This podcast isn’t personal advice. If you’re not sure what’s right for you, seek advice. Tax rules can change and benefits depend on personal circumstances.
This podcast isn’t personal advice. If you’re not sure what’s right for you, seek advice. Investments rise and fall in value, so investors could make a loss. Tax rules can change and any benefits depend on your personal circumstances.
Full podcast episode transcript
[0:10] Susannah Streeter: Hello and welcome to Switch Your Money On with me, Susannah Streeter – Head of Money and Markets.
[0:14] Sarah Coles: And me, Sarah Coles – Head of Personal Finance. And, Susannah, I know we’re lucky to have found space in your diary at this time of year, when you’re in such a frenzy of socialising.
[0:23] Susannah Streeter: Yes – and I know you have a hectic schedule of Christmas films to watch from the comfort of your sofa too.
[0:32] Sarah Coles: Yes – as ever, I’m falling short of my duty to support the hospitality industry, which is what we’re covering in this episode of the podcast, called, ‘Are we going off going out?’
[0:42] Susannah Streeter: We’ll examine how things are looking for the hotels and hospitality sector as we approach Christmas. And we’ll be speaking to Jane Pendlebury – CEO of HOSPA – the Hospitality Professionals Association.
Jane, it’s great to have you here. How is Christmas shaping up for the industry this year?
[1:00] Jane Pendlebury: It depends on what aspect of the industry you’re looking at. Some places are reaping the rewards already – and fully booked – others are going to be struggling. It depends on the type of establishment that these places are – so, typically, city centre, five star hotels that have got a fantastic package on for the Christmas period are going to be doing very well. Other aspects of the industry won’t be reaping the same rewards, and they may well be suffering a little bit more with all the other things that are affecting the hospitality industry at the moment.
[1:30] Sarah Coles: Thanks, Jane – we look forward to delving deeper into this later in the podcast. We’ll also be speaking to Matt Britzman – Senior Equity Analyst here at Hargreaves Lansdown – about what the season holds in store for listed companies in this space. And Emma Wall – our Head of Platform investments – will take us through the fund manager view.
[1:45] Susannah Streeter: The festive period is obviously crucial for the hospitality industry, as revellers book up tables and prop up bars in the run up to Christmas – and book nights away for Christmas markets and family visits.
[1:58] Sarah Coles: The industry has faced huge challenges, which don’t seem to be going anywhere in a hurry. There’s a real pressure on costs – not least staff costs.
[2:06] Susannah Streeter: And there’s a fresh fight for talent underway. Overall, across the jobs market, annual salaries have been rising at the fastest rate in three years – according to the job search engine, Adzuna.
Hospitality businesses are facing the double-whammy effect of rising salary expectations and more expensive National Insurance contributions.
[2:26] Sarah Coles: In the Budget, the Government announced that the rate of employer NICs would increase by 1.2 percentage points to 15% from April – while the earnings threshold, at which the employers start paying contributions, will fall from £9,100 to £5,000.
At the same time, the minimum wage received a sizeable boost, particularly among younger workers, raising the cost for businesses relying on younger, cheaper labour.
[2:49] Susannah Streeter: But there are visa issues for bringing in skilled workers from overseas, with a rise in the minimum salary. That means 95% of the hospitality visas last year now fall under the salary threshold.
And, although wages form a major cost pressure, they’re not the only key factor. There are also higher energy bills. These have fallen from the peak, but gas prices are still 88% higher than in March 2021 and electricity prices are 56% higher. Plus, there’s the impact of food and drink price inflation.
[3:25] Sarah Coles: Of course, businesses can increase prices – and they have done. In the year to October, restaurant and café prices were up 4.2% in a year – and hotel prices were up 5.3% – but there’s only so much they can hike prices before consumers vote with their feet and stay home.
It means hospitality businesses will have to consider all kinds of measures – from how food and drink inventories manage to how businesses are staffed – and even changes to opening hours to focus on those times that might generate the most business.
