Furlough costs the UK Hospitality industry in excess of £542 million a month during lockdown – The True Cost of Furlough

Furlough has been a lifeline for so many businesses in the hospitality sector and beyond, however despite all that the scheme has done to ease the mass redundancies and retain jobs in the sector, it is clear that Furlough is not the free lunch it is sometimes portrayed as. Operators using the scheme benefit from a grant that covers up to 80% of their employee’s average earnings (probably the most simplistic way of describing the behemoth of complex exceptions, limits and grey areas associated with the CJRS). For many employees, this money will see them scrape through the crisis, albeit uneasily. However, for the employer, the ability to be able to keep teams employed comes with a cost and it is no insignificant amount.

For a start, the employer continues to pay National Insurance contributions, holiday is still accrued, and pension costs are not included in the grant. The total figure for average extra employment costs per month per site, over and above government furlough support, comes to: £3,738 which means the monthly furlough bill for hospitality comes to £542 million.

On top of employment costs, operators have rent to pay, utilities and insurance payments; government grants based on rateable value are available and are aimed at offsetting a large sum of bills, yet leave operators constantly out of pocket. There are also variable costs to using the Furlough scheme, such as cash flow costs owning to the fact that the scheme pays in arrears: operators are seeing the money leave their businesses, before being able to claim it back. For most businesses who have little or no expectations of trading profitably for the first 4-6 months of 2021, funding is becoming more and more critical.

Rob Pitcher, Chief Executive of Revolution Bars and user of S4labour said that the scheme, while welcome, has cost the business £1million at a time it has seen revenue vanish.

Sam Wignell Chief Customer Officer at S4labour added: “With the current levels of government support, businesses are going to run out of cash before they get the opportunity to reopen. The true cost of furlough is much higher than one might imagine.”

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As published in BII 

New normal, same old same old

2020 has brought a wave of challenges, some expected (April’s minimum wage increase), others less so; who could have foreseen the COVID-19 pandemic?

This unpredictability has made controlling our labour spend equally challenging.

Whilst the global context of a pandemic means we are adjusting to a new normal, much of what we should have been implementing as best practice for controlling labour cost remains the same.

Although initiatives like “Eat Out To Help Out” and Rishi’s VAT cut have all helped to stimulate public appetite for returning to hospitality venues post-lockdown, the benefit has been offset to a certain extent as operators labour costs have increased, particularly on training on new hygiene measures and enhanced cleaning processes.

Plan, plan, plan

The discipline of planning your rota is more important than ever. The US and Europe traditionally have had a stronger weekday dining out culture, in contrast to the UK, whose culture is more akin to a weekend binge. EOTHO has proved that consumers are open to adapting their behaviour and are happy, and for now able, to afford to dine out during the week. As operators we too have had to adapt but it is also opening up a wider opportunity. It is much easier to manage a business that doesn’t have such highly defined peaks and troughs throughout the week – as long as you plan.

The business can work much more efficiently as the kitchen is not being slammed with high demand at weekends. Similarly, stock rotation is quicker and there is less waste. Food is also fresher and therefore food quality improved, generating a knock-on effect of happier repeat-business customers.

Brief the shift

Looking ahead, when the furlough scheme comes to an end in October, disposable incomes are likely to shrink as the unemployment rate rises and dining out becomes more of a luxury. There may be less opportunity to upsell your desserts, your coffees and the like. Ensuring you deliver a clear shift briefing at the start of every shift means you can maximise those upsell opportunities now. Also make sure all team members have slack tasks allocated to ensure those extra cleaning tasks are covered off. Manage the workload on every shift effectively across your team so that everyone is stressed or slack equally and are still motivated to provide great service.

If these new consumer habits become engrained the “new normal” of regular weekday dining might even mean that January and February don’t have to be the dry spells of old.

Tom Marshall is a former Brakspear GM and M&B lead general manager. He is our in house productivty guru with over 12 years expereince managing high profile venues.

S4labour release labour percentages since lockdown ended

 Short story

 Industry Labour ratios increase by 10% in first month of trading as operators get a handle on new ways of operating and lower sales levels. Analysis from S4labour has shown that the labour ratio in July (from the 4th to the 31st) was 41.1% as compared with 30.9% in 2019. Richard Hartley, Chief Product Officer of S4labour commented “For the hospitality industry the last 10-20% of sales produces all of the profit, and so with the sales levels in July it will be hard for operators to make money. The added increases in labour will make that even harder. The change in consumer behaviour may well be with us for some time and those who adjust their labour model quickly and smartly will win the confidence of the customer, and therefore grow sales, and also enable them to manage costs appropriately through this very challenging time.”

