HOSPITALITY AND LEISURE SURVEY 2016 Key challenges and opportunities for the sector

Transcription

1 HOSPITALITY AND LEISURE SURVEY 2016 Key challenges and opportunities for the sector

2 INTRODUCTION We are delighted to share with you the key findings of the Mazars annual survey of leading businesses in the hospitality and leisure industry, which reveal the challenges and opportunities facing the sector. We hope you find the report interesting and informative. For the fifth year running, the economy and pricing competition are cited as the key factors impacting business performance and considered to be instrumental in changing the shape of the market in future years. Brexit is also a factor expected to change the market. It s no surprise respondents are concerned about the impact of Brexit on the recruitment and retention of EU nationals and economic growth in general. With respondents already concerned about rising costs as a result of the National Living Wage and auto-enrolment, the sector is all too aware that the cost of imports could increase further and significantly impact on margins. In terms of government legislation, for years the industry has called for a reduction in taxes, specifically VAT. This year is no different. Reduced business rates also rank highly on the wish list of many respondents. Changes are unlikely, however, given that current exchange rates are making the UK particularly attractive to foreign tourists at the moment. The sector grew again in 2016 with growth being mostly organic, with some external investment but little consolidation. As new competitors enter the market, and with an uncertain economy, it will be interesting to see if businesses can rely on organic growth alone to survive. For more information about our services to the sector, visit our website. Gareth Gareth Jones Head of Hospitality & Leisure, Mazars

3 KEY FINDINGS 1. What are the top three factors that could impact on the performance of your business over the next year? Key factors raised are the economy (23% of responses), Brexit (22% of responses) and managing staff levels (16% of responses) 2. What do you think will change the shape of the market in the next three years? Key factors stated are pricing competition (31% of responses), new legislation (26% of responses) and new entrants (24% of responses) 3. What do you perceive to be the key risks and challenges associated with the industry today? Key issues raised are increasing costs (33% of responses), the economy (30% of responses) and customer expectations (18% of responses) 4. How concerned are you about the impact of Brexit on aspects of the economy and your business? Respondents are extremely concerned about the recruitment of skilled workers and exchange rates and moderately concerned about economic growth and consumer confidence/spending habits 5. In April 2016, a new minimum wage (the living wage) was introduced. What financial impact has this had on your business? 66% of respondents state that the financial impact has been as expected and 19% of respondents state that the new legislation has had no financial impact on their business 6. What changes in government legislation would you like to see to help improve your business? The majority of respondents would like to see a reduction in VAT. Some are concerned about the impact of Brexit on EU nationals 7. What do you consider to be the greatest difficulty in recruiting top quality staff? The majority (53% of respondents) consider the greatest difficulty in recruiting top staff to be the quality of the candidate 8. Which part of the business cycle is your company currently on? 72% of the businesses are in growth phase with 50% from organic growth and 22% from external and investment growth 1

4 THE RESULTS 1 What are the top three factors that could impact on the performance of your business over the next year? The hospitality and leisure sector is significantly dependent on the state of the economy, relying on both individuals and 66% businesses to survive. 66% of respondents feel the economy will impact their business this year, this is down from 77% last year and 90% in Whilst the Brexit vote has not resulted in the sharp slowdown in the economy forecasted by the Bank of England, and despite business confidence now being higher than before the Brexit vote, the economic outlook for 2017 remains uncertain with corporate travel budgets in particular remaining tight. 63% of respondents believe that Brexit could impact the performance of their business, although the extent of the impact either positive or negative is yet to be determined. Negative fears around new immigration laws far outweigh the short term positive impact of attractive exchange rates for both investment and inward tourism. As a labour intensive sector, managing staff levels affects all hospitality and leisure businesses and 47% of survey respondents predict this to affect their business going forward. Both auto-enrolment and the National Living Wage (NLW) are well embedded into businesses now but, with the upcoming Apprenticeship Levy and significant increases in minimum auto-enrolment conditions on the horizon, the cost of employing staff is ever increasing. The ability of businesses to manage their staffing levels accordingly, whilst still maintaining adequate customer service and health & safety regulations, will drastically affect overall profitability. Percentage of responses 23% The economy 22% Brexit 16% Managing staff levels 13% Business rates 7% Repeat custom 6% Retaining key management 6% Other 4% Brand awareness 3% Raising finance Business rates are also a concern for respondents (13% of responses). Huge hikes in business rate taxes take effect this year, particularly in London. In late 2016, the publication of the draft rating list by the Valuation Office Agency for England and Wales showed significant increases in business rates. Whilst the cap on these rises was reduced from 45% to 42% in the Autumn Statement, these increases come on top of the pressures the industry is already facing from the additional costs detailed above Top three responses Repeat custom, brand awareness and retaining key management personnel were concerns less prevalent in 2016 in comparison to previous surveys, as it is felt the potential impacts of Brexit are consuming the thoughts of many respondents Percentage of respondents 66% 63% 47% The economy Brexit Managing staff levels 2