[3:53] Susannah Streeter: And these are just the businesses that survive. There are plenty that haven’t made it through. The independent sector is around 16% smaller than it was in March 2020, and it shrank every quarter for four years. The spring and summer actually saw more businesses opening than closing, but there are still questions around whether the changes in the Budget will tip the balance towards closures again.
It’s definitely an interesting time for the industry – so let’s get an idea of how it feels to be in the hospitality business at the moment, and bring back Jane Pendlebury – CEO of HOSPA.
So, Jane – you mentioned that there’s a real split in the market there between the more high-end hospitality businesses really offering these luxury packages – and perhaps others within the industry.
Can you tell me a bit more about that?
[4:41] Jane Pendlebury: Absolutely. A lovely hotel in a city centre that has lots of attractions that would bring people into the area – whether it’s the Christmas lights, or whether it’s theatre productions, Winter Wonderland in London, Christmas markets in Bath and Edinburgh. These are all things that will make it easier for the hotels to fill – if they’re in that kind of environment.
[5:03] Susannah Streeter: Is it also to do with the types of packages – and just the investment that these hotels have made into their businesses in previous years?
[5:13] Jane Pendlebury: There’s a split across the industry – it depends why you’re staying in a hotel. If you’re staying in a luxury hotel – to be pampered and treated – then you’re probably not so worried about the cost – or it’s a one-off, exceptional treat.
Then there’s the budget end of the market, who will also benefit from some additional Christmas bookings – because people will be staying with family, but perhaps there isn’t accommodation at the family home for everybody to stay. Some of the budget hotels are really jumping on that bandwagon to fill their rooms around Christmas.
[5:44] Sarah Coles: And I suppose it comes on the back of a number of difficult years, doesn’t it?
[5:47] Jane Pendlebury: I hate referring to COVID, but it did have such a massive impact – and that’s ongoing. Not everyone has paid off their COVID loans yet – there’s lots of legacy from that.
Another thing I hate mentioning – Brexit – that has had its impact on staffing levels in the industry. And things like the cost of living crisis, the supply chain issues, customer confidence – all impacts hospitality at the sharp end, pretty much straightaway.
[6:14] Sarah Coles: What are the biggest pressures on businesses right now?
[6:17] Jane Pendlebury: Probably not so much finding staff – which was an issue – it was a really acute issue previously. Probably the issue now is funding those staff. Since the recent Budget and the increases in NI that we’re hearing across many sectors, but that’s seriously affecting the hospitality industry – especially where we’ve got a lot of part-time working. So, those workers who work not many hours will now be falling into the threshold of National Insurance being due – which is having a terrible effect on payroll.
[6:51] Susannah Streeter: Do you think this is going to have an impact on trading budgets, going forward?
[6:55] Jane Pendlebury: Certainly. Things like training – although nobody wants to cut training, that will be something that will be cut. Likewise, marketing is often one of the first things to go – which can end up coming to bite you afterwards! Where non-essential spend has to be cut, these are the places that it tends to go.
[7:12] Sarah Coles: But there was some good news on business rates, wasn’t there?
[7:15] Jane Pendlebury: Yes – they have retained the Business Rate Relief. That still isn’t that brilliant because the percentage has reduced – and it is only to a certain cap – but the fact that the relief has been extended is a very welcome addition.
[7:29] Susannah Streeter: What would you say the trend is?
We’ve seen this a bit in the budget hotel sector – of the closure of the some of the in-house restaurants, with the concentration on pure hotel rooms instead. Is that a trend that you’re seeing more and more?
[7:44] Jane Pendlebury: Hotel restaurants have always found it difficult to be profitable – unless you’ve got a specific reason or something different about that restaurant. You’ll find a lot of them outsourcing to the celebrity-chef kind of environment, where somebody else is running the restaurant for them.
You’re right – a lot of them are closing, but a growing area of the industry is meetings and events. Some people are changing their space and reallocating some food and beverage space into meetings and events space.
