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Morning Briefing Strap Line
Fri 2nd Nov 2018 - Friday Opinion
Subjects: The fight goes on, too many cooks, let’s all raise a pint and less is sometimes more
Authors: Kate Nicholls, Glynn Davis, Bruce Ray and Paul Chase 

The fight goes on by Kate Nicholls

With the chancellor delivering his Budget in Halloween week, many feared it might amount to little more than a horror show for the sector. Overall, this was a positive Budget for hospitality, recognising and acknowledging UKHospitality’s core campaigns as well as offering a few treats to voters.

There were a number of positive announcements in terms of business rates relief and digital companies paying their fair share – together with a positive outcome on (most) excise duties, the mooted “latte levy” and non-residential capex and investment allowances. Our analysis shows the measures announced in the Budget as a result of our campaigns are likely to save the trade up to £750m – the emerging detail will bring some clarity in this regard.

Whatever the final figure, it demonstrates that hard campaigning pays off. UKHospitality has worked tirelessly to communicate the continued pressures hospitality businesses face and it is good to see the chancellor acknowledge these challenges and listen to what our sector has to say.

But let’s be clear, although this support is welcome, much more remains to be done. We will call on the government to follow this with a continued package of support for businesses, including fundamental reform of business taxation – especially as the Brexit date fast approaches.

Hospitality businesses have been hit hard by upward spiralling business rates so steps to address this are welcome. As Propel readers know, UKHospitality has exhaustively campaigned for support for the sector on business rates so it’s always positive to know the government is listening.

However we also acknowledge the rates relief, which means businesses with a rateable value of £51,000 or less will see their business rates fall by a third for the next two years, will be cold comfort for many larger operators. This low threshold may be helpful for hospitality businesses in rural areas or small towns outside metropolitan centres but will do nothing to help medium-to-larger companies on the high street, with many of them bearing the brunt of declining footfall and struggling night-time economies.

UKHospitality will continue its dialogue with ministers and push for a fairer deal for the whole sector and for the remainder of pubs to benefit from this relief. Ultimately, what is required is for this support to be a springboard to an overhaul of the businesses rates system to make it fit for purpose in the modern business world. 

As the chancellor said in his speech, the rules of the game must change in respect of the digital economy. We continue to put the case that funds raised by the new digital services tax should be used to ease the unfair tax burdens shouldered by hospitality businesses and stop the continued devastation of high streets. The current projection of £400m raised from this tax will do little to ease the hardship.

The need for further support is perfectly illustrated by figures in UKHospitality’s latest Benchmarking Report, produced in association with Christie & Co, which will be released shortly and reveal controllable costs have risen to the highest level in the report’s 12-year history.

It is important members stay vocal and continue to bang the drum on the unfairness and disparity of the current system and how it undermines growth and investment. Put simply, this issue won’t go away. Last month’s Hospitality Day in Parliament, which saw the launch of our Aim High campaign promoting the sector’s significant contribution, was a great example of members coming together to build momentum on the case for reform. 

This point was made loud and clear on Wednesday during a post-Budget debrief I attended with business leaders led by the prime minister and chancellor. He acknowledged many wanted business rates support to go further and emphasised the next revaluation would look at rebalancing the tax take. He said he didn’t want to penalise online retail or turn the clock back but saw the government’s role as smoothing the transition. 

Returning to specific measures announced in the Budget, the £675m co-funding for a Future High Streets Fund to invest in infrastructure and facilitate the redevelopment of under-used retail is welcome. However, with more than 1,000 towns in the UK this sum is a drop in the ocean compared with what’s required to bring a meaningful revival in a significant number of our struggling town centres.

A freeze in the rate of beer, cider and spirits duty, something we and other industry groups have continually called for, will also help avoid an additional squeeze on the hospitality sector and go a small way to encouraging people to visit our venues and enjoy a drink. Why this wasn’t extended to wine is baffling.

Hikes to the National Living Wage and Minimum Wage will undoubtedly put added pressure on sector margins but, combined with bringing forward planned increases in the income tax thresholds to April 2019, will put more money in the pockets of our workers and customers, boosting consumer confidence and spend. This is important as we approach Brexit day and the accompanying uncertainty.

Another positive measure comes in reducing the cost of apprenticeships for SMEs, which will allow more companies to offer jobs to young people and tackle ongoing recruitment and retention problems. Hospitality already provides one in eight new jobs and incentives to employ more people are welcome.

The chancellor has taken some positive steps to reassure and support hospitality businesses during uncertain political and economic times. As someone who has worked extensively with many ministers and officials over the years, it’s clear the government is working to improve business outreach and repair its credentials as the party of business, as well as reassuring firms over the continued uncertainty surrounding Brexit. 

Hospitality is one of Britain’s most dynamic, innovative and resilient sectors and UKHospitality will continue to fight hard for our businesses to get the support they demand and deserve.
Kate Nicholls is chief executive of UKHospitality  

Too many cooks by Glynn Davis 

Food delivery business Just Eat has been built into a formidable operation that only a few months ago achieved a market valuation of about £6bn. The man credited with creating much of that value was former chief executive David Buttress.

