HOSPITALITY AND LEISURE SECTOR SURVEY 2012Market and employment trends

2WELCOMEWelcome to the first edition of what we hope will become an annual survey of market and employment trends within the hospitality and leisure sector in the UK.

We surveyed businesses in the sector, ranging from hotels, bars and restaurants to key players in the travel and tourism sectors.

We would like to thank the respondents for their time and effort in completing our survey. We hope the results provide an interesting update on the current market.

CONTENTSIntroduction 01

Key findings 02

Section one: Market trends 03

Section two: Employment issues 06

Methodology 09

About Mazars 10

1INTRODUCTIONVisitBritain has launched a growth strategy consultation for inbound tourism to Britain with a goal to reach an ambitious 40 million visitors by 2020. The strategy shows how aligning marketing and Government policy can deliver an economic legacy, building on Britains successful hosting of the Olympic and Paralympic Games during the summer of 2012.

Chairman of VisitBritain, Christopher Rodrigues said: This summer has shown what the country can do when we are united in a common cause. This country showed passion, professionalism, drive and energy to stage the best ever Olympic and Paralympic Games. The test now is whether we can maintain this to create wealth and jobs through a major tourism drive. According to official figures from the Office for National Statistics, London had 590,000 foreign visitors for the Olympics or Paralympics.

The hospitality and leisure sector has a key role in this growth strategy: not only the shape of the sector offering but also the flexibility to move with changing consumer demands and expectations. The sector employs a significant proportion of the UK population. According to Nick Varney, Chief Executive at Merlin Entertainment, tourism and hospitality is the UKs fourth largest industry, employing more than 4 million people and being the primary employer of 16-24 year olds.

The headlines show that:

Oftheseemployees,themajorityworkinfoodandbeverages establishments, followed by the leisure and hotel sector

Thesizeoftheoverallsectorhascontinuedto grow over the last decade

Outputofthesectorhasovertakenoutputof the economy overall, as well as seeing rises in recent years

Jobgrowthinthesectorhasoutstrippedthatof the overall economy

This is very important data when looking at the UK market as a whole. The purpose of this survey was to talk and discuss issues with key businesses and people in the sector to get an understanding of the challenges that lie ahead over the next 12 months and beyond.

In particular the questions were divided into two key areas:

Markettrends

Employmentissues

We anticipate undertaking similar surveys on an annual basis so that we can monitor the changes and to enable us to determine the key impacts on the sector over the coming years. It promises to be a very exciting time for the industry with growth in tourism and leisure activities clearly on the Governments agenda.

We appreciate the thought and effort that respondents have put into completing this survey, and would like to thank them for their time.

Lee Brook Gareth Jones

Partner Partner

2KEY FINDINGSWhat are the top factors that could impact on the performance of your business over the next year?

Keyfactorsraisedarelevelsofrepeatcustom(15%), the economy (14%) and brand awareness (11%)

Does the industry as a whole comply with the requirements of the Working Time Directive?

Only43%ofrespondentsbelievethatthiswas being adhered to appropriately

What do think will change the shape of the market in the next three years?

Keyfactorsstatedarepricingcompetition(21%),new entrants (18%), new legislation (14%) and the economy (11%)

Over the last 12 months, in what way have staff absences changed?

71%ofrespondentsfeelthatithasnotchangedover the last 12 months

What do you perceive to be the key risks and challenges associated with the industry today?

Keyissuesraisedaretheeconomy,competition, new legislation, retaining customers and also talented staff

How significantly do staff absences affect your business?

43%ofrespondentsbelievethatabsenteeismhas a moderate impact on the business

Are employees in the industry as a whole adequately vetted in accordance with the Asylum, Immigration and Nationality Act?

Only50%ofrespondentsfeelsectoremployees are vetted adequately

Does the business have a specific strategy for retaining high quality staff?

78%ofrespondentshaveaspecificstrategyforretaining talented staff

There are some significant findings from the results reported. In the following sections, the findings have been reviewed in more detail.

3The impact of the economic slowdown, rising unemployment, falling disposable income and increased competition have made the hospitality and leisure sector a challenging place in which to operate and thrive. With no signs of this trading situation coming to an end in the near future, it is likely that these difficult conditions will continue.

In contacting our survey recipients, we were particularly interested to find out what factors and trends relating to raising finance, people management, competition and legislation cause them the greatest concern and the potential impact on business performance over the next 12 months.

