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Morning Briefing for pub, restaurant and food wervice operators

Fri 25th Feb 2022 - Friday Opinion
Subjects: The bumpy road ahead, reward schemes can help fight inflation fears, the painful ratchet of RPI rent increases
Authors: Paul Chase, Glynn Davis, Nick Griffin

The bumpy road ahead by Paul Chase

So, I woke up on Thursday (24 February) to the news that Russia has invaded Ukraine. I was going to draft an article about how hospitality could now move forward as covid restrictions are lifted in England, and soon in Scotland and Wales too. But suddenly it seemed petty and superfluous in the face of this geo-political challenge to the security, not just of Ukraine, but perhaps Europe more widely. But then I reflect that most of us are inevitably preoccupied with the problems that affect us directly, and particularly those we can do something about.

It is, however, incontestable that in this interconnected world, we can no longer afford to shrug our shoulders and think an invasion is something happening in a faraway place of which we know little. The disaster this represents will obviously affect the people of Ukraine most directly, but it is the last thing the rest of the world needs as we struggle to re-establish economic growth and a return to normality in the wake of covid. The most obvious effects this will have on us, and on hospitality, will be in terms of rising prices and interest rates. Russia is a big exporter of gas, and this invasion and sanctions that western nations impose will affect us too – expect even further increases in the price of energy. This, in my view, will make it even more difficult for the government to maintain the green levy on energy bills in its vain attempt to achieve net zero carbon emissions. Domestic pressure to reduce energy prices will be too powerful for government to resist.

Rising energy and fuel costs inevitably reduce disposable income available for discretionary spend. This will impact on footfall and spending in the various sectors that make up the hospitality industry. Ukraine is a big exporter of wheat, so the invasion will put further pressure on food prices. Given the excess monetary demand sloshing around in the economy at the moment, which neither the government nor Bank of

England has done much to address, these sectoral price rises will feed through to the inflation rate – which is a measure of the movement in average prices. 

The financial markets will also react, and we can expect to see a rise in interest rates – which perhaps was going to happen anyway – as central banks struggle to unwind the vast money-printing that has financed covid restrictions. If there is any upside to this, it is that the government will hopefully give short shrift to attempts by neo-temperance organisations like the Institute for Alcohol Studies, the Alcohol Health Alliance and Balance Northeast to re-establish their anti-alcohol policy narratives in the wake of covid. There will, I hope, be a recognition in government that we simply can’t afford to indulge public health zealotry given all the problems our industry faces.

In the face of economic necessity, over-hyped ideological positions may need to be vacated by those in power. We have seen the hyper-precautionary approach of whole-population measures to deal with covid vacated by government in England in the face of the huge costs of maintaining them – £400bn extra national debt, and a testing system that is costing £2bn a month to maintain, are simply unsustainable. So, suddenly, the government has pivoted from championing whole-population, big government measures to counter covid and have rediscovered personal responsibility and just staying at home if you feel ill. Even the more authoritarian approach of the devolved administrations in Scotland and Wales is crumbling now that the limits of English taxpayer support has been reached.

I wonder whether rising energy costs because of the Russian invasion will speed up the demise of the man-made climate change narrative, and whether the flight from fossil fuels will also unravel in the face of the huge costs of transformation and a taxpayer rebellion.

Today, the world became an even more uncertain place as war erupts in Europe. For hospitality, this change in the economic and political weather can only cause greater caution in terms of investment in new premises and the development of existing ones. We can only hope that government counters this uncertainty by reducing the size of the state, cutting taxes for our sector and thereby encouraging us to be the engine of recovery we know we can be. The road ahead is getting even more bumpy in ways in which our government on its own cannot control. We need it to look closely at what it can control and to remove the obstacles to growth and investment in terms of taxation and over-regulation and set us free.
Paul Chase is director of Chase Consultancy and a leading industry commentator on alcohol and health

Reward schemes can help fight inflation fears by Glynn Davis

When Dollar Tree in the US has to increase its prices to more than a dollar for the first time in its 34-year history and Ikea announces it is to increase its prices by an average of 9% across all its stores in 2022, then you know inflation is running amok.

Just to ram home the point, Dolf van den Brink, chief executive of Heineken, recently stated inflation was “off the charts” and in his 24 years in the business, he’d “never seen anything like it, not even close”. Heineken has duly pushed up prices, with an increase of 8.8% in the company’s price mix metric over the six months to the end of December. This measure rather opaquely also includes the effect of consumers choosing more expensive drinks. Meanwhile, more reliably, the Office for National Statistics found input prices for UK alcohol makers rose at an annual rate of 7% in January, the fastest pace in a decade.

With costs running out of control across the board, consumers are sensibly cutting back on their household spending in order to pay their utilities (if their supplier has not gone bust). Fewer than 10% of people surveyed by KPMG expect to increase their spending, and among the remaining 90%, eating out is the primary target for their cutbacks.

It’s not just homeowners and utility bill payers in the firing line, because the young also have a target on their backs. The Intergenerational Foundation found the disposable incomes of the typical 27-year-old graduate is expected to fall by nearly 30% over the next four years as the cost-of-living crisis unfolds.

This clearly puts hospitality operators in rather a quandary. One route is to preserve some margin by pushing up prices, but this risks deterring customers from visiting. Alternatively, they can hold their nerve by maintaining prices and appearing more competitive against rivals who might have bumped up their pricing. The latter option, it is hoped, will drive frequency.