He took on the role of building the Denmark-based company’s UK operation from literally a single-person operation in 2006 into a division that today accounts for more than 60% of total group sales. Such was his success, he moved into the chief executive position of the overall group across Europe in 2013.

Buttress successfully floated the company in 2014 and the major point of difference between Just Eat and Deliveroo and the nascent UberEats at that time was Just Eat didn’t have the margin-sapping issue of having to handle deliveries itself. Just Eat simply acted as a pure market place for linking online food orders with takeaway owners who had their own scooters and riders.

Before he left the business in early 2017, Buttress was adamant the company should avoid the delivery aspect of the market. He, and perhaps Just Eat, was more than content to harvest the juicy – up to 70% to 80% – Ebitda margins it enjoyed while operating a pure market place model.

This approach also ensured the company gained many supporters including City analyst Peel Hunt, which had a long-standing ‘Buy’ rating on the business and rode the rising share price – from a float price of 260p it climbed to about 850p. Even in mid-June, Peel Hunt was a buyer of shares and had a 950p target in place. However, it has abruptly switched to a ‘Sell’ recommendation in recent times and massively reduced the target price to a mere 520p, which compares with the current share price of about 600p.

As with anything to do with the food delivery market, things change fast due to the industry’s hyper-competitive nature. Recent big changes include Deliveroo’s move to operate a market place model alongside its traditional delivery element.

This has encroached firmly on Just Eat’s lawn and led it to move into handling delivery as well, contrary to Buttress’ early thinking. Just Eat has been pushed into this position but the downside is such a move takes big investments in technology as well as ripping into overall margins.

This coming together of the two once-diverged models puts Deliveroo and Just Eat in opposing corners of the boxing ring and leads to the growing belief this is rapidly becoming a “winner-takes-all” market. Uber has also admitted it is running the slide rule over Deliveroo.

If the two did merge, Just Eat would have a tough fight on its hands but even if Uber and Deliveroo remain in separate camps, they have some threatening items in their armoury. These include the deep pockets for investment that have enabled Deliveroo to develop its innovative Editions Kitchens, which are spawning hundreds of virtual restaurant brands. Likewise, the Uber investors have shown themselves willing to invest big bucks to build market positions.

The other big issue is the way data is becoming fundamental to the food delivery market and Just Eat might be unable to leverage this as fully as Deliveroo and UberEats. It has been a differentiating element for Just Eat so far as there has always been potential for it to deploy rich insights to consolidate deliveries from different takeaway providers and suggest ways for these takeaway owners to improve their food offers based on local demand.

However, the majority of those traditional single-outlet takeaway operators are not the most tech-savvy group and, as such, are unlikely to be in a position to fully utilise Just Eat’s data. Meanwhile Deliveroo and UberEats have been building their data sets and, as they also own the delivery aspect, this provides access to richer information from which to glean insights.

It remains to be seen how this competitive market place will play out but it’s fair to say things are rapidly heating up in the food delivery arena, with Just Eat finding there may be too many cooks spoiling the broth it has been carefully simmering for some time.
Glynn Davis is a leading commentator on retail trends

Let’s all raise a pint by Bruce Ray

The great British pub is a cherished national institution and one at the heart of communities across the UK. We know pubs contribute extensive taxes to government, encourage tourism, create jobs and provide spaces for socialising. That’s why, as one of the UK’s biggest brewers, we support the British Beer Alliance’s Long Live The Local campaign.

Our latest Consumer Insights Report found the pub remains the top out-of-home destination for consumers. Diving into the detail, the report delivers insights into consumer habits and the evolving nature of consumer groups including, of course, the infamous “millennial” market.

Something that stood out for us was even though 26 to 35-year-olds say they go to the gym more on a weekly basis, they regard the pub highly when it comes to longer periods of leisure time. Research from the British Beer and Pub Association (BBPA) supports this, revealing almost nine in ten (89%) of UK adults are pub-goers, with one-third visiting once a week or more. Clearly the pub still holds great value for this influential group and continues to be important for socialising.

Despite this demonstrated value, pubs have been under a range of pressures. Britain’s Beer Alliance flags three main taxes pubs face – beer duty, business rates and VAT. Beer duty in Britain is three times the EU average and today, £1 in every £3 spent in pubs goes to the taxman, which of course has a noticeable knock-on effect. Shockingly, as highlighted by the Long Live The Local campaign, this has meant pubs closing at a rate of three per day. According to the BBPA, during a period of beer duty rises between 2008 and 2013, 5,000 pubs closed with 58,000 jobs lost.

For this reason, the chancellor’s latest Budget announcement outlining a freeze in beer duty and a range of other fiscal measures should help our local pubs and be warmly welcomed by brewers, their employees, the thousands of hard-working publicans across the UK and, of course, by all of us who enjoy a beer in its many wonderful varieties. 

