On the morning of 11 August, Mervyn King took his seat before the financial press to deliver the Bank of England’s latest quarterly report on UK inflation. The governor’s sombre expression told its own story. Economic growth targets would need to be revised downwards, he explained; inflation was likely to stay well above the Bank’s two percent target throughout 2011. King even conceded that a double-dip recession was not out of the question.
Later that evening, one national news broadcaster decamped to a holiday park on the south coast of England to take the pulse of the nation. One by one, the public lined up by the side of the swimming pool to regale their personal tale of woe. Some had recently lost their job: others had seen a marked downturn in demand for their trade and almost all had suffered a significant fall in their disposable income as a consequence of the economic downturn. All things considered, the report painted a bleak picture of Austerity Britain.
But the backdrop for this tableau of despair told a different story. The holiday park was fully booked, as it had been for the vast majority of the summer. Had the broadcaster chosen a different holiday park it would almost certainly have encountered the same scenario. Indeed, evidence from across the industry shows that against a depressed economy and pound, domestic holiday operators are thriving as cash-strapped consumers in the UK eschew an overseas trip in favour of a “staycation”.
Pontins and Butlins, two of the UK’s most iconic holiday parks with their respective bluecoat and redcoat entertainers, enjoyed double-digit growth in bookings in 2009 with the operators predicting similar growth for 2010. Center Parcs’ revenues grew 5.5 percent and profits 13.3 percent last year and occupancy rates hit an all-time high of 97 percent by November 2009. Merlin Entertainments saw UK revenues increase 10 percent as holidaymakers swapped the Costa Del Sol for its Alton Towers, Thorpe Park and Legoland attractions.
Weak pound, more strikes
Figures from the Office of National Statistics show that holidays to the UK from overseas residents rose five percent to 11.4 million in 2009. Meanwhile, the British Tourist Authority says the number of trips taken within the UK increased by seven percent in 2009, citing a rise in demand for domestic holiday trips from skint Brits.
Whether staycations are here to stay or a flash in the pan depends on your point of view. Outsiders looking in prefer to attribute the rise in holidaying at home to a series of external factors that have played to the advantage of UK operators, most notably a weak pound and the increased risk of delays or expensive flight cancellations in air travel because of heightened industrial action. With further deep public spending cuts and tax increases on the horizon, it is possible to argue that the UK tourism industry’s recent resurgence is merely an anomaly that will iron itself out – if, and when, exchange rates realign closer to pre-recession levels.
A flurry of business collapses in the UK tourism and holiday industry over the summer have played to the advantage of the Center Parcs and the Legolands. The collapse of budget holiday operator Kiss Flights in August, which followed the high-profile failures of rival outfits Goldtrail and Sun4U earlier in the summer, served to increase consumer insecurity over travelling abroad, coming not long after the unprecedented disruption caused by the Icelandic ash cloud and more frequent British Airways cabin crew strikes.
“Travel is a sector that is intrinsically linked to consumer confidence and with public sector cutbacks and concern over job security more people will be staying in the UK for their holidays,” said Mark Wilson, partner at Baker Tilly, following the collapse of Goldtrail.
UK holiday operators acknowledge they have been blessed with a prevailing wind. Yet finance directors among their number stress that it has given them the platform they needed to justify bigger capital expenditures in their offerings that will help them sustain the increase in business and compete with the Continent’s charms.
“Many holiday parks have been constantly raising the bar on quality and choice,” says Al Loch, chief financial officer of Park Holidays UK. Demand for Park’s caravan holidays has surged this summer and Loch anticipates finishing 2010 with a 10 percent rise in year-on-year bookings.
“Sales of holiday homes have also increased by a similar amount and in terms of income from renting pitches for touring and camping, many of our parks are reporting a 30 percent rise on 2009,” he says.
Loch notes an increase in demand from the UK’s white collar workers – university-educated, salaried office dwellers traditionally seen as favouring overseas holidays. He also identifies a growing demand for shorter breaks rather than the usual week away.
“For some people, a shorter break may well be an economic choice,” Loch says. “But I think more significant is the preference of many people to take a larger number of shorter breaks each year, instead of the traditional week or fortnight away.”
That is borne out by data from the British Tourist Authority showing that within the seven percent growth reported in trips taken in the UK over the last year, the increase in people staying away between one and three nights was 11 percent.
