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Morning Briefing for pub, restaurant and food wervice operators

Fri 18th Mar 2016 - Friday Opinion
Subjects: A city employing 350,000 hospitality staff, fixing the rent review, and more ill-informed meddling 
Authors: James Hacon, Anthony Alder, and Paul Chase

A city employing 350,000 hospitality staff by James Hacon

There are few places that can truly claim to be built on hospitality but the US tourism Mecca of Las Vegas is one of them. This year celebrates the 70th anniversary of the completion of The Flamingo, noted as being the game changer for the city, paving the way to the near-7km strip that now attracts more than 40 million visitors each year. Last week, Propel managing director Paul Charity and I headed westbound to the city for the Nightclub and Bar Show, researching a potential study tour for 2017. As well as attending the show we were lucky to get to see some of the inner workings of a city that employs almost 350,000 hospitality staff and boasts six out of the world’s ten largest hotels.
 
Less than 15% staff turnover
 
In stark contrast to the UK, the hospitality sector is not only seen as a career option, but a great career option, attracting staff from across the USA and overseas. The gargantuan scale of the resort means recruitment and retention of good staff is absolutely paramount to the success of each business and the resort city as a whole. We met waiters and bartenders in their 50s and 60s who had worked in hotels their whole career. Digging below the surface with a few cheeky questions, it became apparent there was a few elements at play here. Firstly the cost of living was generally good compared to other parts of the USA, with house prices being very affordable. The wages are also good too – even in entry level positions employees could expect to be paid $32,000 (£22,500) per annum. We met good section waiters who were grossing more than $100,000 (£70,000) per annum when combining salary and tips. In addition to the salaries, the best employers were offering full medical cover for the wider family of their employees as well as above average holiday, leisure memberships, free staff meals, educational assistance and “thank you” gifts for length of service and positive guest feedback. The result of such great employee engagement is an experienced workforce with average turnover at less than 15%.
 
Collaborative training
 
The Culinary Academy of Las Vegas is the best example of a combined employer/employee led approach to training I’ve ever seen. A partnership of two employee unions and 32 major properties on the strip, the centre has worked with employers to scope and create collaborative job and training profiles for key positions across entry level positions, then provides training to these levels. To be considered for a different job, employees are required to complete training and the respective tests at the academy, provided at no cost to themselves. The extent to which this is delivered is beyond imagination, the academy facilities include top of the range kitchen facilities, aligned to those of their hotel partners and exact replicas of bedrooms from the strip, each decorated to the hotel standards. The aim is to have a member of staff walking into their job not needing additional training. Work ready on day one.
 
Evolving business models
 
Think Vegas and your mind almost certainly wanders to roulette tables and slot machines, with food, beverage and entertainment secondary. Ten years ago this would have fitted the business model, with management we met suggesting a 70:30 split, with gambling being the key revenue generator. Fast-forward to today and this can be flipped, with food, beverage and entertainment being the major driver of visitors and income. This changing business model has resulted in more and more space being dedicated to food and beverage, with some suggesting the two new complexes under constructions very much centering their operations on contemporary dining and nightlife. With gambling revenues expected to continue dwindling it will be interesting to see how this destination continues to evolve as a food and beverage destination. I’d suggest there is a great opportunity for more all-day dining style venues, having found it very difficult to find somewhere to brunch after a slightly late night checking out the nightlife. 
James Hacon is managing director of leading sector PR and marketing agency Elliotts – www.elliottsagency.com

Fixing the rent review process by Anthony Alder

Luke Johnson recently described the current rent regime as a “fix” that acts to ensure rents tend to rise on an ongoing basis, where there is a vested interest in rents going up, and where too many inexperienced operators are agreeing high rents, which penalises the more cautious operators at rent review.

Unlike many other property classes (ie industrial or retail) the leisure industry is fast becoming unique in retaining the traditional 20-year lease. Unlike retailers who tend to opt for five-year leases, leisure operators require longer lease terms to secure an adequate return on investment. Rent reviews remain a very pertinent fixture with leisure operators.
 
Here I’ve identified ten problems, and hopefully some solutions, which may assist the tenant at rent review.
 