[8:17] Susannah Streeter: Would you say that, following COVID, this part of the business has now bounced back? And there’s a craving for face-to-face meeting environment compared to what we saw just after the pandemic, when there was some speculation that we’d stay with virtual meetings for the foreseeable future.
[8:38] Jane Pendlebury: Virtual meetings still happen, for sure – but I think there is a craving for the face-to-face.
If you look across the conference management meetings and events spectrum, some of the larger conferences have reduced in size, but there are a lot more of the smaller get-together. That could also be a knock-on effect of not everyone going to the office – so office space being let go – and people are having to find other places to meet. And, if a hotel can benefit from that, they will lap it up!
[9:06] Susannah Streeter: If there are fewer, larger events – when they do take place, are there any indications that they might be more expensive and lavish?
[9:15] Jane Pendlebury: Sometimes, you can look at the spend – and maybe the spend hasn’t increased, but the numbers have reduced. That indicates that the spend per head is higher – and people have to be tempted to come to these events. If there’s an option not to, then people will prefer not to travel and work from home. There has to be an additional incentive to want to go to these events – and, if that is upgraded food, beverage, then I would say that’s an investment worth pursuing.
[9:44] Sarah Coles: What other trends are you seeing emerging that really stand out for you?
[9:47] Jane Pendlebury: I think Christmas parties. Corporate Christmas parties are a thing of the past – that’s not to say that people aren’t going to get together, but, in years gone by, where Christmas parties for companies were a big thing, they’re much less of an established part of the social calendar for a company than they have been previously.
[10:06] Susannah Streeter: Why d’you think that is?
[10:08] Jane Pendlebury: I imagine that is an effect from COVID – when these stopped – and perhaps now, in today’s environment, of being more cautious of people going out drinking with their colleagues – perhaps it doesn’t seem like a safe place to be – to have a Christmas party, where there’s going to be lots of free-flowing alcohol, and problems may occur.
[10:29] Susannah Streeter: Thanks, Jane.
All this is affecting listed hospitality businesses too – and it’s a good time to bring in Matt Britzman.
So, Matt, let’s jump straight to it – JD Wetherspoon has just released its full-year results. What’s your take?
[10:53] Matt Britzman: It’s been a strong year for Wetherspoon – they’ve just reported revenues of £2bn. They’ve cut the number of pubs in their estate and focused on driving higher average takings – and it seems to be paying off.
Margins are improving, but they haven’t quite returned to pre-pandemic levels yet, but profit targets for the current year look achievable.
[11:15] Sarah Coles: What’s behind this success?
[11:17] Matt Britzman: The brand is key. It’s the most visited licensed chain in the UK – and they’re increasingly appealing to a younger and more family-focused demographic. Theat’s driving food sales, which now play a bigger role in the overall mix. It’s a smart move – especially as they’re pulling customers away from more expensive, casual dining chains.
[11:36] Susannah Streeter: It sounds positive, but there are still challenges on the horizon, aren’t there?
[11:44] Matt Britzman: There certainly are. Rising costs remain a headwind – and including those changes to the National Living Wage – and some of the other announcements from that Budget.
Cash flow has also been a bit of a weak spot – but that was largely due to the timing of payments and increased investments in their pubs. Looking ahead, cash flow is expected to recover, and the balance sheet is in the best shape that it’s been for years. That’s allowed them to reinstate dividends and buy back shares, though nothing is guaranteed.
Longer-term, it’s a well-run business with room to grow and gain market share. That said, no business is immune to a downturn, and consumer sentiment is still fragile.
[12:25] Sarah Coles: Thanks, Matt. Let’s move onto Whitbread. How are things looking for the Premier Inn owner?
[12:30] Matt Britzman: Whitbread’s first half has been a bit of a mixed bag. Revenue was flat, and Premier Inn’s UK performance dipped slightly. A softer UK hotel market, combined with some disruption from restricting its food and beverage arm, has weighed on results. On the positive side, German accommodation sales rose – which is encouraging for their international ambitions.
