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Coming back from recession: operators who have beaten previous slumps

01 December 2008 by
Coming back from recession: operators who have beaten previous slumps

David Levin, chairman of the Capital Group, remembers some tough times in the 1970s, and says it's important not to neglect any aspect of your business: "Any hotelier has to be prepared for there to be an upswing followed by a downswing. If there is a hint of recession, that is the time you should be seen to be redecorating. You are not turning so many people away so you have to be on top form. You are also going to need the old-fashioned skill of caring for people"

Britain is on the verge of a recession, technically classed as two consecutive quarters of negative growth, but it's not for the first time. There was the oil shock of 1973-75, the slump in 1981-83, for which Margaret Thatcher is held partly responsible, and John Major's "Black Wednesday" bursting of the housing bubble between 1990 and 1994.

Yes - we're turning back the clock and taking a look at the last three big dips to give an idea of what to expect and how to handle the situation. Leading figures in the industry - all of whom have "been there, done that" when it comes to economic crises - tell it us how they got through the difficult times.

The 1970s

Now a hospitality consultant, Derek Taylor has been in the industry since 1954. When the recession of 1973 started, he was sales and marketing director of Grand Metropolitan's hotels division.

"When people think about the 1973 recession, it's always the Arab-Israeli Yom Kippur war, the quadrupling of oil prices by Opec and the effect of 23% inflation, all of which we do not have anything like now.

"These were, of course, significant factors. But what also hit the industry was the 1971 Fire Precautions Act, which took 30,000 beds out of British hotel stock. This forced hotels to get a fire certificate, and often to put in an extra staircase, which many smaller hotels could not afford.

"Another factor was the grant scheme put in place by the British Tourist Authority, to offer any hotel finished by 1973 a grant of £1,000 per room. This was to cope with the anticipated increase in tourist numbers following the introduction of the [then new] Boeing 747. The BTA had expected it would only cost a few million pounds, but in fact it led to a spate of hotel-building. So when the tourist industry collapsed and oil prices soared, hotels very quickly started to go broke and face disaster.

"The pound collapsed and between 1973 and 1974 the stock market fell by around 73%. I remember Grand Metropolitan's shares fell from around 220p to 19p. We didn't really come out of the recession until the time of the Queen's Silver Jubilee in 1977.

DON'T PANIC!

"Nevertheless, while everyone could see that it was very serious, there wasn't an atmosphere of panic. More people could remember previous slumps, and people's memories of the war and the Blitz were much stronger - if you had survived the Blitz then anything else, even a recession, was a bonus.

"And there was still business to be done. My division, for example, made a greater profit every single year, simply because we ensured that we actually increased the money we spent on sales and marketing, particularly on promoting short-haul breaks. I was fortunate in that my director was on the main board so he could make policy decisions stick.

"By the winter of 1974, for example, accommodation generally in the West End [of London] was being discounted by 80%. So we hired celebrity hairdresser Vidal Sassoon to run a training event at the Albert Hall for salon owners from around the world. Around 2,000 people came from Europe, the USA and Japan. We paid him the equivalent of £250,000 but we made a fortune, because people were only able to come to the event if they agreed to stay with us for eight nights at full rate plus 50%.

"In a recession, there are always industries where everybody is going to suffer, and I suspect a great many hotels are going to go to the wall in the next 12 months. I have, for example, a glass with the Cecil Hotel's crest on it. The Cecil had 1,000 bedrooms in London and collapsed in the slump in the 1930s. The glass rings like Big Ben if you tap it, but the hotel building is now part of Shell.

"There is no magic to surviving a slump. It's said that hotels never go bankrupt, only hotel companies. Happily for the hospitality trade, a great deal of our competition sells its products dreadfully. The problem is never going to be the lack of business the real problem is summoning up the vision to properly meet the challenge."

The 1980s

David Levin has been proprietor and chairman of the Capital Group, which includes the Capital hotel and Levin hotel, since 1971. He opened L'Hotel in 1981, in the depths of the 1980s recession and, in 1991, with the UK again in recession, was named Restaurateur of the Year, while in 1994 he was named Hotelier of the Year.

"In 1968, I had bought a pub in Berkshire with six bedrooms, and then came to London to act as an adviser for a property company. To illustrate just how things have changed, when I found the Capital site, which was going to be turned into flats, I simply went to the Hanover Square branch of Barclays and asked to see the manager. I realised at the time that it would be perfect for a hotel, even though it was going against the tide of everyone opening big hotels.

"I did not know them and had never banked with them, but I had the meeting with the manager, who poured me a huge tumbler of sherry while I explained what I wanted to do. He looked at my background with the property company, got out his diary and said: "How much do you want?" I said: "£250,000," and he said: "Done." I still bank with them and they have supported me through the 1970s, 1980s and 1990s - in fact, they've been the nearest thing I have had to a partner, but it's a relationship that would be completely foreign today.

IRA TARGETS

"As well as the economic situation, in the 1970s the IRA was a disaster for four- and five-star hotels. People were frightened because there were bombings where there was affluence. Then, in the 1980s, there was still the IRA, and the unrest between Margaret Thatcher and the unions did affect things. The Lloyds of London disaster of the early 1990s [when many of its wealthy investors faced financial ruin over heavy losses and insurance claims] was also bad for us because so many of our clients were Names and lost fortunes.

