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Leading through Complexity A View from Hospitality CEOs Consumer m arkets Pra Cti Ce | Hos Pitality interest rates are low. But the majority of the growth has been driven from house prices. Consumers are allowing themselves to cash in on house price inflation”. Heidrick & Struggles 3 16050840-hs-00173-Hospitality Report.indd 3 27/05/2016 15:07t he key driver remains uncertainty. uncertainty dents confidence whether that is with consumers and their perceived ability to spend on luxury items and treats, or companies willingness to invest. t he current environment is regarded by many as “fragile”. Chris edger, professor of multi-unit l eadership at Birmingham City Business school, advised, “enjoy the good times but prepare for the worst”. a note of optimism came from several Ceo s who believe the industry is able to adapt quickly to changing circumstances more so than ever, having come through the previous downturn. What is increasingly difficult is the ability to foresee where these game changers are going to come from. Being “leaner and more innovative”, however, provides a layer of protection. London vs the regions t here remains a concern that l ondon is performing very differently from the rest of the uk . o ne Ceo said that “the provinces should be fine, but l ondon will have its challenges” with quieter months in l ondon having a “disproportionate effect” on the whole market. Confidence is building in the “n orthern Powerhouses”, in some part due to the continuing focus from government on improving transport links and devolving power from l ondon. interestingly, certain businesses are experiencing issues within l ondon, with a marked difference in performance between the West end and the City or “outer” areas. o ne Ceo commented on how the “fear factor” was impacting customer numbers in the West end, also adding that the “crazy rent increases” were “dramatically altering” the profile of the sector in high- profile parts of the capital: “r ents are now driving the medium-sized players out of the West end so you are seeing real growth in the challengers as well as the mainstream brands in zones two and three”. Economic growth there has been a slight shift in sentiment since last year from an optimistic to a more neutral stance with regard to the uks economic outlook. the majority of Ceos present a more cautious view and are very conscious this has shifted from their view 12 months ago. While some feel “moderately optimistic” or “as optimistic as last year”, what was seen as a good start to the year has tailed off for some. Duncan Garrood, Ceo of Punch taverns, summed up the current position as “a bit of the shine is off from last year”. While some leaders are seeing “encouraging consumer trends”, with some indication of growing consumer confidence, many feel there are reasons to be more cautious in believing the uk is experiencing sustainable economic growth. they cited factors such as recent terrorist attacks and threats, london versus regional anomalies and the impending eu referendum. as Ceo of Carnival uk , David noyes, mentioned, “many of the fundamentals on the British economy are pretty good, i cant remember when unemployment was as low. there have been 12 months of real salary growth and zero inflation. the issues are more about the British economy in the wider context, in particular the uncertainty around Brexit”. simon Vincent, executive vice president at Hilton, believes the “market remains relatively robust with the uncertainty being created by a disconnect between the economic fundamentals” of his business “which remain broadly positive” and the way “the markets are interpreting some short-term economic data and the geopolitical landscape”. there is also a difference between whether some of these factors are affecting consumer confidence or business confidence. the eu referendum, for example, is viewed by one Ceo as having greater influence on business decisions. mike tye, former Ceo of spirit Pub Company, said, “it will be very wobbly until the referendum because most companies will not invest until after the decision”. 4 Leading through Complexity 16050840-hs-00173-Hospitality Report.indd 4 27/05/2016 15:07Key economic challenges ahead a s mentioned, terrorism (and the threat of future attacks) and the eu referendum are seen as the key challenges facing the uk in the coming year. a potential “Brexit” is causing uncertainty for both consumers and businesses. a rise in interest rates would create a shock wave for consumers, while a rise in oil prices would, undoubtedly, raise costs for everyone. For the hospitality industry in particular, several CEOs mentioned the ability to attract and retain talent as a key worry, along with the raising of the minimum living wage. One CEO said, “The increase is the right thing to do but catch-up is needed to balance the P&L ”. Adam Fowle, CEO of Tesco Family Dining, added, “The cost of housing is a real challenge, nobody seems to have the answer and you have to question how the next generation are going to get on the property ladder. This will also have an impact on our industry, especially around staffing in London”. Business o verall, sentiment on current business performance is positive, but with a slight note of caution. t here is a “sense of