Profitability and cash flow have also taken a hit – the UK’s more challenging environment is the main culprit. They’ve identified £150m in cost savings to be delivered over the next three years, but wage pressures are growing.
[13:06] Susannah Streeter: It sounds tough.
Where are the positives? How d’you view this shift from restaurants to rooms at the company?
[13:14] Matt Britzman: Whitbread’s decision to shift focus towards integrated restaurants within its hotels is smart. Over 25% of planned room openings over the next four years will come from converting existing restaurants. That’s a measured way to grow without overextending themselves.
Whitbread is in a strong position, over the long-term, with a good brand and healthy balance sheet. They own over half their hotels, which gives them flexibility.
[13:41] Sarah Coles: Thanks, Matt. And, finally, we’re moving into the world of contract catering, with Compass Group. What can you tell us?
[13:47] Matt Britzman: Compass has had a strong year too, with revenue up over 10% and operating profit up 16%. It’s seen steady growth in both pricing and volumes, supported by new business wins. The only slight gripe was a softer-than-expected guide as to the future, but management has a reputation for being conservative, so that should be borne in mind.
[14:10] Susannah Streeter: What’s the key driver?
[14:12] Matt Britzman: Compass feeds a huge range of sectors – from stadiums and offices to schools and hospitals. They’re the natural choice for companies looking to reduce costs and gain certainty over their catering budgets. Interestingly, only about half of their target market outsources food services – and Compass has less than 15% of that $320bn pie – so there’s plenty to go for.
[14:36] Sarah Coles: That’s quite an opportunity. Are they well-equipped to capture it?
[14:40] Matt Britzman: We think they are – Compass’s huge scale is an advantage. The US market makes up around three-quarters of profit, but they have a presence in over 30 countries – and Europe is a key growth avenue. That scale allows them to offer competitive pricing without sacrificing quality, which has been key to winning new contracts.
[15:01] Susannah Streeter: All things considered, how do you see Compass moving forward?
[15:06] Matt Britzman: Compass has done a great job positioning itself as a leader in a growing market. The valuation is on the higher side, which reflects the strengths, but also means there’s added pressure to keep delivering.
[15:17] Susannah Streeter: Thanks, Matt – some interesting names to watch in the hospitality sector.
Of course, how things go this Christmas is something fund managers will have an eye on too. So, this feels like a good time to bring in Emma Wall – our Head of Platform Investments at HL – who’s been speaking to Steve Clayton – Head of Equity Funds at Hargreaves Lansdown.
[15:43] Emma Wall: Hi, Steve.
[15:44] Steve Clayton: Hi, Emma.
[15:45] Emma Wall: We’re here today to talk about the hospitality sector – topical in the run up to Christmas – I’m sure lots of people will be going out. So, a good time for the hospitality sector, but it hasn’t been a good few years, has it?
Two major events: a significant headwinds for hospitality. First, the pandemic, and then the war in Ukraine – and significant inflation for input costs.
[16:09] Steve Clayton: Absolutely. The pandemic brought the shutters down for much of the industry for considerable periods of time. Just when they were getting themselves back on two feet, the war in Ukraine began and power prices – which are a big part of most hospitality businesses’ operating costs – went through the roof. Unlike domestic households – who got some help from the Government in limiting the impact of those bill increases – business and industry was left to fend for itself. It’s been a tough period of time.
[16:42] Emma Wall: What about recent curveballs? I’m thinking about measures announced in the Budget – in particular around National Insurance contributions for business. And, good news for those on the wages, but the increases on minimum wages – those two measures will particularly impact the hospitality sector, won’t they?
[17:01] Steve Clayton: Absolutely. The Budget wasn’t universally bad for business – there was some good certainty applied to things like North Sea Oil and Gas investment allowances – but, for the hospitality industry, it was a bit of a direct hit.
The industry has large numbers of staff – many of them are part-time – and minimum wage tends to be the benchmark for a lot of these positions. Not only has the actual baseline [inaudible 17:31] wage gone up, but the employers rate of National Insurance has gone up from 13.4% to 15%. That’s about a 10% hike – but, worse than that for the industry... the Government announced that the threshold at which an employer has to start paying NI for their employees has dropped by almost a half.