Our survey asked respondents to consider three questions:

Whatarethetopthreefactorsthatcouldimpacton the performance of your business over the next year?

Whatfactorsdoyouthinkwillmostchangetheshape of the market in the next three years?

Whatdoyouperceivetobethekeyrisksandchallenges associated with the industry today?

Its the economy, stupid

Across all three sets of responses, concerns over the economy and the on-going impact of the recent recession are the factors highlighted most frequently (see figure 1.1 and figure 1.2). The sector has clearly been greatly affected by the decline in consumers disposable income.

While the hotel sector has been able to maintain weekday occupancy levels, thanks to a continued demand from business travellers, this has often been as a result of cuts in room rates or the offering of special deals.

Pubs and bars are among the UKs most distressed sectors, with a 95 per cent rise in business failures in the first quarter of 2012 (source: Begbies Traynor Red Flag Alert). This is mostly due to static sales of pub beer. The future of food-led pub companies, however, looks brighter as research shows that the pubs share of the dining market is growing (source: Coffer Peach Business Tracker).

SECTION ONE: MARKET TRENDS

Raising finance

Managing stang levels

Retaining key management

Fraud

Weather

Brand awareness

Levels of repeat custom

Refurbishment requirements

Social media

Other

The economy

14%6%

19%

4%

3%

15%

11%

6%

2%

10%

10%

Figure 1.1 Factors affecting performance

What are the top three factors that could impact on the performance of your business over the next year?

Source: Mazars

Consolidation

New entrants

New legislation

Property prices

Pricing competition

Workplace pensions

Other

The economy

11%

16%

5%

21%5%

14%

18%

10%

Figure 1.2 Factors shaping the market

What do you think will change the shape of the market in the next three years?

Source: Mazars

4

Sales and marketing director, Brewer and pub retailer

How are they fighting back?

The UKs restaurant industry, on the other hand, is widely believed to be weathering the storm. While there has been little overall growth, there is widespread evidence of intelligent innovation, with operators investing in new concepts, adapting their menus, opening new locations and examining their pricing structures. Figures compiled by Horizons in April 2012 showed that consumers average spend on eating out had risen from 10.29 to 13.80 per meal, while72percentoftheUKsadultpopulationwereeating out on a regular basis. The sector is therefore strongly positioned for the post-recession recovery.

An Olympic boost?

It had been calculated that the UKs hospitality, leisure, tourism and travel industry could stand to generate 2bn from visitors around the 2012 Olympic Games (source: www.bighospitality.co.uk). While it is still too early to assess the long-term impact of the Games on the wider industry, a generally positive picture of the immediate effects has already emerged:

Afteradipinthefirstweek(partlylinkedtoscare mongering regarding traffic and transport problems), 60 per cent of pubs saw an upturn in trade during the second week of the Olympics, with one in five operators seeing like-for-like sales increase by 11 per cent or more compared with the same period last year. A survey of 20 pub companies (1180 sites) by the Association of Licensed Multiple Retailers also confirmed that fears regarding logistical disruptions were unfounded, with only 10 per cent reporting problems with deliveries.

Accordingtofiguresreleasedbyanumberofhotelconsultancy companies, hotels in London recorded an increase in room yield by almost 50 per cent in August 2012 and year-on-year room rates rocketed up from 110.22 to 165.05 a night, with occupancy levels remaining above 80 per cent for the entire period of the Olympic and Paralympic Games.

Therestaurantsectorclearlysufferedasaresultof negative messages predicting traffic chaos that were circulated prior to the Games. The British Hospitality Association has commented that restaurants had suffered because of the Games, but that this was not because of a lack of tourists. Most of the footfall for [London] restaurants is people who are working in and commuting through town for the day it is this traffic that stayed away through fear or gridlock and congestion. Hugh Fowler, the Managing Director of CG Restaurants added that there will be a great Olympic dividend in future years, but it [didnt] actually happen during the Olympics due to the way Transport for London and LOCOG behaved they did so much scare mongering, they frightened everybody off.

Competition in the marketplace

The second most significant area of concern is the increasing levels of competition in the marketplace. 24 per cent of respondents from the travel and tourism sector are concerned about consolidation, while the arrival of new entrants is a cause for concernonthepartof17percentofrespondentsfrom the bar and restaurant sectors.

