A N O V E R V I E W O F T H E A U S T R A L I A N H O T E L S I N D U S T R Y

Feb 2015

A U S T R A L I A N

H O T E L S

T h e A u s t r a l i a n h o t e l s i n d u s t r y

Disclaimer

This Report has been prepared by PricewaterhouseCoopers (PwC) at the request of Australian Hotels Association (AHA) in our capacity as advisors in accordance with the Terms of Reference and the Terms and Conditions contained in the Consultant Agreement between AHA and PwC.

The information, statements, statistics and commentary (together the “Information”) contained in this report have been prepared by PwC from publicly available material and from discussions held with stakeholders. The Consultants may in their absolute discretion, but without being under any obligation to do so, update, amend or supplement this document.

PwC have based this report on information received or obtained, on the basis that such information is accurate and, where it is represented by management as such, complete. The Information contained in this report has not been subject to an Audit. The information must not be copied, reproduced, distributed, or used, in whole or in part, for any purpose other than detailed in our Consultant Agreement without the written permission of the AHA and PwC.

Abbreviations

The Australian hotels industry is a significant contributor to the Australian economy and plays a pivotal role in providing entertainment to millions of patrons.

Industry size and structure

There may be as many as 6,807 hotels in Australia. Extrapolating from PwC’s survey findings regarding average employment per hotel would generate an overall industry employment figure of 188,000.

Other methodologies for estimating industry employment produce lower estimates.

In addition, a high proportion of hotels have local suppliers, contributing to employment and income in their communities

Varying state regulations applying to liquor licensing and gaming machines affect the structure of the industry in each state.

There is little consolidation in the industry and most hotels are relatively small businesses, employing between 0 and 30 people.

Average food prices were found to be higher in hotels without gaming machines compared to hotels with gaming machines suggesting there may be some cross-subsidisation.

Hotels earn the majority of their income from the sale of alcoholic beverages. In hotels with gambling facilities, revenue earned from gambling activities typically amount to around 30% of total income.

We estimate the hotel industry’s annual expenditure on security is equal to $515.6 million

In terms of profitability, gaming makes a significant contribution to the viability of Australian hotels

Since the introduction of EGM’s hotels have increased capital expenditure, increased community sponsorship and expanded and improved their food and meal offerings

Role of hotels in the community

Key activities and events hosted by pubs include trivia nights, live music and community and sporting group meetings

Hotels with electronic gaming machines are more likely to have other entertainment facilities, including pool tables, pay TV, conference/meeting facilities and entertainment venues

Hotels provide sponsorship to a range of groups, primarily sporting and community groups, and annual contributions are estimated to be $75 million. Hotels with EGMs are more likely to provide community sponsorship

Average spending on training by the hotel industry is estimated to be $71.8 million on formal and informal training

Individual hotels Australia wide indicated that they serve an average of 1000 meals per week

Industry trends and outlook

The number of hotels has declined over the last 10 years, and the industry is consolidating

Income growth in the industry has been minimal over the last 25 years, indicating that the industry is mature

Hotels anticipate that employment levels are likely to remain the same over the next three years

Gambling expenditure as a proportion of household disposable income has been in decline since 1999

Hotel.com.au

Future policy issues

There is a weak and uncertain link between ATM withdrawals and gaming expenditure.

The impact of the removal of ATMs would be most felt in relation to community sponsorship, capital expenditure and employment

Hotels estimate that the introduction in smart cards would lead to significant reductions in income. The most common responses to this development involve reduced employment and a reduction in community sponsorship and support.

Hotels, gaming and economic welfare

Removal of poker machines from hotels would lead to significant short term disruption to the economy with the loss of around 15,000 jobs.

Generalised employment multipliers understate the contribution of hotel gaming to employment, since the removal of gaming from hotels would have an indirect employment effect through increases in state taxes such as payroll tax.

The hotel sector generates a substantial net benefit to the economy: total spending in hotels is estimated to be $12 to $13 billion per annum.

In the absence of the hotel sector, household consumption would contract by an estimated $3.5 billion in the short term even allowing for some reallocation of spending and resources to other sectors.

The removal of ATMs from hotels with gaming facilities is likely to lead to a reduction in overall customer satisfaction and economic well-being welfare, due to the impact on recreational gamblers and purchasers of food and beverages.

Since the Productivity Commission’s 1999 report, there is some evidence that the incidence of problem gambling has declined. This would imply some increase in the overall net benefits extent of safe enjoyment from gambling machines.

The higher level of hotel gaming taxation also suggests that the net overall benefit from hotel gaming is likely to be higher than the Productivity Commission’s 1999 estimate.

Contents

Scope of this review

 Australian Hotels Association (AHA) to prepare a report into the hotel industry in Australia.

In developing a picture of the Australian hotel industry, particular focus has been placed on assessing the industry’s size, scope and composition and the extent of some its key activities. This includes the training of staff, support for community organisations and the hosting of various community events. This information aims to provide a deeper and richer sense of the contribution which the hotel industry makes to the Australian economy and to community life.

Another key area of attention has been the role played by gambling activities, in particular the significance of electronic gaming machines to the financial and broader performance of the hotel industry

This discussion leads on to some analysis of future challenges, including the impact of potential policy measures on the hotel industry.

Methodology

In preparing this report, PwC has sourced a wide range of information. Four main sources or techniques have been used:

analysis of existing data to provide insight into the historical and contextual grounding of the current state of the industry

a hotel survey to obtain data in relation to hotel activities, costs and revenues

modelling to test the economic contribution made by the gaming activities within hotels and

an analysis of academic and other literature

This multi-pronged approach was necessitated by the fact that currently no single definitive data source exists which would answer all relevant questions.

For the purposes of Australian Bureau of Statistics reporting, the hotel industry falls within the Accommodation, Cafes and Restaurants' sector. The ABS publishes information about the specific industries within this broad grouping only periodically. For the club, pubs, taverns and bars industry, the latest survey was conducted in 2006. As discussed below, it is likely that the ABS has understated the size and scope of the industry. Where possible, other sources have been used to test the ABS results.

In addition, there are several variables for which the ABS and other sources do not provide information. As a result, PwC and the AHA agreed to conduct a survey of AHA members, asking a series of questions on a range of attributes, activities, revenue and expenses at individual hotels.

1244 hotels responded to the survey. To ensure the robustness of the analysis, we undertook a data verification exercise whereby we removed respondents from the sample where:

their responses did not include total revenue indicated for the year ended 30 June 2008 (FY2008)

their FY2008 total income appeared to have been entered incorrectly (ie it was significantly different from the sum of their different sources of income such as beverages, food, accommodation, gaming and other).

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the number of full time equivalent (FTE) employees appeared to have been entered in error (ie greater than 500, or did not reconcile with other employee data, such as total number of employees)

they indicated that they had 100 or more accommodation rooms.

In respect to this last point, 72 hotels were identified as being primarily accommodation hotels, as distinct from traditional ‘pub’ hotels, which are the subject of this review. Even though these hotels will also have licensed premises and possibly gaming facilities, their activities, cost structures and primary sources of revenue were identified as being significantly different to the majority of hotels in our sample, and were excluded.

After removing these hotels from the sample, we were left with a total sample of 1,077 hotels, representing a broad spectrum of the industry across all states, metropolitan and regional areas and incorporating both gaming and non-gaming hotels. It is worth noting that in comparison with the other states and territories our sample of ACT hotels was very small. Therefore many of the numeric results flowing from the survey in relation to ACT hotels should be treated with caution. This is particularly the case where total figures are extrapolated from survey results.

Structure of this report

The findings from our analysis, are structured into the following four chapters.