Benchmarking success by Kate Nicholls
Benchmarking success by Kate Nicholls
When we hold the annual seminar launching the latest round of the Association of Licensed Multiple Retailers (ALMR) Christie & Co Benchmarking Report – the largest, most robust and most authoritative survey of its type in the sector – the first question I am always asked is, what has really changed? Sometimes the message is steady as she goes and little movement, but this year, there are some very clear and marked movements. And, with a decade worth of data behind us, it means we can interpret and predict what may be around the corner with some confidence.
As the ALMR has grown and developed over the last nine years since we first started benchmarking KPIs in the sector, so the scale and range of businesses contributing their figures has also expanded – and this leads to some real cross-sector learnings. As our membership has changed, we’ve added in first nightclubs and now for the second year, we have a separate set of analysis for casual dining operators – and at 27% of the market, it is now the second largest segment we are benchmarking.
Against a background of a turbulent economy, rapid social change and anticipated increases in the cost base, it is vital to have a good solid understanding of turnover and operating costs. This is particularly vital this year at a commercial and operational level as we move forward to rate revaluations and rent cycles in both the tied and commercial sector. Appropriate comparables and firm evidence of what differentiates an overperforming operator from a reasonably efficient one will be key when it comes to exercising the new check, challenge, appeal system for rates – this is one report which will be invaluable to refer to and is the only one recognised by RICS and VOA.
But the report is more than just a vital strategic business planning tool for operators, it is also a critical annual health check for the sector as a whole. And here there are some stark messages for government.
There are three very clear headline messages emerging from this year’s report:
Firstly, it is clear that we have an evolving market – some would say that there has been little short of a high street revolution in the way in which we go out to eat and drink. This is a vibrant, dynamic and innovative sector, characterised by business startups, SMEs and entrepreneurship. At a time when the House of Lords is looking back at a decade of licensing reform, we can see significant change with food-led businesses increasing by more than a third, the emergence of casual dining as the second strongest segment and, although there has been decline in community local pubs by a similar proportion, that decline has slowed as it has in the late-night market.
Secondly, this is a resilient market – over the past decade there has only been one year of negative like-for-like growth in 2008/9 and the long-term trend is for 4% growth year-on-year. This year, across the sector as a whole, like-for-like growth of 3.1% has been reported, with casual dining, high street pubs and licensed accommodation all comfortably exceeding this sectoral average and almost doubling their reported like-for-likes year-on-year. There are winners and losers, however. Last year, casual dining reported 2.2% like-for-like growth and this year it is 4%; high street pubs reported 3.7% last year and this year 5%. In contrast food-led and community local pubs last year reported 5.5% like-for-like growth, but this year they are flatter at 2.4% and 3% respectively – so there is evidence of market share steal. Nightclubs, which have seen challenging times, significantly improved their performance with their flat like-for-likes comparing with -3% last year and clearly reaping the benefits of their above average capex.
With CPI actually falling 0.1% over the period and RPI running at +1%, this is 2% real-terms growth. Indeed, if you look back since 2009 when the sector started its road back to recovery, food has seen growth of 56%, high street 35% and community local 23% – with RPI running at 19% over the same period, the sector has comfortably outperformed the economy as a whole.
But there are clear warning signs that government must heed that this is a model under strain – despite this positive growth, the costs of doing business are increasing faster than revenues are increasing and this is putting pressure on already tight margins. Overall operating costs increased this year by 3.3% to 49.3% of turnover on average – and this was fuelled, unsurprisingly, by increases in payroll up 5.5% to 27.8% of turnover. As a proportion of total operating costs, payroll now accounts for two-thirds of costs for food-led businesses and more than half for more wet-led. The increase in operating costs was felt across the board but was seen most acutely in labour-intensive, food-oriented businesses – costs of doing business were up 13% in food-led businesses, 6% in the high street and late-night segment and almost 2% in community local pubs.