This is rapidly becoming the new most important metric in hospitality. For Simon Emeny, chief executive of Fuller’s, the firm’s strategy is to give customers as few obstacles as possible to them visiting the company’s pubs, so price increases are being resisted. He also states there is no way he is cutting back on the opening hours of his boozers.

Glenn Edwards, managing director of Leon Restaurants, is also focused on frequency as an inflation-busting metric, saying: “We’re focusing on transaction frequency and not value. We want to avoid price increases…we’re working on a value proposition for growth.” The tool he is using is the newly launched Leon Club app, which motivates users to visit the restaurants more often by promoting them onto multiple tiers of rewards.

Many other operators across hospitality and retail have launched loyalty programmes to boost frequency rates – with both McDonald’s and Asda recently introducing them for the first time in their histories. Others with existing schemes have been enhancing the proposition.

Emeny also reveals he is open to potentially introducing that other great driver of frequency – a subscription scheme – but only when Fuller’s major digital transformation project is more advanced. Others have already pressed the button, with Pret A Manger the most notable player, having achieved incredible success. US operators including Subway, Taco Bell, Sweetgreen and Chipotle have all gone down the subscription route, so it seems obvious more of these propositions will emerge in the UK as frequency becomes increasingly critical.

This metric (as well the glorious recurring revenues of annual membership fees) is at the heart of private clubs. It is maybe no surprise that amid covid-19 and inflation, there has been an explosion in membership-based clubs opening over recent months. They include Club 64, Martinez, Pavilion, The Fitzdares Club and Nikita. Meanwhile, the clubbing behemoth Soho House just keeps on adding venues to its roster, with the newest member of its portfolio being Brixton Studio.

Against the backdrop of an easing out of covid-19 and an inflationary tinder box, it would certainly be sensible for every hospitality business to focus increased attention on the mechanics that bump up frequency rates. Those that don’t will likely find breakfast, lunch and dinner being eaten by their customers at rivals’ venues.
Glynn Davis is a leading commentator on retail trends

The painful ratchet of RPI rent increases by Nick Griffin

For several years, I have been campaigning for the end of use of the Retail Price Index (RPI) as an index for rent increases. It’s been discredited for many years. Introduced in 1947, it was dropped as a national statistic in 2013, with the government ten years previously adopting the Consumer Price Index (CPI) as the official inflation figure. The methodology of calculating RPI had for many years been criticised. The Office for National Statistics (ONS) has continued to report RPI mainly because of it being listed in historic contracts and pension schemes. Even the ONS website warns that it is “not a national statistic”. 

So why has RPI been widely discredited? It’s not a difficult question to answer, it’s simply because it overstates inflation. The government worked this out long ago. When Sajid Javid was chancellor of the exchequer he was urged by the UK Statistics Authority to reform the index. He refused, but in a move that now seems the norm when can-kicking is required, he said he would consult on whether to introduce reform after 2025. A consultation took place, and the current chancellor, Rishi Sunak, further put his boot to the can, kicking it all the way to 2030, when the index will be brought in line with the Consumer Price Index. 

When it comes to the hospitality industry, we all know it has been severely affected by the pandemic. But even prior to that, there were serious issues for the pub sector in particular, as a cursory look at the on-trade beer sales reported in the British Beer & Pub Association Beer Barometer will show. The use of an inflationary index on rents is a disaster for tenants. Time for a bit of maths. If we take a base rate rent of £45,000 in 2021 and look at the difference between CPI and RPI, with sensible estimates of index rates for the coming years, we can see that in year five, the rent will be £4,500 higher a year under RPI increase, and a tenant will have paid a whopping £11,000 more in rent over the period. Because this is an exponential rise if nothing changes for the following five years, the rent would be over £13,000 per annum higher, and over the course of the ten years, a tenant will pay a staggering £58,500 more than if subjected to the official CPI indexation rate. It’s not small beer.

A few years ago, I wrote to the major landlord companies asking them to drop RPI, and we have seen many move to CPI or drop indexation completely. Some, but not all. With the ONS listing CPI at 5.5% and RPI at 7.8%, we can see the problems ahead for those whose rent is hitched to the latter. With rising costs, a lack of elasticity in the price the tenant can charge at the till and nervous consumers still feeling the pinch, the need is urgent. I urge landlords to be proactive and drop the use of RPI immediately on both new and historic agreements. Where it’s not removed, I urge all tenants to factor it in when faced with rent reviews and talk to independent advisors.

Some of the worst offenders are those that align the use of the RPI to upwards-only rent reviews clauses in their contracts. In effect, this guarantees the landlord an exponential above-inflation rent increase every single year, with no chance of the tenant ever re-setting the rent back to an open market level. Great work if you can get it – but it skews the market, creates unrealistic comparable evidence and inflates the rent market. I’ve heard the rationale that it allows the landlord to securitise their borrowings allowing for investment, but it doesn’t wash. Indexation is there for a reason, it is applied to make the landlord’s rent rise with inflation. It is not there to artificially inflate the landlord’s income year after year.

It’s why RPI was discredited, it’s why all tenants need to be aware of the consequences of it and why landlords need to step into the tenants’ shoes and consider what the consequences of the use of RPI are. It’s why landlords should use an index that does what it says on the tin. If I have a message for landlords, it’s not a great little wheeze that the government has left available to use – it’s hurting the very people you are supposed to be business partners of. The days of annual above-inflation rises to your income have to end. Come on landlords, do the right thing. It’s not about penalising you, it’s about treating your tenants fairly.
Nick Griffin is chief executive of The Licensees Association

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