Representatives of the hotel sector are concerned about pricing competition (26 per cent) and the arrival of new players (20 per cent). This is not at all surprising: there has been a 10 per cent increase in hotel supply in London since March 2011 and several hotel groups have announced ambitious expansion plans - Whitbread alone is planning to add an extra 22,000 rooms by 2016 and Travelodge is aiming to reach70,000roomsoverthenexttenyears(Source:BMI Hospitality Overview, Q3 2012) and according to Keynote (Hotels Market Update 2012) the increase in the number of budget hotels is expected to increase withanestimated14,575additionalbudgethotelrooms planned in 2012.

These plans are very much in line with the fact that VisitBritain has been tasked by Government to increase visitors to the UK by 4.5m by 2014.

However, an increase in supply, combined with a decrease in demand as a result of the recession, can only lead to greater competition. As observed by the general manager of an upmarket London hotel When there is a drop in demand and an increase in supply, people start doing silly things with price and you either have to join them or stand your ground and live with the consequences. Only the smartest hoteliers and operators are going to be successful in 2013.

Continued deflated consumer confidence keeps consumers at home drinking cheap supermarket alcohol.

5It is more important than ever that those in the industry adopt strategies and differentiate themselves in order to compete. In a competitive market, customer loyalty programmes, ensuring a consistent quality of service and a prominent internet presence are all important factors, as are robust customer relationship management systems to allow the industry to track and reward customers.

Traditionally the UK was one of the top world destinations, however today the difference between what we spend abroad and what residents and foreign visitors spend in the UK is 12 billion (Evening Standard 11 October 2012). One reason for this may be that we are uncompetitive in terms of VAT, particularly when compared to other European countries. For example, tourism services in the UK attract 20 per cent VAT compared to 5.5 per cent in France. Other factors may include the high cost of visas to visit the UK, particularly by the Chinese, and complicated form filling.

Attracting new customers and keeping them

The need to increase brand awareness and, as a result, secure greater levels of repeat business was identified as the second most important factor affecting business performance by respondents from all three sectors (29 per cent for the bar and restaurant sector, 20 per cent for hotels and 28 per cent for the travel and tourism sector).

New legislation

The prospect of new legislation has been identified by a third of the bar and restaurant sectors respondents as being a key factor that will shape the market in the next three years. On a positive note, the Government has announced plans to scrap or simplify 60 regulations governing the food and hospitality industry. However, this will be offset by the continued existence of what the British Hospitality Association calls critical barriers to growth such as bureaucratic visa requirements (for both the industrys workers and for tourists from certain countries, such as China), air passenger duty tax and uncompetitive rates of VAT. These factors, when added to increased governmental pressure on issues such as minimum pricing for alcohol, transparency regarding food quality, and sustainability requirements, will mean that the hospitality and leisure industry remains a difficult and complex regulatory environment for some time to come.

Operations manager, Hotel group

Retaining employees

Almost one-third of all respondents feel that issues surrounding the hiring, training and acquisition of qualified staff are a key challenge in the hospitality and leisure sector today. Whilst 4 million UK people have jobs in the sector and job growth has outstripped that of the overall economy, respondents perceive there to be a shortage of skilled staff, particularly those in supervisory or management roles. This may, in part, be due to a lack of high quality hospitality courses on offer from colleges or graduates perceiving the industry to offer undesirable working conditions, low pay and unsociable hours.

One respondent went so far as to say We are starting to see a shortage of [skilled] staff in hospitality - we struggle to promote internally, so start to promote staff who are not ready in order to fill the gaps. Within the next five years we are going to have a skills gap in middle management.

Manager, Luxury game lodge

And finally.

Unsurprisingly, the bar and restaurant sector is the only one where a significant number of respondents (29 per cent) name the weather as one of the top factors affecting business performance. Following the disappointing weather we have experienced this summer, we can confidently predict that this may well be a factor that never goes away.

New legislation that is coming in will make huge changes [as well as a] rise in staff costs and the difficulties of financing.

Its a job nowadays and not a passion.

6We recognise that effective people management, reflected through employee and customer satisfaction, distinguishes the most successful establishments within the sector from their competitors. To this end, we were keen to understand whether respondents had a strategy for retaining their best employees.

