Beyond 2000

13 January 2000 by
Beyond 2000

Welcome to the new millennium. After a year of fuss and bother about the last night of the old year/century/millennium, 2000 is here. But what does the first year of the 21st century hold for the hospitality industry?

David Michels, chief executive at Hilton International, believes that there are only five "real worldwide companies in the owner, management and franchise game", and by the end of the first decade there will be only one "serious-sized hotel company" - no prizes for guessing which one he hopes that will be.

For Michels, the key question is: will these five main players consolidate with each other or consolidate with other players?

The independents recognise the need to have some sort of powerful marketing force, and at De Vere independent hotels are joining that brand to benefit from the company's sales and marketing muscle.

Leisure and hotel analyst Bruce Jones at Merrill Lynch is predicting that 2000 will show steady growth and, as economies globally recover, overseas travellers will help boost hotels in the UK both corporately and through leisure travel. Of some concern is the rise in interest rates, which could affect consumer confidence and have an impact on spending in the leisure market.

Operationally, some corporate hotels are concerned about January. The corporate conference/business meeting circuit islikely to be on hold until February, if not March, which may affect first-quarter figures. But for the independent sector, there is optimism that those customers who are exhausted after the Christmas/New Year festivities will sneak in a short break early in 2000, thereby boosting the traditionally slow month of January.

In the food service sector, where consolidation has already occurred, John Greenwood, chief executive of Compass, believes that greater awareness of food safety issues will lead to more companies handing their catering requirements over to the professionals, thereby raising the profile of that sector of hospitality.

Meanwhile, Frank Whittaker, marketing director at Granada Food Services, believes that e-commerce will be the way forward for greater flexibility in meeting client needs. Both believe that 2000 will be a solid year economically.

Some restaurateurs are less confident. "I think the edge has gone from the restaurant scene," says Simon Rhatigan of Bistro 20 in Oxford. "That is not to say that it is going into the doldrums, but I think people were caught up in the hype and now what matters is return on investment and performance." He cites Groupe Chez Gérard selling two of its Richoux Coffee Co branches at the end of 1999 as an example of what happens when restaurants do not deliver in financial terms.

The rise in property prices is also making operators wary of further expansion - although Andy Bassadone, chief executive of Belgo, says that he expects to see expansion in the London suburbs, where he feels there is a lack of quality restaurants.

Throughout the industry, operators are quietly confident that, whatever happened on the much-hyped Millennium Eve, the year 2000 looks like a promising start to the new century.

Bruce Jones writes:

"The pace of UK economic growth is accelerating despite the increase in interest rates designed to slow the economy. The intention is to prevent too-rapid growth, not to stifle it.

Merrill Lynch is predicting growth in 2000 by 3.2% - and in only two years in the 1990s was growth stronger than that. Our estimates are higher than average but most economists expect growth to be stronger in 2000 than it was in 1999. This is obviously good news for the hospitality industry.

There is a well-established link between the movement of the UK economy and hotel operating profit. Those parts of the business affected by business spending, typically Monday to Thursday in hotels, and business entertaining should prosper. Higher consumer spending trends should help the leisure side of the business, particularly at weekends.

Overseas visitors have a significant impact in some locations and some sectors, particularly in London. They account for about 70% of nights at a typical London hotel and between 10% and 20% outside London, though that percentage will be higher at certain locations such as Edinburgh and Stratford-upon-Avon.

The strength of foreign economies is a major factor in determining overseas visitor numbers to the UK. The majority of visitors are from Continental Europe, and the major economies there are set to improve in 2000. We predict real growth - that is, growth in addition to inflation - of 2.8% in 2000 compared to 2.0% in 1999. In Japan, the economy is emerging from a deep recession and should grow modestly by 1.7% in 2000; and there should be excellent growth from other Far Eastern economies, up by 6%. The US economy has been buoyant for several years and that looks likely to continue, with growth of 3.7% estimated for 2000, though there are some worries that the good times can't last for ever.

The other factor affecting the number of overseas visitors is the strength of sterling relative to foreign currencies. The pound has been strong against other major currencies, which has made the UK more expensive for foreign visitors. However, it has affected their spending in the shops rather than in hotels. Looking ahead, no significant changes are expected in the value of the pound relative to other currencies.