Financial firepower

Larger landlords have the financial firepower to deploy the best agents. Consider British Land, with over £8bn of property investments and a profit before tax of £313m per annum. Compare this with your small high street retailer. Access to professional advice for the average tenant is dictated by the fees it can afford to spend. Accordingly, too many tenants try to conduct the rent review themselves or go for the cheapest option. Access to a fair hearing for the tenant can be denied. The rent review process does not encourage arbitrators to consider the financial resources of the parties – each case is considered on its technical merits. For example, if a rent review goes to arbitration, this can act against a weak opponent. We must not forget the object of the arbitration is the fair resolution of a dispute by an impartial tribunal, without unnecessary delay or dispute. The arbitration body, for example, needs to reflect on the word “fair”. For most tenant operators, the decision to proceed to arbitration, with all the attendant costs, is rarely taken without a great deal of soul searching. 
 
Covenant strength

Any agent will know in a letting process the covenant strength of the tenant counts for a lot. I have acted for a landlord in a letting in Guildford where the landlord chose a rent of £60,000 per annum from Tesco, compared with a rent of almost £100,000 from a nightclub operator. The rent review process needs to reflect a “willing landlord, willing tenant” scenario, in which many landlords would prefer the financial covenant strength of a plc tenant rather than an unknown quantity. Big plc tenants cannot simply crash their company if hit by a huge rent increase. Smaller companies can. This is not fair and evidence needs to be graded dependent upon tenant covenant strength. Many leases will state we are to assume a willing landlord and a willing tenant. Some leases will state we can assume the actual tenant as a willing tenant. The benefit to the landlord of accepting a rental bid from a blue chip FTSE 250 company cannot be underestimated. Larger tenants need to address this in the lease negotiating process and tighten up their rent review assumptions. 
 
Tenants need to speak more

Access to comparable transactional evidence is key to agreeing the best rent. Too often, a tenant in a comparable property will not disclose a rent to a competitor because it is “commercially sensitive”. Get real. Do you think British Land and Land Securities don’t compare notes? If tenants adopt this mind-set, they will be the losers.
 
Fees

Sadly, many agents will not work for smaller tenants because they have a history of not paying. Tenants need to address this and we need to agree a better system of remuneration. To compound the issue, the Royal Institution of Chartered Surveyors (RICS) frowns on rent review surveyors acting at arbitration for its clients on an incentivised fee basis. In my opinion, this mitigates against smaller tenants who dislike the rent review process. In many cases, a tenant can only be encouraged to use a rent review specialist if it can see an incentive to agree the lowest result, while a landlord needs no incentive to fight a rent review. The RICS needs to reflect on this.
 
Landlord control

Landlords tend to control the market, especially in shopping centres. I have seen cases where a landlord, aware that it has a tranche of rent reviews coming up in a leisure scheme, will engineer a letting at an inflated rent to a tenant who never even goes on site. The landlord will use the inflated rent as the main plank in its argument to increase the rents in the scheme. Mysteriously, once the rent reviews are agreed, the new tenant disappears. Such behaviour needs to be investigated even after the rent review process is over. Tenants need comeback on this.
 
Bad behaviour

The RICS is a regulatory body. It is there to enforce good standards. Rent review surveyors before an arbitrator at rent review are required to present their true and honest opinion of rental value to an arbitrator. Sometimes landlords and tenants will adopt implausible positions and an arbitrator may be swayed by the landlord’s exuberance in an upward rent review and the pendulum may swing too far in the landlord’s favour. This needs to stop. Bad behaviour needs to be reported. 
 
Lease agreements

Rent reviews are determined by what the lease says. In too many cases, especially in a buoyant market, tenants will, in a new letting, agree rent review clauses that will prejudice against them in five years’ time. It’s daft to agree wide open assumed user clauses, onerous service charge liabilities and terms that do not reflect reality. Tenants need to exercise greater control in the letting process. They need to ensure all improvements are documented. Professional advice through the letting process is key. The acquisition process needs to be more forward thinking.
 
One swallow doesn’t make a summer

There is a school of thought among some rent review specialists that, provided with a body of evidence, they will pluck the highest rent, regardless of whether that has been offered by an inexperienced “new” operator, an overseas person who might be laundering his cash, or a plc operator. The tenant pays the top rent. The thinking is that, if the tenant then cannot pay, he can strike a private deal with the landlord. This rarely happens. The concept of a “reasonably competent hypothetical operator” and affordability needs to come into the rent review equation more than it does at present (this, incidentally, is how public house rents are assessed, with some success). The rent review process needs to be better equipped to sort the wheat from the chaff. One swallow doesn’t always make a summer.
 