"In the 1980s, the hardest part was the banking interest rate, which was around 15-17% on anything you borrowed. Many hotels also took the view that they should sell their property and create management companies to run the hotels. They took a conscious view that they would sell their properties to rid themselves of their debts.

"But this has led to a split between owners and operators, so that operators are now more concerned about their owners and dealing with them than with their customers. They seem to be locked into their offices and in meetings, so are not able to create the right atmosphere.

"What you have to recognise is that we are always running on a pendulum, so any hotelier has to be prepared for there to be an upswing followed by a downswing. If there is a hint of recession, that is the time you should be seen to be redecorating. You are not turning so many people away so you have to be on top form. You are also going to need the old-fashioned skill of caring for people.

"I am unhappy with the way the banks are using this current situation to say to hotels and restaurants, ‘We do not want to deal with you and we just want our money back.' That used to be unthinkable.

"Surviving a recession is always a bit like a rugby scrum but, in the last recessions, you at least felt that the banks were with you. You could, within reason, delay payment to next year or whatever. In the 1980s, even when it was really tough, the banks rallied round. But that is not the attitude at all now."

The 1990s

Sir David Michels, former chief executive of Hilton Group and president of the British Hospitality Association, worked through the recessions of the 1970s, 1980s and 1990s. In 1991, as chief executive of Stakis Hotels, he rescued the chain from bankruptcy, though in the process he was forced to make 5,000 people redundant in his first three weeks in the job.

"The difficulty with Stakis was that it got into trouble before the recession actually started. When I took charge in April 1990, it was completely shot and could not even pay its interest bill. Interest rates were in their mid-teens and that was having a real effect on people.

"It was exceptionally hard to meet the interest bills. Hotels would be making an operating profit but then would not be able to pay their interest, and so the banks took them.

"It was a very unpleasant experience to have to make so many people redundant. Yet we had about 18,000 staff at the time and I was actually cheered by the people we kept on. Not because they were glad to see people go, but because they loved the company. The staff who stayed knew that this was the only thing we could do. It was really just about trying to save the company.

"In both the 1990s and the 1970s, there was a lot of new hotel stock that was coincidentally completed just in time for the recession. I can remember, for example, in 1973 the Holiday Inn on Cromwell Road [in west London] was selling twin rooms for £9.50, so it was pretty tough.

"This time, the budget hotel chains aside, we do not face the same acres of new hotel stock in this country. Another change now, compared with the 1990s is that, at least until September, people have still been flying and still therefore needing to stay in places. In the last two recessions, we did not have cheap airlines, so that could make a difference.

"Also, people already have all the fridges, cars and homes that they need, so travel is really the thing they have given up last. In previous recessions, it's normally been the case that certain industries and certain countries have been more affected this time, it is every country and almost every industry.

BANKS AS HOTELIERS

"The attitude of the banks was very different back then, too. You were much less likely to be made bankrupt, because the banks were more prepared to take on ownership. Barclays and the Royal Bank of Scotland, for example, were two of the country's biggest hoteliers at that time. Now there is simply no market. Everyone is caught in the headlights.

"I know of no business that has ever been saved by its savings. For hotels, gearing is often so high that you cannot save the business by saving. You can only save the business by trading. You, of course, have a responsibility to be economical, but you have to keep spending on marketing and selling new ideas and new services.

"There will always be enough customers to fill hotels and restaurants, you just have to make sure it is your hotel that they are filling.

"You have to recognise that you have to work awfully hard every day. When it was all over in 1995, I had a lot of wonderful people at Stakis who did not know what a rack rate was because all they had ever known was discounting. So I actually had to go out and re-educate people.

"This time around, after 10 years of boom, it is the opposite, so people will have to be retrained into having a different attitude."

David Michels took over as chief executive of Stakis in 1990, and almost at once he had to make 5,000 people redundant. But he says those who were left behind appreciated that the company had to slim down to survive

Recession-busting tips

1. Spend your way through a recession, in particular on sales and marketing. Promote short breaks at your hotel.

2. Organise events that are tied in to a meal at your restaurant, or to staying in your hotel. Try to add value rather than conduct mere discounting.

3. If you have a hotel management contract, focus on your customers rather than being locked in meetings with owners.

4. Concentrate on better service it gives you an edge, and doesn't have to cost a great deal.

5. Smarten up your property with a lick of paint you don't want to look like you're about to go out of business - even if others are doing so.

Best for Business

Caterer is launching an exciting new campaign next year, aimed at helping hospitality businesses to operate better in these difficult economic times.

Called "Best for Business", the programme will feature in-depth advice from industry experts applied to real-life business conditions.

Monthly articles will focus on selected hotels, restaurants and pubs, as top people in their field apply their knowledge to a variety of testing situations.

Members of this panel will present ideas for change at each operation - how the businesses could be better run, along with the best way each operator or owner could achieve progress.

And we're looking for volunteers - people to offer their businesses to be featured in our pages. It's a great opportunity to find out about your business and to gain great publicity.

www.caterersearch.com/staticpages/best-for-business.htm

By Nic Paton

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