MARKET INSIGHT: Mazars Annual Survey

Mazars’ annual survey of leading businesses in the hospitality and leisure industry, reveals key challenges and opportunities facing the sector. They kindly allowed us to reproduce their report here. We are delighted to share with you the key findings of the Mazars annual survey. We hope you find the report interesting and informative. For the fourth 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. In 2016, compared to other industries, the hospitality and leisure sector will be hit hardest by the National Living Wage (NLW) becoming mandatory. Over a third of respondents told us that they will have to raise prices in order to accommodate the changes, with many having to make cuts elsewhere within the business. The true impact of the changes have yet to be seen, however initial research indicates that businesses are more likely to absorb the additional costs than reduce staff numbers. The sector grew again in 2015 although concerns relating to a squeeze on margins brought about by increased costs and a skills shortage in the sector have had, and will continue to have, an effect on the sector’s capacity to expand. Whilst, in previous years, growth was mostly organic, this year there has been a clear move towards growth from external investment and we have seen the market for acquisitions strengthen yet again. Key Findings 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 (27% of responses), managing staff levels (13% of responses) and retaining key management (13% of responses). What do you think will change the shape of the market in the next three years? Key factors stated are pricing competition (26% of responses), new legislation (20% of responses) and new entrants (19% of responses). What do you perceive to be the key risks and challenges associated with the industry today? Key issues raised are increasing costs (30% of responses), the economy (24% of responses) and competition (21% of responses). A new minimum wage (the living wage) will be introduced in April 2016. What impact will this have on your business? A large number of respondents stated they would have to raise prices because of the NLW (35% of responses). In addition, respondents told us that they would also have to make cuts elsewhere within their business (23% of responses). What changes in government legislation would you like to see to help improve your business? Key changes stated include a reduction in tax, specifically VAT and lower National Insurance. What do you consider to be the greatest difficulty in recruiting top quality staff? Key difficulties included quality of candidates (51% of respondents), relevant experience (21% of respondents) and the time taken to recruit (13% of respondents). What technological changes have most improved your business? Online bookings (26% of responses), social media (19% of responses)and customer database management (14% of responses) have improved businesses. Is brand loyalty more important now than it was five years ago? Almost half (51%) of respondents feel that brand loyalty is more important than it was five years ago. Which part of the business cycle is your company currently on? 64% of the businesses believe they are in the growth phase with 20% from organic growth and 44% from external and investment growth. The Results What are the top three factors that could impact on the performance of your business over the next year? The somewhat surprising result of the 2015 election with the Conservative government winning a majority vote, has clearly given the economy the welcome boost it needed in the second half of 2015, maintaining growth for every quarter since 2013. Despite this, the majority of respondents (77%) claim that the economy is still one of the main concerns and will continue to affect business over the coming year. This compares to 90% in 2014 and 89% in 2013. The introduction of the living wage becoming a mandatory requirement from April 2016 has resulted in 38% of respondents identifying managing staff levels as a top factor; this is up from 31% in the prior year and 27% in 2013. The hospitality and leisure sector will be the hardest hit by this legislation with an expected 3.4% increase in staff costs according to a recent survey by the Resolution Foundation. Staff levels will need to be monitored closely by employers in 2016. This, in combination with the various government incentives needed so the UK can meet its 2020 target of three million apprenticeships, will likely increase the number of younger people employed on apprenticeship programmes in the sector. Static interest rates, low (or even negative) inflation and the Bank of England’s indications that rates will remain low for 2016 have resulted in the improved availability of finance. This is reflected in our survey with fears over raising finance falling from 10% of responses in 2014 to just 1% in 2015. The availability of crowdfunding in the marketplace has proved successful in the hospitality and leisure sector with private investors being able to relate to start-ups in particular. One of the most significant events in 2015 was the Initial Public Offering of low cost fitness operator ‘The Gym’. This raised £125m from new investors and indicates a real appetite for investment in the sector, with its £250m valuation being an impressive 17 times multiple on 2014 EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation). What do you think will change the shape of the market