Make your business recession proof

13 December 2013
Make your business recession proof

As the hospitality industry takes stock in the aftermath of the recession, we look at how the lessons learned might make businesses stronger and ready for the next time around. Rosalind Mullen reports

The government's number-crunchers have told us that we did not have a double-dip recession, but your customers may not agree. They are still feeling the burn from what has undeniably been a vicious, extended downturn. Indeed, the continuing pressure on spenders is revealed in government figures showing that real household disposable income (after tax and inflation) in the first quarter of 2013 fell more than in any quarter since 1987.

Arguably, it's just another hurdle for the hospitality industry. "Running a hospitality business in the past five years has been pretty bloody," says Peter Banks, managing director at four-star spa hotel Rudding Park in Harrogate. "I've been in the industry for 30 years and have never known it to be this depressed for this length of time."

With consumers strapped for cash, pricing has been crucial, but this has coincided
with the growth of third-party booking sites.
This new transparency has educated customers to scour the internet for bargains, but it has also forced those hoteliers who are desperate to fill rooms to pay hefty commission fees. To stay competitive, hotels need to accept that guests expect immediate responses to queries - after all, they can book a hotel from their mobile while waiting for a bus.#

"Guests are a lot savvier, and they have started using technology more over the past five years," says Banks. "They thrive off this being a disparate industry. There's always
a better deal down the road."

With more than half of hotel stock in the independent sector, Banks reckons one of the most powerful marketing tools to emerge has been TripAdvisor. Though he admits it can be a double-edged sword, he has embraced it. "Ten years ago I had to fight brands like De Vere and Marriott. Now 75% of every hotel booking is made after a guest referral on a third-party 
site, and 90% are through TripAdvisor."

Hotel industry consultant Melvin Gold agrees that guests no longer think in terms of a brand, but in terms of a deal - often searching a third-party site by location and cost.

"Third-party booking sites are here to stay, and hotels are struggling to fight that," he says.

Gold also argues that traditional segmentation between leisure and business market rates has been blurred by online transparency.

In addition, maintaining corporate business has been a constant challenge for top-end hotels as corporations tighten their belts. 
One sector to benefit has been budget hotels. While it's not surprising that the downturn has seen them blossom, accounting for some 20% of supply, it is interesting that brands such as Premier Inn and Travelodge have increasingly attracted business travellers. As Gold points out, there was a point when people were simply happy to have kept their job and no longer quibbled about the loss of perks.

"But there is potential for change," he says. "Businesses will start to want to entice their new talent with a good package."

Speculate to accumulate Most hotels have trimmed costs to survive, 
but curbing investment has proved a false 
economy, creating a spiral whereby the property depreciates, attracts fewer guests and makes less money, which forces more 
discounts and so on.

"It's important in the up-cycle that hotels invest and bring their offer up to the expectations of the 21st-century traveller," says Gold. "I believe people have nowhere to go with regards to cost-cutting. [As occupancy improves] they have to grow revenue and invest in their business to entice customers."

Paul Milsom, managing director of East Anglia-based Milsom Hotels and Restaurants, adds: "In a recession it's easier to put clear blue water between yourself and a competitor if you're brave enough to invest. When there are fewer restaurants opening and those that aren't established are unable to invest, you can show your customers you are the place to be. Simple things are enough, such as sprucing up the drive, painting the front door. Avoid apathy. If they aren't busy, get the kitchen team to help."
Milsom's business entered 2008 in a strong trading position, having learned hard lessons in the 1990s. "We are better prepared this time. In the 1990s we had inherent issues we hadn't tackled, so we were on the back foot. This time, we invested during the good times to get the business in a better position for the bad times."

Lessons learned included keeping the teams informed, talking them through the fact that cash-strapped customers want more for less, and insisting that, even when business is slack, key managers are out on the floor rather than in their office. Milsom also stresses the importance of a can-do attitude.

"These are basic hospitality issues that 
confront us at all times. You can say "no" in the good times, but it shouldn't be like that. The lifeblood is the customer - you need to grab extra business."

Milsom also reckons canny operators can exploit the positive side to a recession. For instance, staff are keen to stay in a job, so turnover is lower, thus reducing training and recruitment costs, and suppliers are more price-effective. In recent years, interest rates have been lower, too, which is good for the 
bottom line - it also means customers in employment are happier to spend.

"Today's customer is different, because 
people want to eat out - it's part of their 
expectation. Whether they can afford it is another thing, but this is a fundamental change," says Milsom.

Voucher culture And that brings us to discounting, which can be a controversial subject. Milsom, like many, has taken a positive approach over the past five years, particularly during the winter. But while at Le Talbooth he offered a two-for-one deal on Mondays and Tuesdays in January, he made sure to target existing customers.

"It can be dangerous to try to get new customers that way," says Milsom. "We haven't had to change our prices massively, but there are problems if you need to drop your prices."

Similarly, at Rudding Park, Banks says he has tried every enticement, but ensures that "clever discounts" are on targeted dates when business is slack. For instance, in January, he may offer a £70-a-head dinner in the restaurant with a free bedroom or a weekend package with free golf.

Gold warns, however, that some operators can take discounting to a detrimental level. He was puzzled that some hotels set a bargain price for weddings, which is one market where people don't traditionally buy on price.

One sector where discounting has become a minefield is restaurants. Customers have developed an appetite for vouchers that will be hard to shift, and observers predict that added-value deals, such as Champagne on arrival, will continue.

Besides discounting, menus have been restructured in response to the food-price inflation seen in 2008-2009. Expensive items have been replaced with cheaper cuts and
portions have been reduced and that is now hardwired into the industry.