Similarly we were keen to understand the impact of employment legislation upon our respondents ability to recruit and manage employees in accordance with business needs. With this in mind, we focused our attention upon the key areas of compliance with:

TheAsylum,ImmigrationandNationalityAct

TheWorkingTimeDirective

Compliance with the Asylum, Immigration and Nationality Act

Under the 2006 Asylum, Immigration and Nationality Act, employers are obliged to ensure that all employees over the age of 16 have the right to work in the UK.

When asked if they think that employees in the industry as a whole are adequately vetted in accordance with the Act, 50 per cent of respondents indicated that they believe they are (see figure 2.1).

With the potential for a maximum fine of 10,000 per illegal worker and the possibility of a criminal prosecution for any employer who knowingly employs an illegal worker, this figure gives cause for concern. Moreover even where a respondent has responded positively, it is perhaps interesting to speculate whether the checks undertaken by these respondents are sufficiently robust for them to benefit from the statutory defence in the event they are found to have inadvertently employed an illegal worker.

Within the particular sub-sectors, respondents from the travel and tourism and hotel sectors have the greatest confidence that vetting procedures areadequate(scoring67percentand53percentrespectively - see figure 2.2). The bar and restaurant sector on the other hand only scored 33 per cent, perhaps suggesting such establishments are less likely to have HR specialists in place to undertake such checks. With the number of successful prosecutions increasing year on year more than 1,100 penalty notices were served in 2011, and nearly 7millionwascollectedinfinesitisclear no organisation can afford to be complacent.

SECTION TWO: EMPLOYMENT ISSUES

Yes

No

Dont know

22%

28%

50%

Figure 2.1 Compliance with Government legislation

Do you think that employees in the industry as a whole are adequately vetted in accordance with the Asylum, Immigration and Nationality Act?

Source: Mazars

Yes

No

Dont know

0%

20%

40%

60%

80%

100%

Bar andRestaurant

Hotel Travel andTourism

Other

Figure 2.2 Compliance by sector

Source: Mazars

Per

cent

age

of r

espo

nden

ts

7Compliance with the Working Time Directive

The Working Time Regulations implement the European Union Working Time Directive, governing average weekly working time, night work, daily and weekly rest periods, in-work rest breaks and annual leave.

Asked if they think the industry as a whole is compliant with the Working Time Regulations, respondents are equally split between positive and negative responses, each group scoring 43 per cent (see figure 2.3).

With regard to those respondents who responded negatively, it is not possible to tell whether they have their own business or a competitors business in mind at the time of submitting their response. Moreover it should be remembered individuals can opt-out from the maximum average 48 hour working week (aggregated over a seventeen week period). Therefore where an individual is perceived to be working excessive hours, it may not be apparent whether or not they have chosen to opt-out. Similarly it should be remembered those working shifts and/or those engaged in a sector where there is a foreseeable surge of activity (e.g. tourism) may be excluded from daily, weekly and in work rest periods, although compensatory rest should be granted.

Finally it should be recognised employers cannot force workers to take any entitlement that is made available to them under the Regulations. Therefore where an employee is looking to supplement their income by working excess hours, the employer may be prepared to turn a blind eye, particularly if the

alternative is that the worker will supplement their income by working for somebody else. Nevertheless employers should be wary of the potential for a health and safety claim if they do not do everything in their power to encourage employees to benefit from such rest breaks.

Dealing with staff absences

Across all sectors, respondents report that the overall level of absence due to sickness is largely unchanged over the preceding 12 months (see figure 2.4). Whilst this perhaps represents a pleasing statistic, it may also reflect fears about job security and perhaps a failure amongst respondents to keep accurate statistics pertaining to sickness absence.

Somewhat surprising perhaps is the fact that almost half of our respondents report that staff sickness absence has only a moderate effect upon their business (see figure 2.5). Indeed respondents in the bar and restaurant sector reported that staff absences have no effect whatsoever (see figure 2.6). This contrasts with the 2011 CBI Absence Survey which suggests the annual cost of absence to the UKeconomyasawholewas17billion.Thesurveyalso recognises other implications such as the cost of hiring and paying temporary replacement staff, lowered customer satisfaction, poor morale amongst colleagues who have to take on extra responsibilities and diminished reputation/lost business, all of which perhaps lead us to question whether the full cost of sickness absence is understood.

Yes

No

Dont know

14%

43%

43%

Figure 2.3 Compliance with the Working Time Directive

Do you think that the industry as a whole complies with the requirements of the Working Time Directive?