in the next three years? The main factor impacting the shape of the market continues to be pricing competition with 64% of respondents identifying this as the key factor. This is perhaps most prominent within the hotel industry where, despite significant increases in room supply in the last two years, many operators have struggled to increase room rates, primarily due to the availability of price comparison sites, the rise in popularity of Airbnb and the increasing use of online travel agents. Demand for restaurants and hotel space has never been higher in the UK, however the inherent barriers to entry and the dominance of larger hotel groups makes entry for independent hotels difficult, instead less traditional offerings such as serviced residencies are an increasingly popular option for entrants to the sector. Within the fitness industry the low cost gym segment is growing in prominence with operators focusing on offering low cost and flexible membership, which is proving popular in attracting first time members. However gym loyalty, the ability to offer a variety of group classes and multi-gym access continue to support established gym groups in maintaining their share of the market. New legislation continues to be strong factor with over half of respondents (51%) identifying this as a key factor in the last two years (compared to 58% in 2014 and 46% in 2013). Whilst the industry continues to benefit from the positive impacts of falling corporation tax rates, these are somewhat offset by new employment legislation impacting staff costs. What do you perceive to be the key risks and challenges associated with the industry today? Increased costs are one of the main challenges associated with the industry with 79% of respondents citing this as a top three factor. This marginal increase on last year’s response rate (78% in 2014) has been driven by the upcoming challenge of the NLW as well as the inflation experienced over the last year in food and utility costs. In addition, the trend in booking through online agents rather than direct has seen many restaurants, hoteliers and other leisure providers experience a significant increase in commission costs. Competition also scores highly amongst our responses. As well as price competition, innovation in hospitality and dining continues to put pressure on companies, mainly at the premium/high end of the market. Our survey over the last three years has shown there are four consistent challenges facing the industry – increasing costs, higher customer expectations, a fragile economy and growing competition with these comprising a similar share of responses. A new minimum wage (the living wage) will be introduced in April 2016. What impact will this have on your business? A large number of respondents said they would need to raise prices due to new NLW legislation (35% of responses). Data from the Office for National Statistics (ONS) shows that in response to the introduction of the minimum wage in 1998, many low paid sectors chose to increase prices rather than reduce headcount. Whilst the impact of the NLW is still to be seen, our survey supports this position with more respondents stating cuts would need to be made elsewhere in their business (23% of responses) than those planning to reduce headcount (15% of responses). What changes in government legislation would you like to see to help improve your business? An overwhelming number of respondents (74%) would like to see a cut in VAT and other taxes. This was a key concern last year and will, no doubt, be a concern for respondents in the years to come. Despite lobbying by the British Hospitality Association, there remains no sign of a VAT cut for the hospitality industry. The good news is that some of the impact is offset by plans to reduce the corporation tax rate in 2017 to 19% and then again to 18% in 2020. Changes in NIC rules will also mean the employers allowance will increase from £2,000 to £3,000, in effect meaning firms can continue to employ four full time workers before paying NIC. Other changes include more help with the funding of training and apprenticeships, the introduction of capital allowances to encourage hoteliers to spend money on their hotels, a fairer system of air passenger duty and more education to companies in terms of the Bribery Act and its real impact on those wishing to entertain guests. Within the fitness industry, the different VAT rate between leisure trusts and private operators do not provide a level playing field for competition and remain a contentious point for private operators. It is also debated, what services should and shouldn’t incur VAT given the levels of inactivity in the UK and the need to encourage more active behaviour. What do you consider to be the greatest difficulty in recruiting top quality staff? Interestingly around half of the responses (51%) identified the main difficulty in recruiting top staff to be the quality of candidates applying for positions. In the hotel industry, when asked about the factors that have an impact on the performance of the business, respondents ranked managing staff levels as the second biggest issue. This supports the view that there is a finite pool of expertise at a senior level and the increasing demand from a number of hotels in recruiting these employees. For the first time we have seen training being an area where hotels would look for a change in government legislation to help improve their business. With the backgrounds