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Review of the Year 2007: The ups and downs of the past 12 months

19 December 2007 by
Review of the Year 2007: The ups and downs of the past 12 months

With the global credit crunch beginning to affect consumer and investor confidence, the Government finding more ways of making life harder for hospitality and tourism operators, plus the summer floods, 2007 was an action-packed year. Angela Frewin takes a look back

The year started with the collapse, and rescue, of one of the UK's iconic hospitality brands, Little Chef.

Vector, the UK's first stab at a hotel real estate investment trust (REIT), didn't happen, and a report in July by services provider Experian found 329 companies in the hospitality sector had failed in the first half of 2007, an increase of 16.3% on 2006, at a time when the number of overall insolvencies was down.

Although 2007 was a year of record growth for many, what the next 12 months has in store with the world's financial markets still in turmoil is anyone's guess.

However, Punch Taverns' and Mitchells & Butlers' short-lived time in the FTSE 100 index of leading shares, which came to and end this month, seems to point towards tougher times for all hospitality operators.

Natural and man-made disasters

But the Government was more than ready to make up for this with a series of measures that seemed designed to curb expansion and investment.

Best Western calculated plans to phase out Industrial Buildings Allowance, announced in the Budget, over four years would cost its members alone £80m in extra tax, while London restaurant operator Tampopo warned that changes to Enterprise Investment Schemes would stifle small group growth.

Hoteliers and private equity firms were equally aghast at Government proposals to replace the existing tiered capital gains tax with a flat rate of 18%, although hope remains of a partial U-turn by the chancellor in the New Year.

Tourism

Controversy surrounded the Government's, at best, indifference towards the £100b-a-year leisure and tourism industry. Its Cinderella status seemed confirmed when VisitBritain announced 55 redundancies and the marketing body's plea for £20m to promote the 2012 Olympics was rebuffed and a hammer blow delivered to the organisation with the inexplicable news that there would be an 18% cut in overall funding over three years.

Industry leaders have called for a crisis meeting with the Government, arguing that its tourism policy will cause the UK to miss out on £5b in revenues and the creation of 110,000 jobs over the next decade.

On the plus side, the Government established a single body (VisitEngland) to market England more coherently than the Regional Development Agencies have done to date.

Pubs

The year started and ended with news that the Government was rethinking its shambolically implemented licensing reform in England and Wales despite popular support for the changes to opening hours. The controversy surrounding supermarkets selling alcohol as a loss leader and, in publicans' views, undermining their efforts to retail alcohol responsibly, rumbled on and the spectre of pubs paying for policing returned.

This year's major change for the sector was the smoking bans that took effect in Wales and England in April and July, as well as Northern Ireland, costing the likes of Marston's £20m in preparation costs. While the bans have not killed off profits so far, other negative factors were at play.

The Association of Licensed Multiple Retailers warned that rising wage and utility bills had inflated the cost of running a pub to more than 60% of net turnover. A Parliamentary report, due officially next year, said soaring property prices for pubs and lax planning regulations would threaten the sector's long-term future and consumer group the Campaign for Real Ale claimed on average 56 pubs were now closing each month.

Vector's failure deterred most major pub players from putting their property estates into tax-efficient REITs for now, as did a lukewarm reaction from HM Revenue & Customs to such a course of action.

However, Mitchells & Butlers has found itself considering this avenue once more at the behest of key shareholder Robert Tchenguiz after a joint property venture with the Iranian tycoon stalled in September, incurring costs of £155m for the operator.

Restaurants

Following last year's stunning climb-down by HM Revenue & Customs over demands for national insurance to be paid on tips via the tronc, the contentious issue made headlines again this year. Although a tribunal ruling found in favour of restaurant groups using non-cash tips to top up employees' wages, union Unite launched a public campaign to highlight and challenge the practice, claiming it means staff in effect take a pay cut when on holiday or sick.

Zagat claimed London restaurant prices were now the dearest in the world and there was a slew of business failures including Benjys sandwich chain, Little Chef and Out of Town Group.

Volatile markets also derailed the flotation plans of Wagamama, Pret a Manger and Gaucho Grill, although other deals - such as RoadChef's £425m acquisition by Delek Real Estate - happened.

Gordon Ramsay briefly became jointly the world's most Michelin-starred chef until French maestro Alain Ducasse, who made his UK debut in London's Dorchester hotel, topped him with a 13th star.

Hotels

Hotels started the year on a triumphant note as the Government heeded Caterer's Say No To Bed Tax campaign and abandoned plans to introduce the additional burden.

But mixed sentiment among investors scuppered the flotation of the Vector Hospitality hotel REIT and delayed the subsequent offloading of some of the 71 hotels identified for Vector's portfolio. Other victims included the £700m sale of Malmaison and Hotel du Vin - still pending - and Royal Bank of Scotland's £1.1b disposal of 15, mostly Hilton-run, hotels.

Other deals progressed more smoothly, with Hilton hogging the limelight with its £10b-plus takeover by private equity company Blackstone.

The budget sector achieved a record-breaking £1b-plus turnover in 2007 and is forecast to double in size over the next 20 years, from 12% to nearly 27% of the total hotel market.

Contract catering

School meals went into free fall as secondary school pupils voted with their feet after the ban on junk food in schools, with national average meal uptake falling 17% to its lowest level since provision started in 1944. The Government responded with its Million Meals campaign, but has yet to respond to caterers' demands for clarification of the "confusing" nutrient-based standards due to be phased in from next year. It also moved to tackle malnutrition in care homes and hospitals.

Other sectors - notably defence and business and industry - proved more buoyant. Elior had a turbulent time with massive restructuring, while changes made over the last 18 months by Compass Group's new leaders continued to impress the City. The world's largest caterer even finished the year winning a contract to cater for the very part of the US government that had investigated it over the UN contract scandal.

Charlton House made its first acquisition (Chester Boyd) and specialist caterer Searcy's was snapped up by the owner of De Vere Hotels.

What next?

Despite uncertainty over future prospects, two reports predicted a consumer feeding frenzy in hotels, restaurants and pubs during the current festive period that could lead to as much as a £6.8b boom for operators.

Sector Skills Council People 1st unveiled its long-awaited National Skills Strategy to help tackle the chronic skills shortages in tourism and hospitality. However, it became increasingly clear that the Government's planned points-based system to control non-EU immigrants (starting next year) is likely to worsen the situation for ethnic restaurants. Flouting the law to plug staff gaps could prove costly from February, as bosses face stiffer penalties of £10,000 per illegal worker.

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