Hospitality Pass: another industry in crisis and how we can all help

The ongoing Covid-19 crisis and its fallout will be with us for months and possibly even years to come. The pandemic era we have been thrust into will bring with it innovation as necessity almost always dictates. For some of us, it was about making the transition to online learning, online magazine creation, and online delivery. But what about the hospitality sector. For years bars like the Outback, Static, and Billy’s have relied on the Student income to keep the doors open. When Josh Umbers first pitched the idea to talk to someone we were all a little hesitant. We didn’t want to single out one person or one venue as being hard hit. And we certainly don’t want to promote one struggle over another. In the end, we reached out to John Lawrenson because he has never been short of an opinion.

However, we wanted to start the article with a simple plea to all students. This is what you have been training for. Now is the time to drink. Now is the time to dance. Support local venues, buy the fundraising CD’s from venues like the Nirvara Lounge, throw some money STATIC’s way in their Go Fund Me, spend a Friday afternoon at the Hilly, masacre a song at Billy’s, be social in Cook Street, go bush in the Outback, treat House like it is your flat, and buy a cocktail or two at Wonder Horse. This is a time to support local bars, cafes, musicians and DJs. Now is the time for students to be students. Drink responsibly, but drink.

Nexus: The Hospitality industry has obviously been hit hard by lockdown, how much of an effect has this had on you personally, what changes have you had to make?

John: Personally it has been pretty challenging. I was just as busy through lockdown as I was before lockdown. Every day required a lot of communication dealing with creditors and landlords, and making sure staff were getting paid. It’s mentally tough, although some of that stress manifests physically. You need a lot of resolve to just keep putting one foot in front of the other. Every time you deal with an issue, respond to a demand, etc, there is always something else that you have to deal with next.

Nexus: Where do you expect to see the hospitality industry to go in the next 6 months?

John: I think you’ll see central city cafes and restaurants really struggle as people work from home, especially in the public sector, over the next six months. I expect takeaways and suburban cafes to actually do pretty well at first. Whether that continues will really depend on how many job losses there are and how nervous people get about spending on luxuries. I think the nightclub market will bounce back pretty well. 18-27 year olds generally have less responsibility and expenses in the form of family and mortgages etc, plus they have been pretty well provided for by this government’s policies (wage subsidy, $490 emergency benefit, course related cost increase etc). They will also be travelling less and there will potentially be a lot less concerts with the quarantine we have at the border (unless we get a trans Tasman bubble and artists start looking at trans Tasman tours) so they will look to spend that money on other forms of entertainment and I think nightclubs could benefit.

Nexus: Do you think we’ll see more closures here in Hamilton?

John: Yes I expect so. There are some central city businesses that I am watching at the moment and expect they won’t be around much longer. The issues will hit weeks and months down the track as the pile of bills that built up during lock down become too much. Suppliers will start to cut them off, landlords will get less understanding, as will lenders. As the pressure builds, eventually liquidation becomes the only option. Having said that, I think we are more sheltered from this than the likes of Queenstown, Rotorua, Wellington etc., so it could be a lot worse.

Nexus: Obviously businesses don’t have years of profit lying around, and having no cash flow means it can become difficult to cover expenses. Have your landlords been good 

to you? 

John: This has been a really mixed bag. Most landlords haven’t changed their approach. The ones who were great before lock down have been great and the ones who were jerks before lock down have been jerks. Some leases have a clause in them that allows for a rent reduction when you can’t access your building (which was inserted into leases after the Christchurch earthquake). This has kept a couple of the more problematic landlords in check. However I do have one without this clause who has already commenced legal proceedings over unpaid rent from April. It is a shortsighted approach because the site in question is one of my least desirable and I don’t think he’d find another tenant who would pay close to the same rent, but you just can’t reason with some people. I am still assessing my options with him, but if I decide to close the business, I think losing his tenant will remove about a million dollars from the value of his building, because he wasn’t prepared to negotiate over less than $30,000 in rent. 

Nexus: I read the other day that Bluestone will be closing, as grim as it is, do you think you’ll be closing any more venues?