Full article

S4labour, the labour management experts, have conducted a full review of labour costs for July since the industry re-opened on 4th July. This data only includes sites for days that were open from July 4.

In the first 7 days after lockdown the industry was running at an average labour cost of 65.9%. Sales were low and staff were starting back to work, getting used to new ways of working and doing their best to give customers reassurance that they were operating in a safe manner. This will have left nearly every operator making losses.

As the weeks have progressed this ratio has improved. Week two ran at 53.8% and week three 43.1% , with the final week in July running at 41.1%. This labour ratio compares with a ratio of 30.9% for the same period last year and therefore reduces industry profitability by a full 10% pts against the same period last year.

There are several causes for this:

1 – Lower sales

The lower sales levels have caused an increase in the labour ratio of a massive 6% points. This shows how vital incremental sales are to the industry and over time operators will need to rebase their rotas if sales remain at a lower level.

2 – A less productive business

Business have become less productive because of more outside service, more at seat service and Covid measures on cleaning and staff distancing, all of which have led to a decrease in productivity which S4 estimates to be 10-15%. And therefore accounts for a 3% pt increase in labour ratio

3 – VAT

Operators have taken different approaches with how to treat the reduction in VAT. For any that have chosen to not pass on the price reduction to customers this will have helped them to offset some of the other challenges. This will see an increase in productivity, as measured by sales per labour hour, of circa 10%.

4 – Sales uncertainty and volatility

When sales are uncertain and more volatile then typically more team are scheduled to cover sales that might not materialise. Slack, a measure of non-productive hours as measured by S4labour, has increased by 5%.

5 – Staff getting back up to speed and training

The industry has faced the double challenge of having both to re-train and re-energise staff as well as train new staff, and this will have undoubtedly contributed to the additional cost in July. While the government have offered to pay for training through furlough, less than 50% of businesses are using this facility. This is in part due to the challenge of determining what is, and what is not, training in the way we run our industry.

To summarise therefore the increase in labour ratio is driven as follows:

Sales decline                           +6%

Productivity decline                +3%

VAT change                             -2%

Sales uncertainty                    + 1.5%

Staff training                           + 1.5%

Total                                        +10%

Richard Hartley, Chief Product Officer of S4labour commented

“For the hospitality industry the last 10-20% of sales produces all of the profit, and so with the sales levels in July it will be hard for operators to make money. The added increases in labour will make that even harder. The change in consumer behaviour may well be with us for some time and those who adjust their labour model quickly and smartly will win the confidence of the customer, and therefore grow sales, and also enable them to manage costs appropriately through this very challenging time.”

For further information on this story please contact Richard Hartley, Chief Product Officer

richard@staging.s4labour.co.uk

07766698442

Last month we spoke to Brian Hannon from Super 8 restaurants about how he transformed an outdoor space into Brat, in just a few weeks…

Eat out to help out sees sales increase by 70.9% over the first three days of the week. Sales numbers taken from S4labour have shown that the Eat Out to Help Out scheme has proved hugely successful and a welcome boost to the industry. Food sales have more than doubled with a 114.3% increase, with drink, understandably, not as high at 29.8%. Richard Hartley, Chief Product Officer, commented “It’s been a great initiative at a crucial time for the industry and we hope that this will give consumers the vital confidence we need them to have to return enjoy the great hospitality our customers provide. We have seen confidence gradually increasing since the reopening of the industry at the start of July, however this level of support is the catalyst consumers needed on the journey back to normality.”

Following on from the announcement on Tuesday (23 June) pubs, restaurants and hotels can reopen with a reduced social distancing of “one metre-plus”, we are now on a mission to get everything in place in time for 4 July. Most of us are ahead as the date had been widely anticipated, but there is still a lot to do.

One of the biggest challenges we will face is getting our teams prepared for the new normal. Most have been furloughed and therefore will have had more than three months off work. Some have been prepared for the return and will be excited about it, but others are not. 

Returning to work

A while back we started talking to our teams about the return to work and had a selection of mixed responses. Some are keen, although cautious about how our businesses will operate under new guidelines. Some would like to remain furloughed. Of these there are some genuine requirements (ie childcare and shielding), some worried about returning to the workplace and some who I fear are saying the latter but in truth have gotten used to earning while not working. Some of our overseas team felt the natural pull to be close to loved ones so returned to their countries and have decided to stay there. Of those team members able to return we also need to consider which of them would normally travel to work using public transport – not only for their safety but also for the additional risk it brings into the business for the rest of the team and our customers.

