared to other businesses.

“Operators across the market are all saying that labour issues are still one of the challenges they face. Brexit has had a big impact in it”, he added. 

This, teamed with interest rate rises, Sondhi also predicted would mean consumer environments continue to change throughout 2024 as purse strings continue to “face difficulties”.

He said “With less disposable income, consumers will be very careful where they spend their money, and they want value for it. People are much more price conscious post-Covid.
“Pre-Covid you could get a pint of beer in London for less than or around £5, now it’s around £7.50. That's a 50% rise and inflation hasn't gone up 50%, so operators have to be very careful around that and shrinkflation.”

The finance expert advised pubs to manage these challenges by “being clear about what they do” and focusing on “understanding” what their customers want in terms of value, why they come to that venue and how they feel about the service provided.

“I personally think we will see greater investment in hospitality this year."

“If pubs keep looking at these things, they will do really well. If consumers have a good time and enjoy the food, cost is a little bit secondary.”

“People go to the pub because they have something they can't get at home like a good craft beer or something like that.”

This is where community pubs will thrive in 2024, Sondhi said, noting their operation is typically “niche” within different communities where supply is often “limited”.

In addition, he claimed some bigger operators have looked to harness individuality in a similar way to community venues.

“[Community pubs] will always do well in that scenario. People always want to support local businesses.

“If you look at the big players out there, the Mitchells & Butlers type, they have different brands under the umbrella, but they keep the pub as individual as possible outside the brand.”

The financier further explained there could be a rise in the number of pubs borrowing this year with firms looking to financing options in a bid to diversify their offering.

More stability 

He continued: “I personally think we will see greater investment in hospitality this year.

“There’s more stability in the market now [so businesses can start planning]. It’s very hard to operate a business if you have that volatility.”

In addition, for hospitality firms looking for investment, Sondhi urged businesses to present lenders with “realistic plans” and have a “good feel for their numbers and understanding of their businesses” to demonstrate how the “financing pace” of the business plan will work.

“I'm not saying not to aim for aspirational numbers, we all have aspirations, but be realistic with the numbers and make sure you are able to justify those financial assumptions.

“As a financier I'm going to look at each assumption and say ‘is that valid? How does that look compared to market?’. That’s where businesses sometimes fail.
“I need to make sure they are numbers you're comfortable with and that you will hit, it's about credibility. If you keep missing the number, we lose faith, if you keep exceeding your number you will build goodwill”, he said.

When it comes to OakNorth’s plans for the year, Sondhi added there were “a number of big deals” the bank were looking at within the sector with “exciting opportunities” to “deploy capital to the right businesses”.

Earlier this month, OakNorth supported Red Oak Taverns​ in acquiring four pubs from Marston’s.

Sondhi concluded: “Running a hospitality business is tough. It’s been a long five years we’ve had Covid, Brexit, rising interest rates and inflation, it's tough.

“But I'm very positive about 2024. I think we'll see a number of business that are really well positioned, well capitalized.
“From our perspective, we've always loved to help the hospitality sector and we've always done so consistently, even through Covid, and we will continue to do that and support the best operators.”