That is music to the ears of finance directors at short-break specialists such as Center Parcs, whose core offer is either a three-day weekend break or a four-day midweek break. A falling pound and British Airways’ ongoing industrial disputes have helped Center Parcs “at the margins”, according to its finance director Paul Inglett, who joined from pub company Marston’s last summer. But a more significant reason to his mind for the company’s record performance is its continued spending through the economic downturn on improving its estate: the business has spent around £175m in the last four years. And he believes the outlay will help Center Parcs to maintain any gains it has made from exploiting renewed interest in UK holidays. That, of course, means raised competition between the same players for the same customers.
“Our business has traded well through the tough times, particularly the last two years when I guess you could say it’s as tough as it has been for a generation,” Inglett says. “Last year was our record year for occupancy and we’ve had a similar level this year. But you can’t be too complacent and that’s why we feel we need to keep investing capital in the villages, innovating in what we give our guests.”
Inglett anticipates raising investment to £45m in the current financial year, much of which will go towards a major programme for upgrading about 400 villas throughout the group’s four holiday villages. Center Parcs also has planning permission to build a fifth site in Woburn, Bedfordshire to open in 2013. Inglett says the Woburn investment is in the region of £240m which, as he is eager to point out, “gives you an idea as to our confidence in how we see the future and opportunities in the sector”.
Similarly, Pontins has grabbed the opportunity to turn consumer attention back to its offering while staycations are in fashion. Chairman Graham Parr, who bought Pontins in 1987 for £57.5m, sold it two years later for £115m and in 2008 bought it back again for £46m, will sink a multimillion pound sum into regenerating a number of the operator’s sites under the name Ocean Parcs, after the name of the investment vehicle he used to buy the business back. He hopes the rebrand will draw in those who previously might not have considered a UK holiday park.
Parr thinks Pontins is currently profiting from “a squeeze in peripheral income”, which he says has benefited low-cost operators. “There is a resistance wherever you go to spending money at the moment,” he adds. “That’s a problem in the holiday market.”
Merlin Entertainments has tailored its offer to suit the emergence of the value-conscious consumer. The company has run national TV campaigns promoting an annual pass offering unlimited access to its UK portfolio of theme parks and attractions, which includes a number of the best-known family day out destinations. Sales of the annual pass rose so significantly in 2008-09 that they drove a 10 percent hike in revenues.
Like Center Parcs and Pontins, Merlin has been prepared to invest through the downturn. In the spring, the company opened its latest attraction – a £7.5m Legoland ‘discovery centre’ at the Trafford shopping centre complex in Manchester, which Merlin finance director Andrew Carr says is trading “very successfully”. Merlin also plans to open a new hotel at Legoland Windsor in 2012, capitalising on the trend for consumers to tie in short breaks with visits to theme parks.
In a deal that might become more commonplace in David Cameron’s “big society” closing down quangos in favour of private business working with the public sector, Merlin signed a deal this spring to partner with Blackpool Council to manage the redevelopment and operations of the long neglected Blackpool Tower complex, extending its lucrative London Eye, Madame Tussauds and Dungeon brands to Blackpool.
Having attracted about 20 million visitors a year in the 1980s, Blackpool was one of the main casualties of the rise of cheap overseas travel. Blackpool Council says visitor numbers swelled 20 percent in 2009 but the Tower is in need of a facelift to keep its new fans. Merlin FD Carr is excited at the prospect of playing a part in the resorts regeneration.
“We’re very conscious Blackpool has suffered, but it still represents a great catchment area,” he says. “It’s got a great population within an easy one-hour drive. The basic infrastructure is there – it just needs a bit of a kick start to get it going.”
Those who argue that the recession provided an opportunity for British tourism to put itself back on the map also contend that government spending cuts represent a significant threat to its continued revival, something leisure and tourism FDs are mindful of. Blackpool Council paid around £40m to purchase the Tower complex in April this year, around £30m of which came from the Northwest European Regional Development Fund and the Northwest Regional Development Agency (NWDA).
The deal was struck in the nick of time. Just two months later, the new coalition government announced that Regional Development Agencies would be phased out and replaced by Local Enterprise Partnerships, with funding significantly curtailed. Meanwhile more than 100 projects that approached the NWDA for funding in the current financial year will not now receive the cash following £52m cuts to the agency’s budget. Projects not contractually committed will now be unable to secure funding.
As cuts are replicated throughout the country, the impact is sure to be keenly felt in the locations most in need of capital expenditure, such as seaside resorts whose tourism potential remain untapped.