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How to negotiate the perils of diversification - Joe Spencer, partner at MHA MacIntyre Hudson

It is safe to say that many farmers already have established diversified activities.

In recent years there’s been a major push to drive overall revenues, generate wealth and ‘sweat your assets’, to counteract the seasonal and commoditised nature of the traditional farming business.

 

Naturally, a lot of the diversification routes taken, to meet demand in tourism, hospitality and leisure have lent on assets already in place. Holidays lets, water parks, and camping and caravan parks are just some of the potential enterprises, and have one key thing in common - they all rely heavily on the general public.

 

Lessons from the lockdown

 

What we have learned from the last few months or so, since the Government put the strong restrictions on these particular industries, is that the public orientation of these projects does have its perils.

 

Many farms will have capital tied up in their diversification projects, with debt to service and no income to service it with.

 

These projects are, however, usually aimed at achieving long-term objectives, so it is worth remembering that the current Covid-19 situation is a short-term issue - though currently no one can guarantee when we will return back to normal and for this period there is likely no income at all from many diversification projects that operate in the tourism/leisure and hospitality sectors.

 

A brighter summer?

 

While these issues are prevalent now, we could be on the brink of an influx at the back end of the summer. With overseas travel looking more and more likely to be curtailed, and the public sentiment also dwindling in respect of such travel, there is positivity on the horizon.

 

Many UK residents will be looking for UK alternatives to overseas holidays/trips, though perhaps with less disposable income due to earnings restrictions. This does present some good opportunities for the UK market, and there is potential to make up for ‘losses’ incurred in this initial period.

 

Under current government guidelines in respect of the restrictions lifting, there is likely to be increased booking activity in the back end of June.

 

This will not be too far in advance due to consumers wanting more certainty that they will be able to access the service/product. Providing we can successfully manage the Covid-19 situation on a macro scale in the UK, then I expect that units can become ‘fully operational’ by the start of August.

 

Some limitations will remain

 

But what will ‘fully operational’ look like in the months after the restrictions are lifted? You would expect there will be a much bigger emphasis placed on Health and Safety in the immediate aftermath.

 

Take a holiday cottage for example. Key to letting the property, and perhaps morally too, will be whether the property has had a ‘deep clean’ since its last tenants.

 

There is of course a cost associated with that, and consideration must be given in how much this would affect your margin on each let. Landlords may look for longer lets of two weeks rather than just a weekend as a result.

 

What about restaurants? There is likely to be a requirement placed on these settings to space out covers, impacting margin of course. There will still remain the cost of the staff in order to service the reduced number of customers, not to mention the fixed overhead costs.

 

A starting point to alleviate this pressure on margin will be to revisit your own pricing structures. If the property needs a deep clean, then perhaps this cost can be partially passed onto the consumer, and you can market the property as ‘deep cleaned’, which may be more attractive to potential consumers.

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Businesses will need to adapt in different ways that are specific to their own circumstances, particularly on an operational level. There is support available on the financial side, be it debt or grants, both supported by the government. We would recommend that, if you have not already, you take the following action;

  • Speak to your bank manager to arrange a repayment holiday on any debt associated with the project. You may need to provide supporting documents to the bank like cashflow and profitability projections in order to acquire funding, though usually successful businesses will have these readily available.
  • Contact your local council to enquire if you are eligible for grant funding. We have seen business from Riding Schools to Wind Turbine operators receive the Government funding. This can provide a good sized cash boost which is non-repayable.

It’s worth underlining that it’s not all doom and gloom, and that many of these projects are long-term capital asset generation plans and not just there to add to monthly revenues. There is certainly a good chance of a strong resurgence in the sector once market confidence is restored, and longer term there will be the potential for more demand and interest from consumers.

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