So, now, anyone earning as little as £5,000 – their employer has to start making NI contributions. Not a promising start to the festive season for the hospitality sector. Retailers are also going to be hit by this because they have similar combination of large numbers of staff, often part-time.
[18:14] Emma Wall: What about the opportunity? What’s the outlook for the hospitality sector at the beginning of what is one of their peaks in the year?
[18:27] Steve Clayton: It’s gonna be very hard to make any strong calls over which way Christmas is going to go. The industry knows that it’s got to contend with higher costs.
On the plus side, the UK consumer has proved remarkably resilient. They’ve been hit by extraordinary surges in their fuel bills – there’s been huge increases in mortgage costs – and people living in the rental sector have seen fairly substantial rates of rent increases. Despite all that, consumer activity has held up a lot better than many feared.
We’re starting in a position of relative stability, but the playing field is getting a bit steeper. It’s not a calamity, but I don’t think many people will be expecting this to be a bumper Christmas for the industry.
[19:20] Emma Wall: I suppose it’s one of the industries that is less likely to be impacted by things like tariffs, which are looming over other sectors which may do a lot more business and trade with the US?
[19:35] Steve Clayton. That’s right. If you look at the food side of the industry – the actual cost of ingredients – many of which will be sourced from overseas – is a relatively low proportion of the final bill that the customer pays. The potential for tariffs to impact on that is small in most cases – so the sector should be relatively insulated.
A lot of the stuff that the industry buys in is domestically produced – whether it’s wages or some [s.l. other food 20:04].
[20:04] Emma Wall: Thanks, Steve.
[20:06] Steve Clayton: Pleasure – thank you.
[20:11] Susannah Streeter: That was Emma Wall speaking to Steve Clayton from Hargreaves Lansdown. Please bear in mind that these are the views of the fund manager and are not individual stock recommendations.
To round off this episode of the podcast, we have time for a quick fact of the week – and we’re sticking with hotels for this one. YouGov carried out a survey in August this year to find the hotel brand people rated most highly – so who d’you think came up top?
Was it Travelodge, Premier Inn, or The Ritz?
[20:53] Sarah Coles: I’m gonna rule out The Ritz – that’s the obvious one – so I’m gonna go for Travelodge.
[20:59] Susannah Streeter: No – it was Premier Inn – with 78% of people having a favourable opinion. The Ritz was 7th, which shows just how price matters in this business.
[21:10] Sarah Coles: I know where I’m more likely to be staying – although the idea of staying anywhere this Christmas, where I’ll be looked after, is a very tempting thought.
[21:18] Susannah Streeter: I’m gonna be staying in my camper van outside my sister’s house!
[21:29] Sarah Coles: That’s a great idea! I think I’m gonna spend Christmas just glued to the sofa.
[21:38] Susannah Streeter: That’s all from us for this time – but, before we go, we do need to remind you that this recorded on 2nd December 2024, and all information was correct at the time of recording.
[21:47] Sarah Coles: Nothing in this podcast is personal advice – you should seek advice if you’re not sure what’s right for you. Investments and any income they produce can rise and fall in value, so you could get back less than you invest, and past performance is not a guide to the future. Tax rules can change and benefits depend on individual circumstances.
[22:01] Susannah Streeter: Yes – this is not advice or a recommendation to buy, sell, or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.
[22:13] Sarah Coles: And this hasn’t been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.
[22:19] Susannah Streeter: Non-independent research is not subject to FCA rules prohibiting dealing ahead of research – however, HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing.
[22:32] Sarah Coles: You can see our full, non-independent research disclosure on our website for more information. So, all that’s left is for us to thank our guests: Jane, Matt, Steve, Emma, and our Producer, Elizabeth Hotson.
[22:40] Susannah Streeter: Thank you very much for listening. We’ll be back again soon – goodbye!