John: Yeah I think so. Times like these force some tough decisions that you would maybe avoid during the good times. I think over the years we started focusing on size more than quality. It meant that the Lawrenson Group brand has come to mean something different from what it did ten years ago and I am not sure I am happy with where it has ended up. I think the group has tried to do too many different things and we have become jacks of all trades but masters of none. Some of those weaker businesses need to be cut loose so that I can focus on the 6-7 that make all the money, and make them as good as I can for my customers. While I could carry the weaker businesses in the good times, it is not possible in the current climate. If the likes of The Outback, House, and Keystone are at the top of their games, they can be great businesses. The challenge is to make sure that during the process of closing businesses I do right by my staff, landlords and creditors, however I am confident that I can do that.

Nexus: Given that wages are only a fraction of the cost of running a business due to other overheads like rent, insurance, etc, was the wage subsidy the best approach to supporting businesses?

John: No it wasn’t, but that doesn’t mean it wasn’t helpful. It just means that it should have been part of a more complete package. In hospitality businesses wages generally only make up between 20% and 40% of your total costs. Many retail and manufacturing businesses have similar cost structures. Rent can be as much as 15% depending on the type of business. While the wage subsidy prevented mass redundancy in the short term it hasn’t really assured the survival of a lot of businesses in the long term. 

Nexus: What would you have done differently if you were given the opportunity to provide a support strategy for businesses nationwide?

John: I would have created a code of conduct for banks and commercial landlords with SME tenants and I would have put a more substantial interest free loan scheme in place for businesses. Most commercial landlords can cover their interest costs on even a more recently purchased building with less than 50% of their current rent. If you’ve owned a commercial building for a few years, that number could be as little as 25% of the rent. The OCR is 0.25% at the moment. Banks and commercial landlords could have shared in the heavy lifting of this lock down a lot more than a lot of them have. I do know of very generous landlords who gave three month rent holidays immediately but I also know of others who were issuing Property Law Act notices as soon as their tenants missed the rent. I think we needed a more codified and consistent approach from landlords, and their lenders, that set out appropriate rent reduction percentages based on the tenant’s reduction in turnover. Banks should have been forced to suspend all principal repayments on commercial building mortgages during lock down. I have elaborated on the interest free loan scheme in the next question.

Nexus: We see that the government will be providing interest free loans to businesses if they’re paid back in a year, what are your thoughts on how good or bad this will be at regrowing the economy and supporting businesses?

John: This policy had potential but was poorly targeted. The way the loan was calculated made no sense and didn’t take into account the different natures of the businesses in the economy. While I have a dozen separate businesses, those businesses are treated as one business by the IRD for the purposes of this calculation, so because I have more than 50 staff, I am not eligible for this loan scheme. The result is that it just puts 200 jobs at risk. I know of a guy selling imported clothes out of his dad’s garage who qualified for this loan. I know of a grocery wholesale business with 40 staff with double the Lawrenson Group’s turnover who qualified for this loan. I know of an accounting firm who made their 20 staff work from home every day through Level 4 and Level 3 and billed hundreds of thousands of dollars to clients who qualified for this loan. But I also know plenty of retail, hospitality and manufacturing businesses who don’t qualify despite employing hundreds of people. It is like you are saying to business owners that because you have worked hard and created more than 50 jobs, we are going to disadvantage your landlords and your suppliers by disqualifying you for loan assistance. The 50 person cap should have been removed. The calculation on how much each business was eligible for should have been calculated based on the average of the expenses entered into GST returns over the previous year (and just the more recent returns if the business was less than a year old). The more businesses could qualify for, the better. There are two reasons I say that. The first is that businesses are not just about the business owners, they are about the people they employ, the suppliers they order from, the tenancies they occupy, the tax they pay, and the goods and services they provide to our economy. The more businesses that close, the worse off we all are. The second is that it is a loan. It has to be paid back. Most of the money the government is handing out at the moment will never be repaid. It is a lolly scramble, or like watching Oprah “you get some money, you get some money, everybody gets some money”. But these loans are assets on the government’s balance sheet that they can recover over time, rather than putting more burden on the taxpayers as they have been with all their other payouts. These loans keep people employed AND the money has to be returned to the government coffers. It is better that we have more loans in place and more businesses (and jobs) surviving than more unemployed and more handouts. Finally, these loans are only interest free if they are repaid within a year. Otherwise they come with a 3% interest rate, so the government is actually profiting on the use of this money.

