EP Magazine

2007 - present

A BRUTAL MARKET…BUT HAS IT CHANGED THE LANDSCAPE FOREVER?

"When I look back at the last 18 months, I struggle to understand why we did not read the signs well enough and react. The signs were all there in flashing red lights and yet we chose to either ignore them or believe that the economy would have a soft landing. Whatever the reason, we all took leave of our senses and based decisions off speculation rather than fact. Many of us have caused our businesses trouble through poor decision making. That is the unacceptable truth of the past two years.”

…so commented one senior industry chief executive recently. Whether correct or not, it has been an interesting journey which has been painful, and it will take time for many companies to recover. As we write, there is positive speculation that the market is beginning its recovery. Robert Milburn, from PriceWaterhouseCoopers, recently said; "Visibility is limited but reports of higher levels of transient visitors, more group conference bookings and a return of the business travellers, albeit slow, are all positive – especially for London. We think the worst is over and London looks set to build on its flourish in late 2009."

Encouraging. Yet at the same time, there is speculation that 10 per cent of all public sector jobs will be cut and complaint after complaint that the banks are simply not lending to small to medium enterprises (SMEs). It is perceived by many – true or not – that the banks have simply cut SMEs loose. The British economy for decades has been based off the success and entrepreneurship of such companies, so this is an interesting dynamic that will have consequences.

It should be noted that this is not simply a UK dynamic. In the US in February, CNN Money stated; “Small business loans continue to dry up at the nation's biggest banks. Eleven top Troubled Asset Relief Program (TARP) recipients – including Wells Fargo, by far the nation's largest lender to small companies – cut their collective small business loan balance by more than $2.3 billion in December, according to a Treasury report released late Tuesday.

“The drop marked the eighth consecutive month of declines for the 11 banks. In that time, their total loan balance has fallen 7 per cent, to US$169.4 billion. Seven of the reporting banks have cut their small business loan balance every single month.”

Even in China, it is reported that bank lending will fall by 17 per cent. Japan too. A Reuters report noted; “Japanese bank lending logged its biggest annual fall in more than four years in January as companies faced with overcapacity and a murky economic outlook steered clear of borrowing for capital investment purposes.”

It is a global issue and the UK is no different, there appears to be a disconnect between state-owned banks claiming that they are lending money, to those saying it is impossible to get credit even when loans are guaranteed.

In late February, The Liberal Democrats challenged government to reveal how much money part-nationalised Royal Bank of Scotland and rival Lloyds have lent since a state bailout. A Reuters article argued that this could become a major issue “… if the figures confirm the banks have failed to meet pledges to boost lending to home buyers and firms by a promised 39 billion pounds ($60 billion).”

Government has already said the banks were unlikely to meet targets for overall lending to businesses after higher than  expected levels of loan repayments. By November, net business lending had actually fallen, rather than risen as promised. 

The Liberal Party’s treasury spokesman Vince Cable said in a speech at an event in London hosted by Thomson Reuters, that  hancellor of the Exchequer Alistair Darling should detail the actual lending figures.

“I challenge Alistair Darling to give a full, public account of what has happened under these legally binding agreements which he imposed.

“Bank managers are evidently playing all kind of games to tick the boxes without engaging seriously with smaller commercial clients.

“There are far too many reports of rich private clients having their arms twisted to borrow more money while genuine entrepreneurs are being given a very wide berth.”

Undoubtedly, relationships between banks and the business community will change for a range of reasons. How this will change is open to speculation but many believe that the large banks will be broken-up into smaller entities, and that there will be a return to the old ways when there was a bank for mortgages, a bank for SMEs, etc. Time will tell whether this is correct or not. A fair question to ask, therefore, is whether the business landscape has changed forever?

It is very hard to get any clear visibility. There are a number of question marks hanging over the market. Last year, many companies struggled through with the help of delaying their PAYE and Customs and Excise payments. This is now tightening up again and will impact. So, there will be more casualties to come.

It has been a pretty brutal market over the past two years and this has seen the some well known companies enter administration or die – companies such as Coffee Republic, Fishworks, Regent  Inns, GuestInvest, Laurel Pub Company, Tootsies, Elizabeth Hotels, Merchant Inns, six Worrall Thompson Restaurants, Real Hotel Group, Forbery Hotel, Tom Aikens, Folio Hotels and Duchy Catering among others.

Over the years, hospitality companies have proven themselves to be highly resilient and able to find a path through. These periods often prove to increase innovation and entrepreneurship.

So how will the market change?

It is always hard to predict, and often foolish to do so, as trends and indicators do change. Many reports expect to see four key trends;

• Companies to become increasingly technologically able
• Companies to seek far more information and market data
• Increased globalisation from larger players
• New entrepreneurial concepts to emerge that will focus on excellent service offerings

This is all pretty straightforward and arguably says little that is new. It is interesting that every report swings from the good to  the bad. One report at the end of last year stated; “There's no good way to say this – almost every indicator, every expert and every anecdote says that it's going to be even tougher next year (2010).

“There is no point in spreading false optimism, because burying heads in the sand is the worst way to go about things in the current climate. But if there is pragmatism in the trade, then it's only because we've seen it all before.”

And yet the facts in early 2010 indicate a far better performance than forecast. So where does this leave us?

Maybe with the straight forward truths. Business goes on. It maybe tough and there will be many that fall away but, as always,  the good will survive and develop strategies in these bad times that will lead to increased market share and profitability as the market recovers. As another industry CEO stated; “Fear is a great innovator and it is amazing how fear helps find a way through even the worst of times. It is not all bad –just not all good.”