Will Government support for the hospitality industry make a difference?

28/07/2020 By James Bland

The Chancellor’s announcement of extra support for the hospitality sector in early July provided a welcome boost for a sector brought to its knees by the COVID-19 crisis.  A drastic reduction in VAT from 20% to 5% until January and the “Eat out to help out” scheme are bound to have some impact, but the question is how much?  And what were the alternatives?

Let’s be clear.  I would not want Rishi’s job right now.  He has had to intervene in the UK economy far more in a few short months than any Chancellor I can remember; even those for whom spending vast amounts of public money would be an ideological choice.  He is having to make decisions about which sectors to save and which to allow to go under, maxing out the credit card and leaving the problem of how to pay for it on the to-do list of “Future Rishi”.

Actually, forget what I said earlier.  If I had to have Rishi’s job, I’d want it now.  Everyone loves you when you’re spending money.  The job I don’t want is Future Rishi’s.

VAT is a complicated weapon if deployed correctly.  It can be targeted very precisely on activities that a government wants to encourage or discourage, but, despite best intentions, can end up being the most regressive of taxation approaches.  A cut in VAT on luxuries, for instance, can very easily become little more than a tax cut for millionaires if all it does is reduce the take on spending which would have happened anyway.  In this case, the broad-based nature of the activities to which it applies means that it will apply pretty broadly, so the question is whether it will stimulate demand or not.

In ordinary circumstances, basic economics suggests it should.  But these aren’t ordinary circumstances.  The elimination of hotel demand has not been driven by price or affordability, but by enforced closure.  The pace of demand recovery may be affected by price to a degree, but there is also genuine concern for health and safety and that is most likely a more significant driver.

Serendipitously, this announcement landed the same day we released the results of the first attitudinal segmentation we’ve done within our free weekly COVID tracker.  I could take up column inches describing the output, but instead I’ll point you at the free sign-up page for the report and make do with a summary of the key segments we identified and their stated likelihood to book hotel accommodation before the end of December 2020.

Putting pen to back-of-envelope, I get 31% of the population likely to book accommodation before the end of December (among a group we define as “Travel Activists”, that rises to 37%).  All told, about 70% can be considered off limits this year.  I think that the change in VAT is unlikely to tempt many of the Anxious Appreciators or COVID Impacted back into the market, but they’re pretty small segments.  The rest could well be open to persuasion, and that gives us 57% to aim at with a large group of them in the segments significantly less concerned by the potential risks.

To pass on or not to pass on.  That is the question.

Unfortunately, I don’t think I can give you an answer as simple as “yes” or “no”, because it’s going to vary by segment but also, I think, by property and business stream.  The way it is positioned will be important. Rather than just cutting the price, it’s probably better to make it clear the exceptional circumstances.  And not only because if others do make a song and dance about it, those who just silently pass it on look bad by comparison.  I’ve been pondering the feasibility of offering guests a choice between a “Rishi Rebate” or a “Sunak Supercharge” though – they can either pay less for the basic product, or put the difference towards a selection of upgrades/add-ons.

In some cases – think of a luxury hotel in a prime location on a Saturday night – simply passing on the cut is likely to result in missing out on an opportunity that probably would already have been achieved.  For a midscale or economy hotel in a secondary or tertiary location on an off-peak date it’ll probably be a different story.  As with every pricing decision, it comes down to which way you think the trade-off will play out.  I don’t think one size fits all.

The restaurant voucher is a different animal.  Intent to visit a restaurant before year-end is much higher (67% of our Travel Activists) but by the end of August it’s just 36%.  That is much more clearly intended to bring a cashflow benefit by bringing people’s decisions forward to August and I think it undoubtedly will.  If you’re in the September camp, I can’t see how a tenner off your dinner wouldn’t bring you forward a week.  The only question is whether dishy Rishi’s dinner dishes special has just accidentally killed Thursday nights…

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