Upward only

In my view this is the crux of the problem. In 2007, many institutional landlords, under pressure from the government, agreed a Code of Leasing Practice whereby they agreed to consider upwards and downwards rent review clauses in their leases. This has quietly fallen by the wayside. Too many tenants have historically been hit by huge rental uplifts and have then had to carry this burden for the duration of their remaining lease term. The government should follow the example elsewhere and legislate for upward and downward rent review clauses, albeit with the proviso rents cannot fall below the level of initial rent stipulated in the lease. To their credit the major pub landlords (Punch, Enterprise and so on) have agreed to this. 
 
Rent review surveyors only reflect the market

At the end of the day, I’m afraid there really is only one thing to blame for all this – supply and demand. Rent review surveyors only reflect the market. And landlords only want a return on their money. If operators will continue to bid high rents in the good times, I fear they will feel the pain in the hard times. Act in haste and repent at leisure.
Anthony Alder is a partner at leading London property agent AG&G, which represents Greene King, Mitchells & Butlers, Nando’s, Draft House, Glendola Leisure, and Prezzo (among others) on rent reviews. He also represents landlords at rent review including Land Securities, AXA Investment Managers and Aviva Investors. He is also an arbitrator

More ill-informed meddling by Paul Chase

You may not have heard of the Road Traffic Act 1988 (Alcohol Limits) (Amendment Bill), but it was a private members bill introduced in the House of Lords by Lord Brooke of Alverthorpe, a Labour peer. The effect of this amendment, had it been introduced, would have been to lower the drink-drive limit from 80 milligrams of alcohol in 100 millilitres of blood to 50 milligrams – which is already the drink-drive limit in Scotland. In Scotland this change has had a devastating effect on pubs, and particularly pubs in rural areas. The Scottish Licensed Trade Association (SLTA) has stated the introduction of this measure has been “catastrophic” for pubs, with people who might have stopped-off for a pint on the way home from work now deciding not to do so.
 
In a debate in the House of Lords on 11 March, a number of comments were made that are worthy of note. Lord Rae, also a Labour peer, had this to say: “The Scottish licensed catering association (sic) has said that the introduction of that measure has been ‘catastrophic’ for the industry. In other words, drinking as a whole has gone down – no one has mentioned that effect of the measure – quite apart from any effect on accidents on the roads. When the prohibition on smoking in public places came in, it reduced the prevalence of heart disease. Heart attacks, for instance, came down measurably as a result of that step. Therefore, small measures such as the one we are discussing will gradually reduce the consumption of alcohol, which, when used excessively, is very harmful, as we all know.”
 
Now, what is wrong with this statement? Well, just about everything. Firstly, the fact that consumption in pubs has fallen as a result of the change to the drink-drive limit does not prove alcohol consumption as a whole has fallen. What we know is that there is a long-term trend away from drinking in pubs and bars and towards drinking at home, where the measures people pour for themselves are generally much larger than those served in a pub. Lowering the drink-drive limit can only serve to accelerate that trend. Secondly, a measure that is designed to reduce population levels of alcohol consumption shouldn’t be smuggled in as a measure to reduce drink-driving. Thirdly, there is no evidence the reduction in the limit in Scotland has reduced drink-drive deaths or injuries. Certainly, as the government peer Lord Ahmad of Wimbledon pointed out: “It is also important to note that the penalties for drink-driving in England and Wales are more severe than in other countries, and despite the majority of these other countries having lower alcohol limits, they do not have a better record on reducing drink-drive casualties. The government therefore maintain our position that lowering the limit in itself is not going to change people’s behaviour and would not be the best use of resources to improve safety on our roads at this time.”
 
Well said sir! But Lord Rae then goes on to cite the smoking ban as having directly led to a reduction in the prevalence of heart disease and a measurable reduction in heart attacks; his point being that small changes can have big effects which are a kind of bonus to the effects originally intended. Only one problem, the smoking ban has had absolutely no effect on the prevalence of heart disease or the incidence of heart attacks.
 
Running up the white flag of surrender, the last word in this debate went to Lord Brooke, the author of the amendment: “I hope that the many individuals, organisations and members of the public who have supported me – I express my public gratitude to them – and who are in favour of this measure will continue to put pressure on the government to bring about a change which will be in the best interests of all concerned, other than, perhaps, the drinks and hospitality industry.”
 
Well perish the thought we should even consider the interests of the drinks and hospitality industry – after all they just create wealth and jobs and generate taxes so these ill-informed, unelected and unaccountable jobsworths can meddle in things they don’t understand. But then again, it was the Lords that rejected nationalisation of pubs in 1908. Well at least they got one thing right in the last hundred years!
Paul Chase is a director of CPL Training and a leading commentator on on-trade health and alcohol policy

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