3 September 2020

A new report aiming to help governments and business managers decide where to focus support warns that if the Covid-19 economic downturn is as severe as the financial crash of 2008, more than 1 in 4 hospitality businesses in Scotland could go bust, with 58,000 jobs lost.
Study Shows Jobs at Risk in Scottish Tourism and Hospitality So Support Should Be Targeted

Academics at the University of Edinburgh Business School, in collaboration with Wiserfunding, a London-based fintech specialising 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. 209,000 people were employed in these sectors 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 2009–11, and swine flu in 2009–10.

Using Wiserfunding's powerful models and technology to simulate potential stress scenarios, it was found that 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.

The study also found, surprisingly, that most medium and large companies were more at risk of defaulting than most small businesses who have leaner structures and lower fixed costs, so can adjust faster to challenging conditions.

The study was funded by the University's Data-driven Innovation initiative, part of the Edinburgh and South East Scotland City Region Deal.

People and business will need to accept this new status quo and adapt. This is the only way to ensure a faster recovery.

Dr Galina Andreeva, Senior Lecturer in Management Science at the University of Edinburgh 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 estimates should provide an idea of the required intervention in order to assist industry through these difficult times.

"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, in order to increase the chances of success in the deployment of public funds. 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: travel will be less common, businesses will have to space workers and customers further apart, restaurants will be serving fewer customers at a time, and sporting events, concerts, and other activities involving large crowds probably will remain off limits for a long time. People and business will need to accept this new status quo and adapt. This is the only way to ensure a faster recovery.

"Small businesses have a leaner structure, lower fixed costs, and faster decision times. These elements will play a major role in the coming months and hopefully will provide them with a competitive advantage."

The picture that comes out of our models is providing a frightening, but also encouraging message for SMEs.

Dr Gabriele Sabato, co-founder and CEO of Wiserfunding, commented:

"We were delighted to work with the University of Edinburgh on this extremely important study to help understand the potential impact of the Covid-19 pandemic on the Scottish hospitality industry.

"The picture that comes out of our models is providing a frightening, but also encouraging message for SMEs. 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 the most likely to visit and spend money in the immediate future.

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