"Consumers flock to brands because they offer good prices and consistency. Independents are struggling more," says Peter Backman, managing director at foodservice consultancy Horizons.

Certainly, the restaurant industry has struggled, seeing a year-on-year decline for the past few years. Backman comments: "London did well until the beginning of this year, but people don't have any money. They have jobs, but 
they aren't paid as much."

Outside London, managed pubs are proving a threat. Not only do they have well-priced food offers, they also have a revenue stream from beer, which helps keep prices down.

Those restaurants that have survived tended to have entered the recession after several years' growth, having understood the customer's need for value and the importance of being flexible and making offers carefully.

Arguably, the industry has learned these lessons. "It's tempting fate, but I think the worst is over. But life will never be the same again," says Banks. "In 2005-2006 you opened the doors and people flooded in. Now it's sluggish and you have to work hard for every penny."

Cutting the flab at Rudding Park, Harrogate

When the recession bit, Peter Banks, managing director at the 90-room, four-star spa hotel, was brutal in assessing processes that had been unchanged in 10 years.
"Any business that says they weren't flabby in 2004, 2005 or 2006 is being economical with the truth," says Banks. "There are always areas that can be tightened up."
As the banks got tough, he started asking all guests for a booking deposit - something he had never done pre-2006.

To improve cash-flow, he also launched non-refundable deals, whereby guests got a lower rate for paying up-front. To reduce debt, he pushed the credit card providers to pay up within two days rather than three. He also returned excess stock to suppliers to release cash and introduced a daily cash-flow forecast projecting a year ahead. But what particularly helped Banks was the introduction of a monthly flash report, giving a "quick, down-and-dirty" snapshot of the key financials: sales, wages, food cost, beverage cost, debtors and cash flow. This flagged up any warning signs rather than waiting for a profit-and-loss report (see 'How to stay afloat…').

"Things like laundry and electricity can take care of themselves. But if your food costs are rubbish, you need to take note. Look at what's popular on the menu and push that. Check whether the chef has slipped an extra scallop onto the plates, which adds costs. Then you can do something before the next month."

To tackle sluggish cash-flow at the beginning of January, he offered owners at Rudding Park's adjoining holiday park incentive vouchers to pay their licence fee before February. This helped reduce the hotel's overdraft exposure.

When corporate business fell away, Banks reacted quickly. Previously the hotel saw 25% leisure business, but this has increased to 50%. "You have to accept that the market is falling and find something else, so even though leisure is a difficult sector, we did what we should already have been doing and worked the database and communications."

He was also flexible with rates, filling shoulder periods with discounting. "It's no longer a dirty word in the provinces," says Banks. "The rules have changed irrevocably."
He squeezed his suppliers, too. In 2008, he started sending out monthly tenders to get the best price for a guaranteed order. And with regards to regular service providers, such as taxi companies, Banks has not been shy about asking for a kick-back.

"Make it worth your while - online travel agents do it to us," he points out. "It's a case of thinking differently to change the business. We wouldn't go back from that now. But a new wave will come along who won't remember the pain and businesses will get flabby again."

Offer value, but don't discount and damage the brand

Restaurateur Jamie Barber of Hush and the five-strong Cabana Brasilian Barbecue group reckons the fact his restaurants are London-centric has insulated him
from some of the hardships faced elsewhere.

"In 2008/9 we noticed that wine choices were downgraded compared with 2006, but food trade remained good," he says. "Everyone was talking it down and investors had no appetite to put money into new ventures. But it wasn't hard for us. We traded well and today business is buoyant. I see great activity for the next four or five years - unless Europe throws us a curve."

He notes that successful restaurants found fat where they didn't know it existed and became leaner. But one area he feels didn't work for competitors is discounting.

"Discounting in 2008 was rampant and a knee-jerk reaction they regretted," says Barber. "When Groupon vouchers popped up, we steered clear. I think people [who signed up] found it damaging to their brand."

What wins customers today is value, but Barber believes this is subjective. "You can spend £10 on a burger you feel has no value, or £100 in Nobu and feel you have great value. Whatever market you are operating in, you should be attuned to value and added-value."

In his view, people spot "emperor's new clothes"more than they used to and are less impressed by over-priced, stuffy restaurants. "In 2006, people took their clients out to lunch and bought a £300 bottle of wine. Now that's vulgar. People are less showy," he says.

With Cabana, he says what worked was huge levels of customer engagement. The company exploited the rise of social media - particularly Facebook and Twitter. Cabana maintained a strong dialogue with customers and gave instantaneous feedback.

If a customer was tweeting about a birthday, the staff would produce a birthday cake; if they were moaning about not being served, the staff would react.

So where will Cabana be when the next recession strikes? "With any luck, we'll be a larger company, but that will mean more challenges.

At the moment we're agile, so I have sympathy for large groups. For them, dealing with the recession was like making a U-turn with a tanker."

But while Barber would expand out of London, he will only consider hotspots such as Manchester. "There's lots of pain out there, so I would steer clear of non-major towns and cities."

How to stay afloat the next time… and there will be a next time

There are six fundamental indicators of whether your business is sound, and they are sales, wages, food cost, beverage cost, debtors and cash flow. These should be distilled onto one sheet at the end of every month, rather than waiting for a profit-and-loss account.

Other areas that should not be ignored include:

  • Investment - update your property during the good times and keep it looking fresh when recession hits to give you market advantage.
  • Concentrate on service - make sure your managers are wooing customers on the floor, even when quiet.
  • Be prepared to adjust your market segments.
  • Consider "clever" discounting to nurture existing guests.
  • Listen to your guests and meet their needs for added value.
  • Trim excess costs and become leaner.
  • Push your suppliers for better deals and release your cash by returning excess supplies.
  • Avoid becoming over-geared.
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