That brings us to the final strong message to take from this year’s benchmarking report – and it is a forward looking one. Based on the decade of data, we should be able to predict steady continued growth, a cyclical substantive increase in capex and a further softening of rents (the latter two being critical lagging indicators). But we are not in normal times and this continued growth and investment that the government and the economy are increasingly reliant upon can’t be taken for granted.
Brexit means we are heading into unchartered territory – although the markets have stabilised somewhat, business and consumer confidence remains fragile and could yet crash when Article 50 is triggered next spring. The cost of imported goods is already predicted to rise this autumn – wine suppliers and food importers are citing a weak pound to justify 5% to 6% increases in cost of sales and the difficulty of prising British supplies away from the buying power of the supermarkets means that prices here will be influenced by demand. At the same time, we face significant additional operational costs in the form of a second increase in the National Minimum Wage in six months, another 6% hike in the National Living Wage (NLW), a new payroll tax in the form of the Apprenticeship Levy and a significant hike in business rates.
This year’s report already shows margins under pressure – particularly food margins suffering where operators do not feel confident in passing on price increases to customers. Across the market as a whole, food margins dropped by more than 4% but community locals were hit hardest, with their food margins down 12%.
Little surprise then that post rent operating margin saw a squeeze – down two percentage points for most and at an average of 11.4%, but falling particularly low to 6.7% for the pub sector, both food-led and community local. This margin squeeze is being reported before the full impact of the NLW took effect – although many operators made adjustments early – and is very clearly apparent before the next deluge of regulatory costs is set to hit. We now know from our work on benchmarking, and also with KPMG on employment costs, an increase of just 1.5% in costs leads to a margin erosion of 10% – the heat, therefore, is well and truly on.
Our benchmarking survey had just started last time we faced this type of crisis and we can see then the effect of a perfect storm of credit crunch, increasing costs and legislative change (smoking ban). That was the last time the sector showed negative like-for-like growth and while it was only a one year blip, crucially what our survey shows is this seismic and sustained shock to the economy had a longer term effect. In short, it created a two-year fiscal drag on growth. Time and time again when we look back at our survey data, we can see it took us two years after we came out of recession to recover the lost ground in terms of revenue growth, margins and profitability and investment. For example, like-for-likes were showing incremental growth at around a long-term average of 4%, but having fallen to -2% in 2008/9, it was 2011 before they recovered that and it was actually 2013 before the high street and community local segments reached their previous forecast track. Similarly on rent, a lagging indicator, rent as a percentage of turnover peaked and took two more years to come off the boil and return to sustainable levels.
The message to government is clear – this is a sector already under pressure and regulatory changes that may be affordable in the good times are now on the fringe of sustainability. Remember, every 1.5% increase in costs will erode those 7% net margins by as much as 10%. April 2017 could be a perfect storm for the sector just like 2008 – but it needn’t be. There is a truism that those who fail to learn the lessons of history are condemned to forever repeat them. What those lessons show is that we need a two-year breathing space to manage the challenges of Brexit and economic turbulence to allow us to respond to the challenges of additional costs and regulatory change.
We know as new rates bills will hit in April, we need at least two years of transitional relief to help us through that pain – and a resumption of high street retail rate relief (worth £1,500) would help too. We should delay the introduction of the Apprenticeship Levy for two years to allow it to be fully road tested and piloted and to ensure that it isn’t just another tax burden on business. Then we face a fighting chance of responding positively to politically motivated living wage – but again, taking two more years to reach the goal could mean it is achieved without significant job loss and would allow businesses to continue to invest in growth, in jobs and in their communities.
Get it right and next year’s benchmarking survey could continue to report a robust, resilient and vibrant industry but get it wrong and it is not just our sector which will suffer, it is the UK. The government therefore needs to act now to give the industry that vital two-year breathing space it needs. Full copies of the ALMR Christie and Co Benchmarking Report are free to participating operators and to purchase from the ALMR office