Very positive

So, the demand looks strong. There is, however, a danger that the UK economy will grow too fast in 2000, leading to a recurrence of high inflation. That could lead to a substantial rise in interest rates, which would reduce business and consumer confidence. However, the fact that interest rates have already been moved up before inflation can go out of control is very positive. It should mean that interest rates should peak at much lower levels than past peaks, when interest rates went higher than 10% - and it should also mean that further increases are modest enough not to lead to a recession.

Hotel room rate increases are likely to be modest in 2000, given the present low-inflation environment. Last year was a hard year for rates, with many hotels discounting. Granada's London hotel achieved room rates fell by 1%, and its provincial rate by 2%. Customers are showing some resistance to high rates - one reason for the growth in the budget hotel market. Given those past increases, and the present low inflation environment, achieved rate increases are likely to be modest in 2000 - at best 2% to 3% - and, as ever, costs are bound to increase.

Increased building

Another factor that may limit room rate and profit increases is supply. Between 1996 and 1998, good times were reflected in strongly rising room yields. This has led to increased building of hotel rooms and facilities, particularly in London.

Take Hilton, for example. The extended Hilton London Metropole opens in October 2000, and will add 328 bedrooms to push the total above 1,000, together with extensive conference facilities. In November 2000, the nearby Hilton London Paddington will reopen with 355 refurbished rooms, and the new Hilton Trafalgar Square will open in early 2001 with 131 bedrooms.

Outside London, there are fewer developments, but there is a danger of oversupply in some locations such as Leicester.

On the catering front, the largest increase is in pubs and bars rather than restaurants. We at Merrill Lynch estimate that spending on expanding the number of pubs is running at around £800m per annum - in addition to maintaining the fabric and décor of existing pubs. That investment requires increased revenue from customers to get a decent return. That will lead some companies, such as Wetherspoons, to discount prices in order to get customers through the door, which in turn puts pressure on other pub chains.

Out of favour

In City investment circles, hotels were out of favour for most of 1999, a situation that will continue in 2000, despite a stirring of interest at the end of last year.

The stock market is still wary of the hotel industry, having got a case of the jitters in 1997 that continued into 1998. By 1999, there was the usual early-year rally, and quoted Leisure & Hotel shares rose by 18% in the first quarter. But the rest of the year was dismal, with average declines of 16% over the year. There were exceptions, such as Thistle Hotels - its shares were 107p at the start of the year, 167p at the start of April and are now 185p. More typical, however, is Hilton Group. Its shares started 1999 at 241p, went to 283p at the end of March but are now down to around 200p.

These share price movements reflect the more difficult trading conditions encountered in 1999. Some hoteliers felt that modest declines in room revenues in 1999 were a resilient performance after the strong growth of previous years. However, to the City, talk of room rate declines was boring compared with the excitement of areas such as telecoms and Internet stocks.

Share ratings of pub and brewery companies are low, too. The problem for pub operators is the level of investment and new supply into the industry - levels that continue to exceed annual increases in demand, which is rising by 2% per annum in value terms.

Despite this, the outlook for 2000 is encouraging for the hospitality industry, but there are no guarantees that this will translate into profit advances. "

Paul Dermody

Managing director, Greenalls Hotels & Leisure

There is a generation of business travellers coming through who recognise the benefits of health and exercise and demand the facilities to continue their regime when they stay at hotels. The UK leisure business will be worth more than £70b by 2003, according to Mintel. In the USA, many bookers will only talk corporate deals with hotel companies that have fitness facilities available, and that will happen more often here.

Database marketing will drive business, but loyalty schemes need greater understanding - people in our industry still confuse the "mechanic" (the card) with the "heart" (the database), and even then they have a lot to learn about understanding customers and driving each section of the database with imaginatively targeted promotions.

Time famine will be a common problem for customers, and the "value for time" test needs to be applied to everything we do - for example, providing health club members with a take-away breakfast.

Andy Bassadone

Chief executive, Belgo Group

Generally, the outlook in the UK is good, but it requires more dedication to quality and complexity of operation. The theme-restaurant approach to food that was so popular in the 1980s is not going to work now. Today, it needs a high skill level in the kitchen, and either you train them or encourage them to get the skills they need.

Doreen Boulding

Marketing director, Fawsley Hall, Fawsley, Northamptonshire (30 bedrooms)

Staffing is our biggest problem. I have been in this industry since 1976 and this is the worst it has ever been. No-one is doing anything - not the Government, not Springboard. We would not be in the mess we are in if more attention was paid to the hospitality industry.

