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  • 2013

    2014 FEBRUARY

    STATE OF THE NATION: HOSPITALITY

  • CONTENTS

    Section Page

    WELCOME 3

    1 KEY ISSUES: Our ringside perspective 4

    2 A ROUND OF DRINKS: Developments around the country 6

    3 TECHNOLOGY: Are you wired for success? 7

    4 RAISING THE BAR: Precinct profiles 9

    5 IT’S A JUNGLE OUT THERE: The competitive landscape 10

    6 BEHAVING RESPONSIBLY: Legislative pressures, compliance and costs 13

    7 2013 DEAL REVIEW: Consolidation, market sentiment and float 19

    8 OUTLOOK FOR 2014 22

    9 CONTACTS 23

    2

  • WELCOME

    February 2014 Welcome to Ferrier Hodgson’s 2014 Hospitality State of the Nation report, detailing our analysis of the key developments and events of 2013, and the outlook for 2014. The hospitality sector has been the focus of significant media coverage over the last 12 months. Enormous political and social pressure to reform gaming was significantly diluted by the wider gambling industry issues, and then relegated to the backburner following the election. After a series of tragic events in the Sydney Kings Cross late-night precinct, alcohol-related violence drew the attention of the public and the media and NSW Premier O’Farrell’s tough response is likely to create some structural shifts in the NSW hospitality sector. Despite these challenges, the sector remains dynamic and thriving. Social media and a focus on the customer experience continue to raise the bar for quality and service, which is good news for consumers. The rise and rise of small bars and greater expectations of customers demand a higher standard from hospitality-sector participants which continues to emphasise the gap between the successful operations and the less successful. During 2013, Ferrier Hodgson’s Hospitality Team managed a number of high profile and challenging hospitality sector matters, including the Annandale Hotel and the Heritage Group. We also hosted many of our clients at popular pop-up bar events, providing an opportunity to network with industry participants and players, brokers, valuers and financiers. We look forward to seeing you at our next event. No doubt the year ahead will continue to be interesting, and as always there will be winners and losers as businesses respond to the rapidly changing landscape. The Ferrier Hodgson Hospitality Team is ready to assist you in navigating this challenging environment. I hope you find this publication useful and informative. Best regards,

    3

    Morgan Kelly National Hospitality Practice Leader

  • 1. KEY ISSUES Our ringside perspective

    We have spoken with key industry contacts on a selection of big picture themes including the dual effects of rising costs and increasing competition, and the intensifying pressure from anti-social-behaviour legislation. With the sector as a whole continuing to experience limited revenue growth and declining alcoholic beverage volumes expected over the next 12- 18 months, competition for consumer discretionary dollars is intensifying. The Ashes tests are over and the next Lions rugby tour will be in 12 years, so we won’t see the Barmy Army coming to the rescue in 2014.

    Given the flat revenues and increased levels of competition expected in the sector, holding market share will require a renewed focus on the key areas of product offering, customer service and cost control.

    The need to innovate and the ability to adapt to changing market conditions is what separates progressive operators with growth prospects from traditional operators whose only route to improved financial performance is through cost reduction.

    The lower Australian dollar is expected to provide some relief for the sector, driving an increase in inbound tourism and a rebound in domestic leisure spending as overseas holidays become more expensive. The sector should see a corresponding rise in economic sentiment as consumer confidence returns and drives increased visitation and spending.

    Transactional activity, which rose in 2013, is expected to continue to improve as access to funding is facilitated by lenders competing for market share and the cost of debt remains relatively low. However, the market is likely to be affected by lock-out laws in Sydney and Adelaide which may subdue transaction activity as exposed operators and lenders adopt a ‘wait and see’ approach. A number of opportunistic vendors are repositioning their portfolios and we expect to see distressed assets continue to be brought to market, particularly in regional areas

    4

  • *Hipster culture – Urban cheesemongers and mustachioed greengrocers, with their organic fruit and vegetable smoothies, making creative waves and setting trends.

    Source: Huffington Post

    Key issues for 2014 are: • A number of major transactions and strategic moves

    are being executed; in particular, we have seen the exit of Coles from the NSW pub market at the same time Woolworths has doubled its holdings. We look at the significant transactions for the year in Section 7 of the report.

    • Liquor act reviews are being conducted across the country, and the recent tragedies in key hot spots have seen on-premise venues under intense scrutiny from governments, media and public interest groups. Lock-outs, service restrictions and identification scanners are being imposed or proposed in high-risk precincts across the country. These changes threaten to have a significant impact on revenue and profitability, particularly for late-night gaming venues. We anticipate revenue declines of up to 30 per cent across affected areas. We address the implications of these legislative changes in Section 6 of this report.

    • Technology and social media continue to have a growing influence on the sector. While venues exist as places for social interaction, it is becoming increasingly important for venues to interact with their guests online.

    • Up, up and up – Rising costs across the key expense areas of wages, rent and cost of goods sold (COGS) are being compounded with new costs including the carbon tax and additional compliance requirements. In the face of flat revenue growth forecasts across the sector and intensifying competition, it is becoming increasingly difficult for operators to maintain profitability. Progressive operators are now competing to retain the best staff and ensure they do not carry expensive ‘dead wood’ on their teams.

    • Small bars continue to grow, particularly in NSW, WA and SA. Hipster culture* is now influencing the broader sector as operators of boutique bars, generally attracted by cash-flow and lower entry costs, take advantage of consumer trends towards customisation and premium service offerings.

    1. KEY ISSUES Our ringside perspective

    5

  • 2. A ROUND OF DRINKS Developments around the country

    • CBD precinct enforced lock-outs and closing times with the real threat of state-wide implementation

    • Three-strikes legislation • Small bar proliferation

    NSW

    • Gaming operators now control their own gaming performance destiny, leading to further consolidation

    • Changes to the gaming tax rates in 2014

    VIC

    • Government alcohol management plan - March 2014

    • Ban on motorcycle gang colours • Changes to allow $50 and $100

    notes for pokies entry

    QLD

    • Retail liquor sales restrictions to reduce indigenous drinking issues

    • Banning of motorcycle gang colours

    NT

    • Liquor Act review findings handed down in 2014

    • Slowing of economic growth with mining boom moving to production phase

    • Small bar proliferation

    WA

    • Adelaide - enforced lock-outs and closing times

    • Small bar proliferation • $250 ATM withdrawal

    maximums

    SA

    • Recovery plans for operators after changes to gaming promotions saw lower revenues in 2013

    TAS

    6

  • 3. TECHNOLOGY Are you wired for success?

    Key segments of the population will now investigate bars and restaurants on Google, read blogs and online reviews and ask their online networks, friends and peers for informed advice.

    Whilst connecting with new and existing customers is great news, it is pointless without controls in place. Of vital importance to every business is an integrated point of sale (POS) and inventory-management system enabling tight cost controls, margin analysis and profit maximisation. Combining rostering and time-and- attendance systems with effective gaming, POS and inventory management programming allows business management to be fact-based rather than relying on gut feel.

    Dash is a payment app for bars and restaurants, linked directly to a venue’s POS.

    Customers who download the mobile app can settle their restaurant and bar tabs, even before they’ve been handed the bill. Customers “open a tab” when they arrive at the business, and they can pay with their phones whenever they’re “ready to dash”. Faster service and payments with no cash changing hands, tips calculated, bills split and regular customer information stored. Although presently only available in the US, we expect to see similar apps appearing in Australia soon.

    Whilst consumers cannot dine or sleep online, they can research, book, pay for and share their experie

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