How Governments Can Support The Hospitality Industry

Boston Consulting Group Managing Director and Senior Partner Luke Pototschnik et al discusses APAC economies post-pandemic, and argues that ‘waiting it out’ for the hospitality industry to recover is not an option.

By Luke Pototschnik et al

The fight against the spread of COVID-19 in APAC has been long and arduous. While economies across APAC are determined to return to near normalcy and mitigate the risks of further financial impact spurred by the pandemic, the hospitality industry has a longer road to recovery ahead.

Comprising small and medium businesses, ranging from restaurants and bars to hotels, comedy clubs, and music venues, this industry is critical to the global economy. Yet they are also uniquely vulnerable to the pain inflicted by the pandemic. Ongoing lockdowns and the continued suspension of regular international travel with less tourist footfall will mean the hospitality sector is unlikely to see its profits return to what it was pre-COVID anytime soon.

Governments around APAC have provided relief to this industry, with countries like Malaysia and New Zealand, setting their sights on domestic tourism. The Singapore government is also exploring its options with a pilot program for pubs, karaoke, night clubs and bars to safely reopen by early 2021.

While these government support efforts are helpful, limited financial reserves and the nuanced challenges, faced by different businesses within the hospitality sector, mean that there is an urgent need for meaningful and coordinated support from governments, private enterprises, and multilateral organizations to prevent vast economic and social fallout.

For many hospitality SMEs, a lifeline may already exist within their eco-system. There is opportunity to leverage longstanding business relationships with larger suppliers and their deep roots in local economies, particularly producers of consumer packaged goods (CPGs) and, especially, beer, to gain better access to funds, resources and external or government support to navigate their uncertain financial future.
Waiting out the pandemic is not an option. Without action, hospitality SMEs risk permanent closure.

Critical to Global Economies

Amidst travel and movement restrictions, the hospitality industry has seen profits dwindle because there are simply no customers. Choosing to stay open while maintaining operating costs comes with risks and many businesses have found it difficult to pivot their services online despite the growing e-commerce space, either due to lack of access or resources. In addition, hospitality SMEs tend to have limited resources and difficulty accessing capital, forcing some business owners to stop paying themselves a salary to stay afloat.

COVID-19 is threatening to undo all the social and economic gains made by SMEs in general over the past 15 years. According to a World Bank forecast, East Asia and pacific countries are going to see a growth of only 0.9 percent in 2020, the lowest rate since 1967. As it stands, the hospitality industry generates 10% of global employment and contributes USD 8.9 trillion to global GDP, generating as much as 70% of the industry’s revenues globally.

In China, food service SMEs account for 98.1% of the food service industry. While food service SMEs account for 71% of the South Korean food industry. Failure to support the hospitality industry will have grave consequences on the global economy.

Socially, the industry also lifts up entrepreneurs, allowing them to make a better life for themselves and their communities. Local hotels, restaurants, and bars build community and culture as well as attract people (and their spending power) to local economies: For every USD 100 spent on lodging, guests spend another USD 221 in the community. The hospitality industry is a community backbone and a common way for entrepreneurs to make a better life for themselves and their families.

At Greater Risk of Keeping Afloat

In responding to the crisis, China and South Korea spent billions to provide support to their industries and have created an opportunity for others to follow suit. While these are significant, not all stimulus plans in the region are equal, with some developing countries providing less support than their wealthier peers.

Lack of funding access, low financial buffers and lack of direct and formal ties to their respective governments put many informal hospitality businesses, particularly those in developing countries, at significant risks of closure. On top of that, poverty levels continue to skyrocket, and the potential collapse of hospitality SMEs may add fuel to the fire as mass loss of jobs presents another threat.

With countries like China and South Korea reporting a loss of 1.8 million and 50,000 jobs respectively, despite having kept their number of cases under control, the workforce serving hospitality SMEs is vulnerable.

These simply aren’t challenges SMEs can take on alone without assistance.

Support in the Supply Chain is Key

Finding support within the existing ecosystem is critical. Producers of CPG are one avenue given they have localized value chains and have a vested interest in keeping the industry afloat. For example, bars and restaurants are a critical channel for the alcohol category, comprising around 16% of volume in APAC. These private enterprises often have direct connections to SMEs in the informal and formal economy, enabling them to have access to the government for support.

Around the world, many CPG companies are already helping to support these struggling businesses. They have invested in the industry’s recovery and demonstrated tremendous effectiveness.

There are several extant examples of multilaterals amplifying the impact of private enterprises. In 2013, the IFC, a member of the World Bank Group, worked with Coca Cola to launch a USD 100M initiative that supports female entrepreneurs in SMEs across Eurasia and Africa.Also, the IFC provided financing and business training, while Coca Cola used its value chain to identify and connect with SME entrepreneurs who would benefit from the program.

Providing a Lifeline

In the new normal, vulnerable businesses need to adjust to changing consumer sentiment and the costs to comply with safety measures. As governments across APAC work towards full re-opening, the hospitality sector will still lag behind the relaxing of restrictions. As such, these governments will have to consider the following to address the needs of these SMEs:

Striking a balance. Governments will have to balance between public safety and ensuring the hospitality industry is not further damaged amidst the various restrictions. Funding support, wherever available, should be efficiently distributed.

Stabilize and clarify. Providing businesses early and detailed information on what they will be allowed to do, what the regulations will look like, and the kind of support they can expect will minimize unnecessary costs, such as those related to hiring and to food and drink purchases.

Take tactical steps. Tactical opportunities also exist to optimize reopening plans for economic success without high COVID-19 risk and to prevent evictions, such as by providing rent subsidies and tax credits to SMEs.

Collaborate. Beyond government stimuli, the market will require a support ecosystem that draws from governments, private enterprises, multilateral organizations, and consumers, to grow and support economic recovery.

Despite the recovery efforts, many SMEs still face the risk of permanent closure or financial damage. Quick action, financial and regulatory assistance, and increased collaborations between governments and private enterprises will be instrumental in helping support APAC’s wounded hospitality industry and SMEs, together.

(Ed. A note on the Authors; Pototschnik is Managing Director and Senior Partner for Boston Consulting Group New York (BCG). He leads BCG’s transformation work and BCG TURN in North America. Nicol Zhou is Managing Director and Partner for BCG New York. Zhou says he is a core member of the Consumer practice and is currently focused on growth-oriented transformations in the consumer sector. Hillary Maxwell and Frederik Bruggink are Project Leaders at BCG New York too.)

(Ed. Featured image by Photographer Ricardo Esquivel.)