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Morning Briefing Strap Line
Fri 26th Mar 2021 - Friday Opinion
Subjects: Using VAT to level the new playing field, flexibility of freelancers, a year in property deals, why we are drinking less – but better – wine
Authors: Matt Fountain, Ann Elliott, Stephen Owens, Michael Saunders

Using VAT to level the new playing field by Matt Fountain

Now is the perfect time for a radical rethink of our countries’ taxation mechanisms, to negate the combined threat of e-commerce, technology and the pandemic to the future of UK high streets and retail parks.
This government was elected on a mandate that included not raising VAT but that does not prohibit them from overhauling an archaic system that was designed 50 years ago? We are now running businesses in an entirely different world.
Amazon, whose sales last year in the UK alone eclipsed £13.5bn, claims to run a “low-margin business”, yet in the same press release it states to have invested “more than £23bn” in the UK since 2010. By comparison, physical retail is in free fall, in the past few months alone, we have seen huge legacy brands failing and then being purchased and taken exclusively online.
New business rules demand new ways of looking at taxation. The government will not drive tax revenue from bigger businesses via corporation tax increases, but it will punish smaller businesses that have set their business up in a traditional manner. Larger corporations will sidestep via complex company structures.
In the UK coffee sector alone, since 2010, without fail, our business has paid more corporation tax than Caffe Nero. My understanding is it doesn’t pay any. Caffe Nero also effectively owns or has majority stakes in both Harris + Hoole and Coffee#1. I would be fascinated to understand its corporation tax arrangements since those acquisitions took place. Historically, Starbucks has also obviously been frequently challenged on its corporation tax contribution in the UK.
With unprecedented national debt levels, racked up at record rates, it is time for a different approach, one that addresses the playing field we are now all on. Focus on the tax that could balance the scales of traditional retail versus e-commerce, namely value added tax (VAT).
Why can we not see a variable VAT rate, driven by how and where the product is sold? The VAT treatment is lower and rewards businesses that are selling goods from physical locations on the high street or in retail parks and burdened with all the associated fixed costs.
Then obviously a higher rate treatment for those companies that sell products online, the caveat being if those companies set up physical bricks and mortar sites in town centre or retail park locations. Goods sold from those locations would receive the lower VAT treatment.
I think the disparity within this variable mechanism should be equally radical in order to create the shift back to physical retail that is needed. It could be as much as 30% VAT for on an online sale and only 5% on a physical sale.
Ignoring the complexity of which goods are VAT-rated and which are zero-rated (this also needs totally overhauling and simplifying), based on Amazon’s 2020 sales alone of £13.73bn, a shift in the VAT treatment could net the treasury an additional £1.3bn annually in VAT revenue alone, versus the £293m Amazon paid in corporation tax last year.
Staying on the subject of Amazon and looking to the future and the next phase of retail development in the UK, the Amazon Fresh stores are surely just the beginning of a new retail experience – in fact an “experiential” shift in how we shop. Amazon Fresh negates the need to “pay”, perhaps future retail clothing experience is a store with no physical stock.
A variable VAT rate could fast-track online retailers into physical site models. With smaller footprints and leveraging their vast storage and distribution networks, they could redefine how we shop for products such as clothing, drawing the consumer back to the high street and creating the much-needed additional footfall.
The UK could be at the forefront of this shift as our high street shopping experience is reimagined. It would be great to reverse the trend of brands being taken online and instead seeing them return and thriving in physical sites with preferential VAT treatment, even becoming the online retailers preferred point of sale, because the transaction is more profitable for them.
If retail is allowed to follow its current path of continued decline, inevitably, it is intrinsically linked to the success (or otherwise) of many hospitality businesses in the UK.
An opportunity exists to reverse that trend but a traditional approach will only garner the same results – it will drive more retail businesses into administration from where those seen as legacy brands will be bought on the cheap and placed exclusively online. The ramifications for our sector and all the associated supply chain and manufacturing businesses are very clear if that continues to happen.
Matt Fountain is managing director of Northampton-based cafe operator Bewiched Coffee

