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TOP STORY: Surviving the downpour

For most people in the UK, this summer has been characterised by relentless rain but for licensees it has felt more like the perfect storm, reports Alex Eyre

Rising fuel bills, duty hikes and the increasing price of raw ingredients have upped the cost of running a business; the smoking ban caused a downturn in footfall; and licensing reform raised the competitive stakes.

The credit crunch, affecting the cost of borrowing, was the final straw in the fiscal firestorm that’s been traumatising licensees for the last 12 months. As the fallout has rippled through homes across the UK, boosting mortgages, food and fuel bills, consumers have responded by tightening their belts – and leisure-spend dependent businesses have found themselves on the front line.

Signs of changing spending patterns are evident everywhere. Anecdotal reports of Audis parked outside Aldis translated into a 20.7% sales growth for the value-based retailer in the 12 weeks to 15 June, seeing them take a record share of the UK grocery market of 2.9%. Middle class shoppers were, if not ditching Tesco and Waitrose for good, at least dipping their toes in the discount shopping sector. Frozen food specialist Iceland and bargain store Lidl were also publishing positive sales results – well ahead of their mid-market cousins. Economic circumstances are playing into the hands of the discounters, who in turn are appealing to new customers from more middle-class backgrounds.

Organic decline
Cost consciousness isn’t just affecting where people shop, it’s affecting what they buy. News broke in August that the British love affair with organics had stalled for the first time in a decade. TNS research had charted a 10-fold rise in organic food sales in the last 10 years to more than £1.3 billion a year – but their latest figures show a steep decline: nearly a fifth from their all-time peak in February. Consumers are scaling down spend on food purchases, it seems. But would the same cost-cutting approach be evident in the on-trade?

CGA conducted a survey of 560 licensees to assess the impact of the credit crunch on their businesses. The result? 58% felt that the credit crunch was having a negative impact – a figure rising to 63% in the social club and wet-led market segments. 54% of respondents felt that the main manifestation was a decrease in footfall, with customers looking for one big night out a week. 32% of operators thought that there were the same number of people in their venues but that those people were drinking less. 11% of operators said that people were opting for cheaper drinks. Like for like sales analysis comparing this summer to summer 2007 provides the numbers to back up this perception. Volume sales in all major categories are in decline (see table, p8), with the growth of premium brands mitigating the impact of the downturn in some areas – but only just.

Elaine Clarke, MD of North-West based bar chain Baa Bar
“Baa Bar is performing remarkably well considering the current economic climate. We’re actually benefiting from the credit crunch! Our drinks offers continue to draw people looking for a good night out on a tight budget. Our sales are up year on year, so while other bar companies are contracting, we at Baa Bar Group are looking to invest in new locations. We also keep investing into the other bars through tweaks and refurbishments all the time. It keeps the bars fresh and makes sure that we stay ahead of our competitors.”

>David Crabtree, CEO of 3D Entertainment, which operates the Chicago Rock Café (CRC), Love 2 Love and Mortimers brands
“The credit crunch has hit CRC hardest because of the age profile of its average consumer, who is around 30, therefore feeling the financial pressure more keenly than their younger counterparts. Midweek is very difficult and foot traffic only moves with low prices and sometimes with well organised and marketed promotional activity. We are growing volume with all inclusive activity. Profitability remains good.”

Aaron Mellor, CEO of national bar and nightclub operator Tokyo Industries
“Like everyone we’re certainly finding trade tougher, but are currently in a programmed lull with the students on holiday and anticipate that on their return trade will be good. That said, we are predicting a faster than usual tail-off to student spending, which would normally last to mid-January but which this year we expect to drop off late November/early December – with gala exceptions at the end of December. Strong musical programming and high operational standards will continue to differentiate the outlets from the competition and help us capture both footfall and spend.”

Stephen Hawkins, consultant and owner of a portfolio of Leeds venues including Oracle, OK Karaoke and The Loft
“It’s fair to say the credit crunch is having some effect. However, I do feel very strongly that quality brands with a customer focus and a unique product will weather the storm well. Regardless of the bad weather, Oracle had a fantastic July, although August was a little slower. OK Karaoke saw a small dip around May when the news started to filter through, but has again regained its legs. The restaurants I feel may have suffered more than the bars but again our outlets with price conscious menus have remained fine.”

Winners and losers
Consumers are increasingly price conscious, thinks Elaine Clarke of expanding North-west bar chain Baa Bar – one of only a few operators bucking current trends. “We’re actually benefiting from the credit crunch,” she told the drinks business. “Our drinks offers continue to draw people looking for a good night out on a tight budget. Our sales are up year on year.”

The story is not as positive for every operator. Since the beginning of the year CGA has monitored a rapid shrinking of the on-trade sector that’s seen the number of licensed businesses dip below 140,000 for first time since the database was created in 1991. Hardest hit is the community wet-led pub sector: accounting for the majority of the average 36 closures a week we’ve seen since Christmas – an acceleration of 2007’s 26-outlets-a-week slide. But also struggling are bar chains on the competitive high street, from where news of fresh casualties arrives each week. Candu, Korova, Bar Sport and Herald Inns & Bars: just some of the victims of tough trading conditions and a reigning in of credit facilities in recent months. While supermarkets can respond to cost consciousness with deep discounting, in the on-trade it is a strategy fraught with problems. Not only can it contribute to excessive consumption and social disorder but it can also change a consumer’s perception of an outlet – or brand – for the worse. For these reasons it’s not a favoured strategy among most licensees, who on the whole view it as a last resort.

But the news is not all bad. While the overall trend is poor and some businesses are struggling, some venues are still performing strongly. 7% of licensees in CGA’s survey reported a growth in trade this summer, with circuit bars, branded food pubs and dry-led pubs most likely to be seeing increased profit. All of these market sectors are also in growth – reflecting the attractive-ness of their ability to trade around the clock and thus allow operators to “sweat the asset” effectively.

Time for change
This is not the end of the on-trade but it most definitely is a period of significant realignment. The credit crunch is hastening the demise of sticky-carpeted nightclubs, insipid chain bars and pubs clinging on to all that was worst about the boozers of old.

A smaller but smarter on-trade is emerging – populated by operators who invest in improving their venue, adding or strengthening the food or entertainment offer and developing sophisticated stocking and pricing policies. There are still wins to be had – but more than ever before, operators must be proactive in getting their offer right if they want their business to grow.

db © October 2008

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