It’s essential we all support measures that will help prevent the closure of pubs – it’s an ongoing task but a vital one. Pubs are essential hubs where people can enjoy social interactions and embrace their local community. Our Consumer Insights Report revealed pub space is being used to host wider occasions such as book clubs and even exercise classes. The pub has evolved and adapted to the needs of its community.

Combine this with the wave of energy that has hit the beer market in the past few years and the pub looks like an exciting place to be. Craft beer has generated huge consumer interest with new and exciting craft brewers exploding on the scene with unique brews, the resurgence of cask ale and everything in between. This has led to a staggering number of brews becoming available. Consumers are looking for authenticity and, most importantly, variety. In a market full of choice, we know experience-led occasions are still key to driving discovery across cask and craft, with more than two-thirds (70%) of consumers saying bar staff recommendations encourage them to try a new beer.

With all this in mind, you can argue the importance of campaigns such as Long Live The Local in trying to preserve Britain’s community, culture and national identity but also the importance in protecting spaces to explore the vast world of beer. The announcement from the chancellor this week is a positive step in the right direction but the importance of creating a fair system for business rates and VAT can’t be underestimated. For the time being, we can all raise a pint to the freeze on beer duty. 
Bruce Ray is vice-president of corporate relations and independent free trade at Carlsberg UK

Less is sometimes more by Paul Chase

It has been said the first duty of a chancellor when delivering a Budget is to make sure you don’t make things worse. It appears on that measure at least Philip Hammond has succeeded. For our sector we have seen a freeze on duty levied on beer, cider and spirits, although the duty levied on wine will rise in line with RPI. My guess is the chancellor thought that wouldn’t upset the trade too much as most wine sold in this country is produced abroad, but it is a blow for British wine producers who have seen a bumper harvest this year thanks to the warm weather. 

Meanwhile, bowing to popular prejudice we will see a new duty band on ciders with an ABV of between 6.9% and 7.5% from February. This move is designed to tackle the infamous strong white ciders frequently, though by no means exclusively, drunk by chaotic street drinkers. Given these products have a market share of 0.27% it is hard to see this as anything more than political virtue signalling.

Predictably, health groups are unhappy at the duty freezes. They have been campaigning relentlessly for the return of the alcohol duty escalator and bemoaning the revenue “lost” because of its abolition and previous duty freezes. Professor Sir Ian Gilmore, chairman of the Alcohol Health Alliance, described the duty freeze as a “missed opportunity” to use a duty increase to fund alcohol services. By his reckoning duty freezes have cost the Treasury £4bn in the past five years and will cost it a further £5bn by 2023.

But is this calculation of lost revenue correct? It is based on the assumption that increases in the duty rate will always lead to an increase in the duty take. The same assumption is often made about tax rates in general yet when the higher rate of income tax rate was reduced from 50% to 45%, the tax-take from it rose from 25% of government tax revenue to 28%. 

This is an example of Laffer’s Curve. Art Laffer is the US economist who first observed that if a tax rose beyond a certain point it delivered diminishing returns. The art of setting tax and duty rates from the government’s perspective must be to maximise revenue without damaging incentives to work or invest. Over-burdensome duty rates do both and have the effect of reducing demand for products and reducing the number of jobs the sector can sustain.

So have previous duty freezes and the abolition of the duty escalator led to the loss of revenue Gilmore claims? The fact is, in every year since the hated duty escalator was abolished alcohol duty has delivered more revenue to the Treasury, not less. Between 2013-14 and 2017-18 the revenue from alcohol duty rose from £10bn to £11.5bn – an increase of 15%. Health campaigners make the simple mistake of assuming the volume of alcohol sold would remain unchanged even if prices rose because of increases in duty and that’s where their calculation of lost revenue comes from. This is curious, not least because when they argue for minimum unit pricing they assume the opposite – consumption will reduce significantly in response to raising prices.

In the run-up to the Budget, health campaigners argued the pub trade had failed to benefit from the abolition of the duty escalator. They sought to drive a wedge between publicans and brewers. It is obvious duty increases are not the only factor putting upwards pressure on the cost of running a pub, but they are a major factor. 

Between 2008 and 2013 – the duty escalator years – beer prices to the on-trade rose 21%. Between 2013 and 2018 – in the five years since the duty escalator was scrapped – beer prices rose little more than 11% (source: HMRC). So beer price rises to the on-trade have almost halved since the duty escalator was abolished. This benefits pubs and consumers and will help safeguard 3,000 jobs that would otherwise have been lost (source: BBPA).

The announcement of rate relief for the next two years is also welcome, although not a substitute for the root-and-branch reform of business rates that is required. Given the uncertainty surrounding the outcome of Brexit negotiations, this is probably as much as the chancellor could promise. So if not three cheers for “Spreadsheet Phil”, we can perhaps offer one and a half cheers!
Paul Chase is director of CPL Training and a leading commentator on alcohol and health policy 

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