Nexus: The opposition have suggested GST returns instead of interest free loans for businesses, what would you prefer, and why?

John: I think a more well thought out loan scheme is the way to go, combined with the wage subsidy and the forced co-operation of the major banks and landlords. Returning recently paid GST or writing off any GST amounts due during lock down would definitely help, but that is a gift to businesses rather than a loan, which means the government never gets it back. It also doesn’t take into account businesses that may have just sold major assets, or bought them, who would then be hugely advantaged or disadvantaged by the size of their most recent GST return.

Nexus: Do you think there was a case to be made for gathering restrictions to be loosened earlier for the sake of saving jobs? Why/why not?

John: No, not really. From a selfish standpoint, sure I would like to have seen my bars full, but we have taken a more conservative course and now face the possibility of being fully open again for business in less than a month’s time. That is a great result, and will be the envy of most of the world. If we had moved too fast and had a similar incident to South Korea (nightclubs) or Melbourne (McDonald’s delivery driver) we could have been shutting back down again. There is a study that showed that kids who could delay gratification by not eating a marshmallow for 15 minutes in return for a promise of two marshmallows grew up to be way more successful. Sometimes we need to delay gratification in the short term to get a much better result in the long term. The ability to trade uninterrupted for years is more important than another week or two right now. 

Nexus: Would halting the minimum wage increase at the start of April would have been a good idea, given that a lot of people were about to lose their jobs because of money being tight?

This is probably a question for another time! I am not a huge proponent of minimum wage increases because while they look good politically, I don’t think they achieve their desired result even at the best of times. I’d suggest they generally just create price inflation, which eventually passes through the economy to property speculators who see their properties increase in value, while their loans stay the same size, and they get forever richer. Meanwhile the price of everything else just goes up at a similar rate to wages and those on middle incomes are disadvantaged by poor wage growth and increasing costs of living. If you get a pay rise from $18 to $19 but I just put the price of a pizza up from $18 to $19 at the same time (businesses actually do this) then are you any better off? You still have to work the same amount of time to buy the same amount of stuff. If you were already on $22 an hour, and you don’t get a pay rise, you are now worse off because of those price increases. If you want to address income inequality you need to address the tax system. Australia and the Scandinavian nations have far more progressive tax systems than us, which means the lower income earners pay less tax, and the higher income earners pay more. New Zealand’s system is a lot “flatter”. Granted those countries are also richer because they have been mining and selling huge quantities of coal, oil and natural gas, but if you disregard the source of large parts of their GDP, their tax system stands up and arguably addresses issues of income inequality and redistribution more effectively. I guess it doesn’t really answer your question but the government would have been better off leaving minimum wage alone and changing the income tax brackets to support lower paid workers. To actually answer your question, yes it will affect the viability of a number of businesses and make things relatively more expensive for people who earn just above minimum wage. I occasionally hear people say “if you can’t pay minimum wage then you shouldn’t be in business”. This is usually trotted out by people whose parents have been employed in the public sector for most of their lives and have absolutely no idea about where the tax revenue came from to pay their parent’s salaries. Business is very hard. Not all businesses are created equal or are during the same stage of their life cycle. A small rural cafe that contributes to the social fabric of a tiny town probably cannot pay the same wages as a Viaduct restaurant. A new “start up” may turn into Apple Computers one day, but for now it can’t pay a lot to its staff and that doesn’t mean the owners shouldn’t be in business. The next time someone says to you “anyone who can’t pay minimum wage/living wage shouldn’t be in business”, ask them to explain their statement in the context of all the businesses they have owned and operated and see how they get on (I’m looking at you Deborah Russell!)

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