Flexibility of freelancers by Ann Elliott

I have spoken to about 40 freelancers in the sector over the past two weeks and their stories have really inspired and motivated me. About a third of these were freelancers before the pandemic, a third had lost their jobs due to restructuring and want to try freelancing to see if it works (but probably see themselves being an employee again) and a third have used the pandemic as a real opportunity to change their lives and now do what they really want to do. They are going to give it a go.
The past 12 months have been incredibly difficult for many suppliers in the sector and for freelancers, in particular. If freelancers don’t pay commercial rents, they can’t access grants (as I have been told by my accountant). If they pay themselves from dividends, they can’t take furlough and if they don’t pay VAT then the cut in rate is irrelevant. It’s been a desperate time with no one to really represent them or argue their case.
While the most recent Budget has the potential to transform the cash position and the balance sheets of many operators over the next nine to 12 months, it has not had that level of direct impact on many suppliers and most freelancers. They are dependent on the success of operators to survive, less so on the generosity of the government.
The impact of the pandemic on suppliers has been mentioned in some of the government lobbying and sector PR but it has been a postscript, not the main event. The focus of this lobbying on behalf of operators, in the main, has been without doubt, the right strategic decision. A thriving marketplace means thriving suppliers across a whole spectrum of providers from designers to data experts.
Despite, however, the dire position of hospitality over the past 12 months and the limited amount of support available, I have found incredible resilience and innovation among freelancers – just as I have with operators.
They have had to dig deep. They haven’t had a corporate structure to help them maintain their mental well-being. No company yoga classes, quizzes, helplines, gifts, gym sessions, book clubs or helpful messages from the managing director. They haven’t had a network of colleagues to talk to about their issues or opportunities. Many saw their income go to zero about a year ago. It’s not always easy to see the positives of life when you have no income. No salary. Nothing. And you have to home-school at the same time.
Yet no one I have spoken to has complained or moaned at all about the situation they found themselves in. They dug in and found work wherever they could, gave their time for free to struggling businesses, gained qualifications or did voluntary work. For most, going freelance is the choice they have positively made. They don’t have the advantages of corporate life, which may have been very useful over the past 12 months, but they do have freedom. And they treasure that freedom beyond the benefits of being employed.
I have been genuinely stunned by the level of skill and experience I have seen in the hospitality freelance community. Every single person I have spoken to has something to give and contribute. As employers now consider how they can help their teams work in ways that suit their lifestyles – working part time, working from home, job sharing – freelancers fit this mix very easily. There is an amazing resource out there waiting and wanting to be used.
They love hospitality and this crisis has not dampened their enthusiasm for this sector. They have pivoted, retrained, worked whenever and however they could and kept going. I have been so impressed.
Ann Elliott is a hospitality strategist, connector and adviser

A year in property deals by Stephen Owens

It has been a year since Boris Johnson made his declaration that all hospitality businesses had to close as covid-19 started to take hold across the UK, and what a year it has been. Most bars, restaurants and hotels have now been closed for more days than they were open in 2020, we have seen an array of imaginative approaches from operators to generate income through other means, and “you’re on mute” has become a catchphrase. Yet through it all, we at Christie & Co have sought to support our clients by giving timely advice on where the hospitality property market has been heading.
Many within the sector, including us, thought back in April 2020 the market would grind to a halt with transactions on hold until reopening was possible. At the time, no one envisaged the length of the first lockdown because it was a completely new experience for all of us. However, many buyers we encountered remained optimistic and keen to get in, ready to operate in early summer. 
This level of optimism continued throughout the warmer months, buoyed by the chancellor’s Eat Out To Help Out scheme and individual pub and hotel deals continued, reflecting only a modest drop in freehold values. There has been renewed demand for community-based operations, with venues located in town and city centres, particularly restaurants, faring worse than those in rural and coastal destinations, mainly due to the shift towards localisation, driven largely by the work-from-home directive, and the high proportion of leased businesses.
Despite some further uncertainty thrown in by the tiered lockdown system and second lockdown, for us, 2020 ended with the sale of more than 170 hospitality businesses of all shapes and sizes. We also valued and advised on over 800 businesses with an aggregate value of £2.6bn. Transactions were predominately individual asset sales because the one missing element was the lack of sizable group and package activity, which was quite the contrary to previous years in which we saw some of the busiest years of M&A activity in a decade. In comparison, during 2019, the pub market alone saw £8bn worth of deals carried out, with Christie & Co involved in 50% of these deals on an agency, advisory or valuation basis. 
Fast forward to this year, however, and momentum is beginning to heat up with the bubbling optimism and long-term view towards opportunities among existing multi-site operators translating to a strong start to the year, despite hospitality businesses remaining all but closed. The recent roadmap and Budget announcements have injected a renewed sense of confidence within the market and many investors remain forward-looking and eager to acquire good-quality assets ahead of the summer when trading will return. 
During the first quarter of 2021, the team at Christie & Co has handled 90% of the portfolio activity seen to date, which has contributed to the team’s 100-plus exchanges on hospitality properties overall so far. The year began with a significant investment deal, in which a majority stake in Red Mist Leisure, the Surrey-based group of ten managed pubs operated by Mark Robson and Mark Williams, was sold to Jason Myers-led Red Lion Holdings. Shortly after this, we negotiated the disposal of ten freehold tenanted pubs in Bedfordshire and surrounds, on behalf of Wells & Co to national pub company, Red Oak Taverns, as co-founder and chief executive Mark Grunnell continues to build his collection of tenanted pubs. The group’s portfolio now comprises almost 200 sites, with plans for further investment under way.
During February, we were also pleased to announce key activity within the takeaway and delivery space, an area of the sector that exploded in 2020 due to increased demand from consumers during lockdown. We secured a new franchisee partner for 27 Pizza Hut Delivery sites around the Midlands in Starboard Hotels. Acting on behalf of Yum! Brands, we were able to come to market on the back of a rapid increase in sales. With 21 hotels around the UK, Starboard sees this as a useful diversification and is ready to invest in further sites.
The most recent deal has been the sale of Seafood Pub Company, where the ever-ambitious Oakman Inns has acquired six of the former sites out of administration. These well-appointed pub-restaurants attracted a good level of interest when brought to market in October 2020. 