of key hotel staff often including time spent in the more basic functions within the hotel, a change in legislation to reduce the costs of staff training would support the pipeline of quality candidates for key positions. What technological changes have most improved your business? The dependence on online bookings continues to be the main technological change that improves business in the sector (26% of responses, comparable to last year). Social media also continues to score highly, being a top three factor, although the number of responses has dipped since last year (19% of responses compared to 23% in 2014). Respondents also told us the recent advances in email marketing and LED lights (reducing power costs) have also improved business. On the flip side, however, in rural locations respondents told us that weak mobile signals and Wi-Fi issues are having a negative impact on their business. In the leisure industry in particular, according to a recent Mintel report, apps will continue to dominate innovation. Whilst presently our respondents don’t cite apps as a ‘game changer’, it will be interesting to see next year if apps appear in our top three technological changes. Is brand loyalty more important now than it was five years ago? Around half (51%) of respondents feel that brand loyalty is more important than it was five years ago and appreciate that where customers are loyal to their brand, repeat custom is most likely. However, as the majority of respondents feel they will have to raise their prices due to the new NLW, there is a risk that we could see a change in brand loyalty as their expectations, particularly with regard to price, will no longer be met. In particular, within the fitness industry, the competition from low cost operators combined with these price pressures on established operators may have a real impact in the market. In comparison to last year, the hotel sector did not think brand loyalty was as important as before, however the sector as a whole feels brand loyalty is more important than in previous years. Which part of the business cycle is your company currently on? 64% of respondents believe they are in the growth phase, the largest percentage so far (compared to 61% in 2014 and 53% in 2013). Compared to last year, there is a clear move towards growth from external sources and investment (20% in 2015 compared to just 10% in 2014). This is a trend that has been noted throughout survey responses, as the availability of external investment is seen to be stronger than ever and more acquisition opportunities are available. The market for transactions is as strong as it has been in the last few years and there are plenty of opportunities for acquisitions. Impact of the National Living Wage The hospitality industry is expected to be hardest hit by the introduction of the NLW which becomes a legal requirement from April 2016, with UK businesses required to pay £7.20 per hour from this date (and £9 per hour by 2020) to all staff over 25. However changes in pay are not restricted to employees currently earning under this threshold – the increase to junior staff pay will bring many in line with the current market rates for team leaders and supervisors. Companies face a challenge of reviewing their wider benefit structures whilst maintaining control over staff costs. This is arguably the most significant change in pay related legislation since the introduction of the minimum wage in 1998. The data from the ONS from this time shows that staff numbers in low paid sectors were not significantly impacted with the changes, a trend we expect to see with the NLW. The Resolution Foundation research supports this with their findings showing almost a third of employers plan to manage increased cost by improving efficiency/productivity. Whilst the ONS shows that at May 2015 the average weekly pay had increased 3.6% year on year, we have found that since July 2013, staff costs have seen a small decrease against revenue which is growing at a faster rate. Other responses to the Resolution Foundation’s survey included plans to absorb the additional costs (22%), followed by reducing overtime and bonuses (16%), raising prices (15%) and reducing the number of employees through redundancies or slower recruitment (15%). With the NLW applying only to those over the age of 25, as well as continuing developments to incentives surrounding apprenticeship schemes, we anticipate those in the sector, particularly hotels, looking to a younger workforce. The longer term benefits of apprenticeship schemes are clear as the industry continues to face challenges over retaining and attracting key staff. In July, Boris Johnson argued companies currently paying the Living Wage find that they have higher loyalty and productivity from staff, lower staff turnover and HR costs. However, once compulsory for all companies, these benefits will largely disappear. Methodology For the fourth year running, we surveyed a cross section of finance directors, HR directors and owner-managers in the hospitality and leisure 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 and 2014. We conducted our research during October and November 2015. We would like to take this opportunity to thank respondents for the time and thought they devoted to completing this survey. [divider style="solid" top="20" bottom="20"] About Mazars Mazars is an integrated international firm with a presence in 74 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.