Source: Mazars

Increased

Stayed the same

Decreased

16%

71%

13%

Figure 2.4 Changes in staff absence levels

Over the last 12 months, in what way have staff absences changed?

Source: Mazars

8Perhaps significantly the CBI survey also highlights research identifying that absence levels tend to increase with high levels of overtime or frequently rotating shifts and that frequent, shorter periods of sickness tend to be more prevalent amongst younger people, characteristics synonymous with the sector as a whole.

Retaining quality staff

Despite the recession, retaining the most talented individuals is a challenge facing all organisations seeking to establish a competitive advantage. In the past, the psychological contract was based upon hard work and employee loyalty in return for a job for life, regular salary increases and reasonable promotion prospects. The new psychological contract is substantially different with the concept of a job for life a thing of the past and change being an ever constant. It is perhaps little wonder that the most talented individuals will readily move for higher salaries and better prospects. Add to this the reduction in the number of quality hospitality courses producing high calibre supervisors and junior managers and the need to retain high calibre individual becomes all the more critical.

We are pleased to report that our survey suggests the hospitality and leisure industry appears to have identified with the need to retain key employees, with 78percentofrespondentsconfirmingtheyhaveaspecific strategy for retaining quality staff. Indeed this figure grows to 100 per cent for respondents from the bar and restaurant sector. A consideration for next years survey will perhaps be to examine the robustness and hence the effectiveness of such talent retention initiatives.

Significantly

Moderately

Not at all

24%

43%

33%

Figure 2.5 Effect of staff absence

How significantly do staff absences affect your business?

Source: Mazars

Significantly

Moderately

Not at all

0%

20%

40%

60%

80%

100%

Bar andRestaurant

Hotel Travel andTourism

Other

Figure 2.6 Effect of staff absence (by sector)

Source: Mazars Jobs within the industry are seen as a filler until a proper job comes along. Despite a shortage of jobs, there is a lack of quality people for roles.

Per

cent

age

of r

espo

nden

ts

Financial controller, Hotel management and investment company

9Mazars hospitality and leisure survey 2012 was designed to provide an insight into the current state of the market, identifying the key factors affecting business performance and looking at the challenges ahead.

We surveyed a cross section of Finance Directors, HR Directors and Owner-Managers in the hotel, bar and restaurantandtravelandtourismsectorduringJulyand August 2012.

We would like to take this opportunity to thank respondents for the time and thought they devoted to completing this survey.

METHODOLOGY

10

Mazars is an integrated international firm with a presence in 69 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.

Our expertise

We provide professional advice and support to the hospitality and leisure sector that allows businesses to respond quickly to new developments and demands.

We have extensive experience advising:

Hotelsincludinglargeandlistedgroups,independent establishments and small, medium-sized and boutique hotels

Travel and tourism businesses

Restaurants,pubsandbars

Sportsclubsandassociations

Gymoperatorsincludingprivatecompaniesmanaging private and public facilities, hotel leisure gyms and leisure trusts

We pride ourselves on being able to provide assurance services that play a fundamental role in the successful management of your organisation; advisory services that help you provide a positive customer experience essential in a market where the key differentiator is service excellence; and professional advice that addresses your financial needs and supports your business through each stage of its strategic development.

Our services to the hospitality and leisure sector:

Auditandassurance

Governanceandrisk

Internalaudit

Consulting

Taxadvisoryandcompliance

Outsourcing

Corporatefinance

Duediligence

Restructuringandturnaroundservices

Forensicandinvestigations

Humanresourcesconsultancy

Employeebenefitservices

PropertyconsultancyprovidedbyMazars Property Consultancy Ltd

ABOUT MAZARS

Integrated countries Correspondent countries and Joint-Ventures Local correspondents

Mazars LLP is the UK firm of Mazars, an international advisory and accountancy organisation, and is a limited liability partnership registered in England with registered number OC308299. A list of partners names is available for inspection at the firms registered office, Tower Bridge House, St Katharines Way, London E1W 1DD.

Registered by The Institute of Chartered Accountants in England and Wales to carry out company audit work.

MazarsLLP2012-1027903

www.mazars.co.uk

Lee Brook Partner London

T:02070634563 E: lee.brook@mazars.co.uk

GarethJonesPartner London

T:02070634630 E: gareth.jones@mazars.co.uk

Contact us for more information on how we can help.

Alternatively you can you can also email us at hospitalityandleisure@mazars.co.uk