positivity”, acknowledging that consumers are spending more, rather than more often. t his may indicate a move towards quality and loyalty as consumers demand a better experience. t his performance is viewed as being generally better than the previous year, particularly the start of 2016, with consistency being key. simon t ownsend, Ceo of e nterprise inns, talked about “greater levels of investment in the sector” than he had seen in “the previous 510 years”. t his is balanced, however, by comments describing 2016 as “challenging” and “interesting” with more competition for share of wallet than ever before. l ooking ahead, predictions around business performance are equally mixed. o ne Ceo of a hotel chain expects “double-digit” growth across its uk business whilst a C eo of a mid-sized private equitybacked restaurant group said, “i certainly do not feel optimisticpeoples spending is not where it should be”. For some, the protection of being a known and trusted brand is helping to maintain business growth even during times of uncertainty. However, this view was challenged by other participants who commented that whilst “consolidation will continue”, the threat from “smaller, more entrepreneurial brands who know their customers” is “very real” outside of central l ondon. a nother Ceo said that “headlines would suggest that we were heading into the next recession” but that “whilst things were slightly slowing down, they are still relatively robust”. t he Ceo of a global restaurant brand added, “t he press are doing their usual thingthere is a massive disconnect between what were seeing and what the press are actually reporting”. uncertainty around what may happen in the european election remains a key concern, with the leader of a uk listed pub group commenting, “Had it not been for Brexit, i would have been very optimistic. it does feel like the scottish referendum. it feels scarily close. so much uncertainty we need barriers to come down, not be built up”. Heidrick & Struggles 5 16050840-hs-00173-Hospitality Report.indd 5 27/05/2016 15:07Predictions for commercial performance going forward: Last year This year 20% 8% 53% 13% 7% 7% 48% 25% 10% 9% Much Worse Somewhat Worse Same Somewhat Better Much Better Top concerns t he key concerns for business are varied, from the previously mentioned security threats (one leader commented that “my real concern is around central l ondon: to me there is a sense of waiting for something dreadful to happen”) to technology alongside the arrival of market disruptors, to the cost of doing business. But one common theme is how to keep your customers coming back. a s Paul Flaum of Whitbread commented, “t he consumer is becoming much more demanding they have much more choice and more knowledge than ever before, therefore they are more unforgiving”. Consumers are demanding a bespoke, personalised experience now, and for the bigger brands this is challenging. t rying to react to the demand whilst staying true to the brand is extremely difficult. t echnology is creating a very interesting landscape for the hospitality industry, given the ease with which consumers can talk about each business. t he scrutiny each business is now subject to, and the transparency they have to deliver, is redefining the customer experience. o ne Ceo stated that the “customer is more influenced by technology. t hey check you out before they visit you you have to create the great experience much earlier on”. 6 Leading through Complexity 16050840-hs-00173-Hospitality Report.indd 6 27/05/2016 15:07What keeps you awake at night? Given the optimism, albeit cautious, for business in the year ahead, there are still many things keeping our Ceo s awake at night. Given recent events, it is no surprise that safety and security are at the forefront. t he impact of recent terrorist attacks, and the threat of future attacks, is of particular concern especially given the locations of recent targets restaurants, airports, holiday resorts and venues. a ttracting and retaining talent is also a major concern, as it was in our previous report, as well as the need to ensure the right strategic talent is in place as markets evolve. t here is also a concern over attracting new, young talent into an industry that has been traditionally seen as offering a job rather than a career. l eaders also spoke about regulatory and legislative costs not least the rise in the minimum wage. t his has added a great deal of additional costs to many hospitality businesses and at relatively short notice. underpinning all this is the sense of uncertainty and instability which tests not only consumer confidence but also the validity of strategic plans and decisions. t he uncertainty around the eu is creating “a complexity of influence” which only further confuses the picture. a nd finally, competitors are always a worry, especially with “a trend for the new” and diminishing brand loyalty. Brand power is no longer enough in itself, with consumers expecting an increasingly personalised experience. a s michel taride, group president of r ent a Car international at Hertz, commented, “l eaders need to be aware of what is going on around them you never want to fall behind.” Heidrick & Struggles 7 16050840-hs-00173-Hospitality Report.indd 7 27/05/2016 15:07
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