5 2 What do you think will change the shape of the market in the next three years? 69% Over two thirds of respondents (69%) believe pricing competition will change the shape of the market in the next three years, with new legislation (59% of respondents) and new entrants (53% of respondents) following closely behind. Percentage of responses The rise of the importance of Online Travel Agents (OTAs) in the industry and the historic inability for businesses to price below that of an OTA means the first port of call for many travellers and holiday makers is a comparison site to find the cheapest rate. In the restaurant sector, many diners now search for vouchers/deals online before booking restaurants. Whilst in the gym sector, there has been a rise in the number of low cost, unmanned gyms, open 24 hours with minimal joining fees and low monthly commitments. These are just a few examples of aggressive pricing mechanisms in the sector. New legislation particularly around the employment of EU nationals, is also a factor expected to shape the market. The British Hospitality Association estimates that 700,000 EU staff are currently employed by the sector with these making up 15% of the workforce. Worryingly, Immigration Minister, Robert Goodwill, has proposed a 1,000 levy for EU workers post Brexit. However, having distanced itself from this policy, the Government s future position on EU workers remains uncertain with the ongoing challenges in employing skilled staff and the high numbers of non-uk nationals working in the sector being a cause for concern among respondents. 31% Pricing competition 26% New legislation 24% New entrants 11% Consolidation 7% Property prices 1% Other In terms of new entrants to the market, 20,000 new rooms are expected in 2017, with 12,000 of these opening in the regions. It s no surprise, therefore, that 53% of respondents expressed their concern. We expect the trend for branded, budget offerings, led by Travelodge and Premier Inn, to continue. 100 Top three responses Percentage of respondents 69% 59% 53% Pricing competition New legislation New entrants 3

6 THE RESULTS 3 What do you perceive to be the key risks and challenges associated with the industry today? Once again, increasing costs are the greatest challenge cited by respondents over 80%. As a result of general inflation 81% and fluctuating exchange rates, businesses are being hit by increasing food and drink costs. In addition, utility price increases, significant business rate hikes, the additional costs of employment such as NLW and auto-enrolment and OTA price increases are significantly affecting the market. This is all at the same time as the demands of consumers increase exponentially 44% of respondents are concerned about changes in customer expectations. Competition also continues to be a key risk and challenge for the industry. The rise of Airbnb has been rapid and took many by surprise. And with businesses set to take advantage of the partnership between Airbnb and American Express Global Business Travel, Carlson Wagonlit and BCD Travel by making it easier for their employees to book business accommodation with Airbnb hosts, there may be a rocky road ahead for the industry. 33% 30% 18% 15% 2% 2% Percentage of responses Increasing costs The economy Customer expectations Competition Raising finance Other Increasingly, hotels and hotel groups are looking to add elements of these disruptors into their service offering or, in the case of Accor Hotels and One Fine Stay, moving into this area of the market through acquisition. The emphasis on an authentic local experience and enhanced guest convenience continues to drive strategy with groups deviating from their core brands to build brand loyalty with the expanding millennial market. Whilst the UK has brands such as Citizen M and Hoxton, it is very much behind the US in this trend where Virgin Hotels, Hyatt Centric and the specific millennial focused brands of Raddison Red and Hilton Tru have already been established. Other new concepts in the sector are being developed on an ongoing basis and will continue to disrupt the more established players in the industry Top three responses Percentage of respondents 81% 75% 44% Increasing costs The economy Customer expectations 4

