ConDemned: the spectre of a VAT increase

How we laughed incredulously at the volcanic ash. Our jaws dropped that something as leftfield as a simmering volcano more than a thousand miles away from the UK could paralyse half of Europe. And yet, it turns out that this little Icelandic episode, which saw airports shut for the best part of a week in April, and is still resulting in sporadic closures of travel hubs in Europe (as seen this weekend), has wreaked havoc upon the trading figures of London-centric operators. Those in the know tell me that business in the capital’s Zone 1 area was down almost 20% in the first full ash-laden week. It was a rare occasion when the performance of the eating and drinking out market in central London perfectly mirrored that of the hotel market. It speaks of a reliance that central London, which has long outperformed the regions and proved fairly resilient during the recession, has upon tourists and inbound visitors. I’m told that such was the impact that Pizza Express was down mid-single digits on a like-for-like basis in April. Parent company Gondola has not confirmed this but it may explain why it and others have firmly switched the 2-4-1 discounting tap back on. London is still tough right now, down mid-single digits for most, as without the surety of travel many visitors, especially those on business, are still electing not to travel to the UK. There is now however a bigger cloud than any derived from volcanic ash forming on the horizon – and drawing nearer for those businesses dependent on consumer spending: the dreaded VAT rise. First it was the love-in on the steps of number 10, now we wait for the squeeze. Those at the heart of the Con-Lib ‘dream ticket’, or the Con-Dem Nation as the non-believers have labelled it, have insisted that the cash required to tackle Britain’s £163bn deficit will largely be found from cutting and saving. But such is the size of the task that inevitably there will be tax rises in the near term, and economists warn that a rise in VAT to 20% is looking like a non negotiable. The average VAT levy across the EU is about 20.5% so compared to our European cousins, we’re looking a little on the low side. It will raise about £12bn annually for the public purse. Aside from the direct cost to business of another change in prices, which is not insignificant, the real issue for this market is the hit on discretionary spending that will likely accompany the anticipated hike. Many operators will also wrestle with the dilemma of absorbing the hit or putting through price rises. Some will have little choice but to protect margins, and pass the rise on. Given that any new government wants to get the bad news out of the way, blame the last lot, and move on, this rise can be expected sooner rather than later. On the wider point of what the leisure sector can expect from this new government, time will tell. With any new government, it tends to take the new lot a bit of time to acclimatise and work out how the (real) corridors of power work. Hopefully this will mean that those in both the eating out and drinking out markets will be left to get on with running their businesses for now, unlike the last lot, where big-brother interference became the hallmark, such as the glassware policy contained within the recent alcohol code – do we really need government telling pubs what size wine glasses to stock? The obvious curve-ball is the fact that nobody expected the Lib-Dems to be in power. The scope of their influence remains to be seen but in the last parliamentary session and in the run up to the election they talked about: a plan for minimum pricing; an immediate investigation into the leased pub model; pubs footing the bill for binge drinking and a very tough line on underage alcohol sales. By the beginning of July, we’ll have a flavour of what this government is about, and we’ll also have had a budget. A Mexican happening The doors have finally opened on one of this year’s most eagerly awaited restaurants. I speak not of the upscale Bar Boulud, Daniel Boulud’s offering at the Mandarin Oriental in Knightsbridge, but Chipotle Mexican Grill. The debut of the 900-strong US giant on London’s Charing Cross Road last week is the first of an anticipated European-wide assault by the group founded by Steve Ells. Chipotle is thought to be looking at further London sites in South Kensington and the West End. And will look to establish a cluster in the capital before looking at other key cities both here and in mainland Europe. The arrival the world’s biggest burrito chain to the UK throw’s a spotlight on what is already an increasingly interesting segment of the fast-casual eating-out market, with fledgling home-grown chains trying to take ownership of an up-for-grabs space that some people believe is the sector’s current ‘big’ opportunity. Some liken it to the “better burger” opportunity of a few years ago that Gourmet Burger Kitchen has since capitalised on. The oft-quoted saying is that where America leads we follow. And while there have been some notable exceptions, not least in eating out, it feels like the UK’s penchant for flavourful and interesting cuisine means that for those that do it well, Mexican food is a massive opportunity. This food is huge in the US, especially in the quick service and fast-casual space, where four of the top 10 brands are Mexican. For Chipotle, this is a big play. Success over here says “we are a global brand”, which apart from anything else is good news for the group’s valuation multiple, which has started to ease down – reflecting its maturing US business and more conservative home-market growth prospects. The most striking thing about the new London Chipotle is the price point – by the time you’ve taken a drink and added guacamole (£2.30 for the privilege) the average spend is up at £10 and beyond. The quality is fine and clearly it is early days, but to my mind the leading UK burrito players – Chilango and Tortilla – match up favourably when it comes to comparing the product. What both those businesses would kill for is the brand and muscle that Chipotle will surely bring to bare here in the UK.