We now have an understanding of our staff availability. We’ve also forecasted our sales based on our best assumptions so it’s time to start to pull our rotas together. We are inclined to use our best team members but need to be fair and also consider what the ideal shift length is for an individual returning to work. We believe a five-hour shift is optimal to get the most out of a team member without overexerting them but sometimes this is not practicable. We would also like to try and keep our teams in operating bubbles to ensure they are consistently working with the same people so if there is a requirement to isolate we don’t lose the whole team. 

We have also had to debate what to do if a team member refuses a shift. Can we insist? Do we remove them from the furlough scheme? These are some of the issues we are starting to have to understand and deal with, and of course we don’t have much time to do it because we need to train and get open. 

Training

We are viewing this as an opportunity to have the best trained team we can. Our teams have been using the furlough period to make sure their online training is up to date. We had already started work on how the offer will vary and what refresher training our teams will require. When we started to break down all the activities that require refresher training, we quickly realised there is a lot of ground to cover to ensure everyone is at the standard we want them to be.

We also need to train the team on all of the measures we have put in place to ensure we have a covid-19 safe environment for our customers and our team. There is a 41-page guide from government we have had to digest and implement those requirements that are applicable to our business. We also plan to learn a lot in the first few days of operating that will no doubt mean we will require tweaks to how we operate. 

Keeping everyone safe and what if…

We are putting the ownership of personal safety on to our staff but making very clear of what our expectations are. They are all required to complete a simple health questionnaire each day they are expected to come to work that covers the key covid-19 symptoms. If anyone cannot come to work we have plans in place to arrange cover.

The worst situation for us would be if any one of our team were to get covid-19. Primarily our thoughts would be with them, but we also have the wider team and our customers to consider. There would be a requirement for all of the team they have been working with to self-isolate (hence we are looking at the operating bubbles) and we would have the unenviable task of contacting the customers that might be infected. This situation also requires us to look at our staffing contingency.

It’s going to be a challenge to say the least, but we have been preparing for it for the past three months and feel as ready as we can be. 

Flexible furlough

From Wednesday (1 July) individuals can return to work, and organisations can claim the furlough grant for hours they would have usually worked but have not. To be eligible they must have previously been furloughed for three consecutive weeks between 1 March and 30 June.  

When understanding an employee’s usual hours you should use contracted hours for anyone that has them in place. If an employee does not have contracted hours (ie zero-hours staff) then you should use their usual hours, which is a 52-week average (prior to the start of furlough) or comparable hours from the same period of time last year, whichever is the higher. If an employee has less than a year’s service then it is their average hours prior to furlough.

As an employer you then pay your staff for the hours they work and claim the grant for any hours that are left from their usual hours. As this is done on an hourly basis you will need to calculate an effective hourly rate for anyone that is not paid hourly (ie salary, shift, etc).

The amount an employee receives for the period of time they are furloughed does not change until the end of October, albeit at a pro-rata level based on how much they work. The amount an employer can claim in July remains at 80% of usual pay (capped at £2,500) plus any associated National Insurance (NI) and pension contributions. In August they can no longer claim for NI and pension, in September this reduces to 70% of usual pay and then in October to 60%.

Training while furloughed

Employees are able to train while furloughed so long as they do not provide a service for or generate income for their organisation. For the period of time they are training they are required to be topped up National Minimum Wage/National Living Wage if their effective hourly pay on furlough is below this. 

This covers all online, refresher and covid-19 training and anything else that does not contravene the government statement. It will also continue through to the end of October, which could be very useful should guidelines change and further training be required.

How to handle the challenges

Flexible furlough and training while on furlough require an amount of detailed record keeping ensuring you pay your staff accurately and can submit an accurate claim. We recommend communicating with your payroll provider regularly and in advance to ensure you know what information they require and when they will require it.

Understanding staff health and availability is critical. You need to know as soon as possible that someone is not able to come to work and have your back-up plan ready to launch. We have enabled health questionnaires through our S4labour app and have also introduced shift swapping functionality for our customers. They are part of a wider portfolio of measures we have put in place to help navigate the challenges. We’ve been impressed with a number of initiatives organisations and suppliers have introduced to help get through the pandemic but most of all how, as an industry, we have worked together. Long may this continue.

Alastair Scott owns Malvern Inns as well as the labour management system – S4labour, while Richard Hartley is chief product officer at S4labour

S4labour is a Propel BeatTheVirus campaign member