7 4 How concerned are you about the impact of Brexit on aspects of the economy and your business? Respondents are concerned about the recruitment of skilled workers with 34% stating they are extremely concerned. This 34% theme has been prevalent in our survey in previous years although not, as you d expect, to the same extent as in The difficulty in attracting and recruiting skilled workers highlights the significance to employers of retaining quality staff for longer. Often this is not through financial efforts, but through training, flexible benefits and strong communication from senior management. Another key area of concern is exchange rates. The weak pound is attractive for tourists visiting the UK, however it has made imports very expensive, particularly food, thus hitting margins considerably. We also believe it is the volatility of the exchange rate that is affecting businesses and the unpredictability that comes with it. Many experts predict that sterling will strengthen during 2017 although the timing and initial negotiations around Brexit will undoubtedly impact the degree to which our currency increases in value. 97% of all respondents express an element of concern around the impact of Brexit on economic growth, with half being slightly or somewhat concerned and the other half being moderately or extremely concerned. There is also some concern over the impact this will have on consumer spending with the majority of respondents slightly to moderately concerned. Respondents are least concerned about the impact of Brexit on external investment in the sector % 28% 22% Extremely concerned Top three responses Percentage of respondents The recruitment of skilled workers Exchange rates Economic growth Not concerned Top three responses Percentage of respondents 25% 13% 13% External investment in the sector Profits Occupancy/bookings 5

8 THE RESULTS 5 In April 2016, a new minimum wage (the living wage) was introduced. What financial impact has this had on your business? 66% For two thirds of respondents, the financial impact of the NLW has been as expected. It is encouraging to know that one of the hardest hit sectors has weathered the storm and survived. Indeed, for a fifth of respondents, the introduction has had no impact at all on their business and only 3% have found that the introduction has had a greater than expected financial impact. Percentage of respondents In 2015, our survey found that most businesses were more likely to absorb any additional costs rather than reduce staff numbers. In line with this, many businesses have used the introduction of the NLW as an opportunity to review their wider employee benefits package to see if savings can be made elsewhere. The introduction of the NLW represented a long term structural change to the costs faced by the hospitality and leisure sector and it may be too early to say what the true impact will be. In our view, short term savings on overheads are unlikely to provide a sustainable solution. Instead, we expect alternate employee benefit offerings that improve staff retention whilst maintaining existing pay differentials between staff grades to become more widely implemented. Perhaps the question of how have you paid for the financial impact of the NLW? would have provided a more varied response. 66% 19% 12% 3% As expected No impact Less than expected Greater than expected 6 What changes in government legislation would you like to see to help improve your business? The most sought after change is, unsurprisingly, a reduction in VAT. The hospitality and leisure sector has long argued the case for reduced VAT, and will undoubtedly continue to do so. To date, the Government have been less than willing to oblige. In the meantime, especially whilst the exchange rate makes the UK attractive for foreign tourists, it is unlikely we will see a reduced VAT rate for a number of years. Despite voting to leave the EU over six months ago, the UK is no wiser as to the full implications of Brexit, particularly from an employment perspective. The responses around Brexit have been mixed with the majority wanting the Government to make the process as quick as possible to give more clarity to businesses, with some arguing to delay (or even avoid altogether) triggering Article 50. A number of respondents are calling for the UK to follow recent European changes to the laws around rate parity with OTAs. Currently businesses are restricted from offering a cheaper rate to customers booking directly with them than those booking through an OTA. Associated with OTA rate parity, is the need for government intervention in the ever increasing cost of OTAs and the commission levels taken. Other changes include slowing down National Minimum Wage annual increases, more favourable reliefs on business rates and more support for hiring overseas staff. 6