Of course, we are realistic that the sector still faces many challenges. More than £3bn of government-supported debt has been taken out by the sector to get to this point and with deferred rent building up for some, the next few months are critical. Yet the increased portfolio activity we have seen to date suggests the market remains active and opportunities exist for investors.
At least for now, we can hope the roadmap does not deviate, the successful vaccine rollout continues and buyers continue to look forward, not backwards. Plus, of course, that the sun shines on our staycations.
Stephen Owens is managing director of pubs and restaurants at Christie & Co 
Christie & Co is a Propel BeatTheVirus campaign member

Why we are drinking less – but better – wine by Michael Saunders

Over the past few years, we have seen a significant change in consumers’ attitudes towards alcohol with people often drinking less, but better. Yes, I know what you may be thinking… I’ve heard this before. 
But this trend shows no signs of slowing down and, despite what headlines might suggest, the pandemic has accelerated this, given pent-up demand and with people not able to treat themselves in the usual way. They are more likely to spend more on a bottle of wine than ever before. And when hospitality was open, this is a trend we saw play out, with outlets reporting higher-than-average wine spends and a rise in all age groups of consumers going out to eat. One regional pub group saw its average bottle price increase by £2.50. This, coupled with the fact people are looking to make better decisions both for their health and the planet, means there is a fantastic opportunity to give consumers more compelling options, be that exciting and artisanal wines, or wines that are made sustainably. Some 48% of consumers say they are open to trying something new. 
The shift towards “local”, favouring local restaurants or local products, is also playing a huge part in how consumers make purchasing decisions with 67% of UK consumers actively trying to buy local where they can. For wine, this means a surge in interest for English wines, both still and sparkling. The English wine category continues to go from strength to strength. English sparkling is now worth £14.7m in the on-trade (at the beginning of 2020, pre-pandemic), up from £5.6m in 2018. From traditional English sparkling wines to increasing numbers of Charmat method sparkling to Bacchus, Chardonnay and Pinot Noirs (with some orange wines along the way), there is something for everyone. 
And we can’t talk about the trend towards more premium wines without mentioning rosé. Rosé has continued to increase in popularity, growing 25% in value in the off-trade in 2020, with lighter “Provencal” styles all the rage with younger consumers. It has been startling to see how they are willing to pay more for these rosés that symbolise exclusivity, especially when the English weather decides to behave. 
But what does this mean for operators? It’s all well and good highlighting trends but after months of lockdown, we need to adapt to meet consumers’ rapidly changing expectations and give them the best customer experience. In my view, having a diverse and exciting list by the glass is the best way to capitalise, with consumers looking to spend a little bit more while drinking a little less and while often also wanting to try something different and experiment. Having more expensive wines by the glass means these wines become more accessible, giving consumers access to wines that they wouldn’t usually be able to afford by the bottle. Fine wine is not just something you see in Michelin-starred restaurants –there has never been a better time to allow consumers to try these wines. When we think about wine, it’s not all Bordeaux and Burgundy. New World fine wines are a great addition to any list that, crucially, also gives customers incredible value for money. Preservation systems like Coravin and Enomatics make listing more expensive wines by the glass so much easier and they ensure the perfect quality serve every time – with some theatre too, if served well. 
As we head towards reopening, premium outlets can make the most out of outdoor dining, capitalising on the trend towards premium rosé, perhaps by serving magnums by the glass at the table, giving consumers that ultimate customer experience and theatre of serve.
For wet-led venues that need to keep social distancing measures in place for the foreseeable future, make the most of table service to encourage higher spends by using staff recommendations to drive experimentation, particularly in the wine category. Wine can be daunting for some, and staff recommendations particularly, can go a long way in helping consumers navigate the category and persuading them to trade up to something more exciting and, ultimately, more profitable, with 48% of key wine consumers more likely to trade up to a more expensive drink if it was recommended to them. 
Michael Saunders is chief executive of Bibendum Wine
Bibendum Wine is a Propel BeatTheVirus campaign member

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