John Greenwood

Chief executive officer, UK, Ireland and South Africa, Compass Group

I think we are under-rated as an industry and do not get credited for what we do. Our managers are under huge pressure. I think clients who do their own catering will begin to battle with all the regulations being introduced, and will find it easier to hand the job over to professionals such as ourselves. People are much more aware of food safety issues now, and this will help our status as professionals evolve.

Simon Rhatigan

Manager, Bistro 20, Oxford

I think the edge has gone from the restaurant scene. That is not to say that it is going into the doldrums, but I think people were caught up in the hype and now what matters is return on investment and performance.

Operators make promises to banks that, if they are loaned the money to set up, they will deliver certain returns, and if they don't meet those promises then the banks own your business.

Staffing is now the problem for the industry, and the Millennium Eve was the first display of the power of staff - so many people didn't open because they couldn't afford to upset their staff.

We must invest in technology and infrastructure, like the French do, so that we can afford to have fewer, highly skilled staff - for example, we buy in all our vegetables prepared.

Talk of deskilling in restaurants is only a red herring - the future must be about getting skilled staff to work more efficiently.

David Michels

Chief executive, Hilton International

Consolidation will continue, even though today there are only five real worldwide companies in the owner, management and franchise game - Accor, Bass Hotels, Hilton Hotels Corporation/Hilton International, Marriott and Starwood. The most interesting question is: will they consolidate or, as in the past 10 years, will they continue to consolidate others?

In world terms, that means that everyone in the industry is still a minnow. I forecast that there will be one serious-sized hotel company in the next decade.

Alison Rogers

Chief executive, Hospitality Action

Historically, our industry has not gravitated towards an industry-relevant charity as easily as it has to charities that deal specifically with a single identifiable concern, such as cancer. The need which Hospitality Action serves tends to encompass the gamut of issues affecting lower wage earners, from disability and terminal illness to those that have had to reduce the time they work to care for a child with special needs.

Think for one minute about those who must survive on the Job Seeker's Allowance of £51.40 a week after housing costs. Payroll Giving allows employers to get tax relief on the costs of administering the scheme, on the Payroll Giving agency's costs (usually 35p per donation) and if they match their employees' donations.

Employees benefit because, as donations are deducted before PAYE tax is calculated, tax relief is given at his or her top rate of tax. This means that a monthly donation of £10 only costs £7.70 on 23% tax, or £6.00 on 40% tax. And for three years from April 2000, the Government will top up these donations with an extra 10%. So, for every £1 donated, the charity will receive £1.10.

Malcolm McHardy

Nunsmere Hall, Oakmere, Cheshire (36 bedroom)

Looking at the interest rates and economy, we are in for a steady year. We personally have had three very successful years and I recognise we can't maintain that sort of growth, but I am predicting 12% growth in 2000. Our average occupancy is 57%, and we focus on the Monday to Friday conference and business market.

Stefan Breg

Director of food & beverage, Thistle Hotels

The hotel sector will enter a year of change in the way it sells and markets food.

After years stuck in pomp and formality, there is a new confidence in hotel food. The myth that hotel restaurants can't compete is beginning to be dispelled by champions such as Atlantic Bar & Grill, Titanic, Axis, the Great Eastern and, of course, Thistle's own developments, Faya, Gengis and C¼Motion brew shops.

Driving the change in 2000 will be the newly found willingness of hoteliers to embrace ideas from outside the industry - a broad spectrum from buying in pre-prepared foods to full outsourcing of hotel food operations.

Frank Whittaker

Marketing director, Granada Food Services

There will be continued consolidation in the market, with medium-sized companies being acquired by larger players. There will also be further consolidation through strategic alliances among these larger players, and we will continue to see new market entrants in the hospitality industry.

Increasingly, our business will take place on-line. It will become commonplace for our customers to order food via an intranet facility - this will then be ready for collection at a specified time or delivered to the customer's desk, thereby bringing greater flexibility and providing a more tailored service for the customer.

Clients will benefit from the on-line service that will enable them to put contracts out to tender via e-mail, and purchasing will be conducted electronically.

Bruce Jones is an analyst at Merrill Lynch

Source: Caterer & Hotelkeeper magazine, 13 - 19 January 2000

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