9 7 What do you consider to be the greatest difficulty in recruiting top quality staff? The majority (53% of respondents) consider the greatest difficulty in recruiting top staff to be the quality of the candidate. 53% Compared to last year, there has been no significant change in respondents views (51%). The introduction of the Apprenticeship Levy in May 2017 should help increase both the quantity and quality of apprenticeships in the UK and therefore look to close the gap between the skills employers look for and the candidate s attributes. The Recruitment & Employment Confederation notes this skills shortage is one of the key reasons for the above average staff turnover in the industry. At 20% per year this is significantly higher than the average of 13% for other industries, costing the sector 274 million annually. Unreasonable wage expectations is also a factor in recruiting staff (cited by 19% of respondents). The growing hospitality sector has led to increased demand for staff in certain positions, both front and back of house. The impact of this is a more advantageous position for candidates, especially when they realise that top quality staff are difficult to attract. Both the quantity of time taken and the cost involved in hiring top quality staff are also seen as main difficulties. Percentage of respondents 53% Quality of candidate 19% Unreasonable wage expectations 10% Time taken to recruit 9% Relevant experience 6% Other 3% Cost of recruitment 8 Which part of the business cycle is your company currently on? The trend towards growth organically or through acquisition is continuing to rise with 72% of respondents now considering 72% themselves to be in this part of the business cycle (this has risen annually for the last three years from 61% in 2014 and 64% in 2015 to 72% today). Half of all respondents claim to be in an organic growth stage. In a period of minimal economic growth and record low interest rates, we consider this to be a dangerous time for businesses to rely on organic growth alone with new competitors entering the market with a slightly different offering to the norm. The number of respondents looking at re-focusing their business remains below the 20% mark. We are surprised by this given the fast moving technological developments within the industry and the opportunities this will create, particularly for new entrants to start-up in the sector. Our opinion is that those businesses who do not stand still but look to change their business in line with consumers needs and be at the forefront of new innovative ideas, will be best placed to grow and enhance capital value and brand recognition. Percentage of respondents 50% Organic growth 22% External growth/investment 15% Re-focus 13% Consolidation 7

10 METHODOLOGY For the fifth year running, we surveyed a cross section of finance directors, HR directors and owner-managers in the hotel, bar and restaurant and tourism sectors, representative of the market, to gauge their views on the events of the past 12 months and the challenges that lie ahead. The survey was designed to uncover the key factors affecting the industry and compare these to the key concerns of 2012, 2013, 2014 and We conducted our research from October to December We would like to take this opportunity to thank respondents for the time and thought they devoted to completing this survey. ABOUT MAZARS Mazars is an integrated international firm with a presence in 79 countries with a vision to make a real difference to clients by providing high calibre accountancy, audit, tax and other advisory services. Mazars has an extensive international and UK client base which demands exceptional technical depth and commercial awareness and a particular understanding of the specific dynamics of hospitality and leisure businesses. OUR EXPERTISE We have extensive experience advising: Hotels including large and listed groups, independent establishments and small, medium-sized and boutique hotels Gym operators including private companies managing private and public facilities, hotel leisure gyms and leisure trusts Restaurants, pubs and bars Sports clubs and associations The wider sector including travel and booking agents We pride ourselves on being able to provide assurance services that play a fundamental role in the successful management of your organisation; advisory services that help you provide a positive customer experience essential in a market where the key differentiator is service excellence; and professional advice that addresses your financial needs and supports your business through each stage of its strategic development. OUR SERVICES TO THE HOSPITALITY AND LEISURE INDUSTRY Audit and assurance Governance and risk Internal audit Consulting Tax advisory and compliance Outsourcing Corporate finance Due diligence Restructuring and turnaround services Forensic and investigations Employee benefits 8

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12 Please get in touch... For more information about the survey results, or how we can support your business, please contact: Gareth Jones Partner T : E : gareth.jones@mazars.co.uk Alternatively you can also us at hospitalityandleisure@mazars.co.uk Mazars LLP is the UK firm of Mazars, an international advisory and accountancy organisation, and is a limited liability partnership registered in England with registered number OC A list of partners names is available for inspection at the firm s registered office, Tower Bridge House, St Katharine s Way, London E1W 1DD. Registered to carry on audit work in the UK and Ireland by the Institute of Chartered Accountants in England and Wales. Details about our audit registration can be viewed at under reference number C Mazars