“Upwards interest rate corrections could cause havoc across this industry,” says Andrew McKenzie at The Vineyard

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With its burgeoning wine collection and reputation for impeccable service, The Vineyard in Newbury, Berkshire, is one of the most distinguished hotels in the country. But like most luxury properties, success comes down to the finest of margins. Boutique Hotelier met managing director, Andrew McKenzie, to discuss the measures it is taking to create a profitable business in the most testing of times.

To understand the fabric of The Vineyard, you need to know the back story. Rewind to 1976, in a small room in a Paris hotel, and a blind tasting involving some of the leading French wine aficionados is taking place. For the first time, Californian wines are chosen over France’s very best, disrupting the natural order of the global wine-tasting landscape in an upset that few predicted.

For Sir Peter Michael, The Vineyard’s owner and a wine farmer renowned for producing very fine estate wines in the remote northeast corner of California’s Sonoma County, it’s the day that the wine world changed forever. Mr Michael, who at 79-years-old still takes an active interest in the business, including attending board meetings, commissioned a gargantuan portrait entitled ‘After the Upset’ documenting all the protagonists of that fateful day, including himself.

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That image adorns an entire back wall of one of The Vineyard’s restaurants, although it is actually the imposing sight of a huge glass-fronted wine vault that initially greets guests stepping into its plush reception. That particular installation only took place five years ago, but like ‘The Judgement of Paris’ it has also proved to be a seminal moment in the hotel’s history.

“We were called The Vineyard and we had a great wine list but that was about it really — we were kind of cheating it a bit,” reflects the hotel’s managing director, Andrew McKenzie, who has worked in the hospitality trade for the best part of 35 years. “We remodelled the hotel and built the wine vault, so when you arrive you think, ‘crikey, this is about wine’. All our marketing changed to come out slightly wine-led, although you have to be careful not to turn it into a theme park. You have to keep it on the edge of overly gimmicky, but we have got 30,000 reasons in our cellar why we are a wine hotel.”

The Vineyard stocks wines from all over the world, not just California, and is a proud winner of the European Hotel Wine List of the Year award, while some of the industry’s top sommeliers have made their name under its roof.

Given its location away from any sort of obvious tourist hotspot or the heart of a major city, the venue, which comprises 32 suites and 17 bedrooms, has had to find ways of punching above its weight. Gastronomically it has always enjoyed a good reputation, but as McKenzie himself concedes, there are plenty of hotels around with an enviable food offering. Wine, on the other hand, separates it from the crowd. “There are a lot of great hotels doing a lot of great wine, but I don’t think anybody nails the colours to their mast quite as much as we do on the wine front,” he says. “But with the owning family having an iconic winery in California, it is in our DNA really.”

That said, The Vineyard is not immune to the challenges that have shaken the sector in recent times. Business has been better than McKenzie expected given the fallout from Brexit, but equally he admits it won’t be breaking any records this year. His biggest worry, by some distance, is labour. 57% of his employees originate from outside the UK, but the figure for front-of-house staff is significantly higher. “I don’t have the exact number, but I would imagine it is 75% to 80%, and crikey do we rely on them. They are fantastic employees. I remember before 2003 or 2004, when the Eastern European nations were allowed into the EU, recruitment used to be a nightmare. It really solved a lot of our recruitment issues. We were given an instant, intelligent, hard-working customer-focused workforce.”

Changes in housing regulations have also proved prohibitive and McKenzie feels sure that other provincial hotels face the same frustrations. Being able to offer assistance with accommodation has been integral to enticing staff out to Newbury, but the controversial ‘houses in multiple occupancy’ rule has made things considerably more difficult. Even the mechanism for subsidising staff rental costs is no longer as viable as it once was due to new regulations linked to the National Living Wage. McKenzie describes it as the “law of unintended consequences” facing regional hotels, but there can be no denying that with margins being squeezed, operational costs rising and room prices under pressure, a perfect storm is brewing.

“There is a huge amount of competition and so there is little price elasticity in what we can charge. Our other hotel, Donnington Valley, for example, is very strong in the business market during the week and then it has golf and spa and leisure at the weekend, but its biggest client, a large local telecoms company, was paying a rate when I arrived here in 1998 for the rooms that is £5 more than they are paying today. That’s just the way the world has gone. In that time, I think our average hourly rate was less than half of what we pay our staff now, so all of the other costs of doing business have soared.”

You don’t have to be a genius to work out what the consequences might be for some market players if you follow this pattern through to its natural conclusion. Hotels can only be efficient in so many ways and there comes a point when they have to start evaluating whether they can really afford to offer all of the added value for which they are known. McKenzie acknowledges that even for hotels at the upper end of the scale, such as The Vineyard, it boils down to cutting your cloth accordingly.

The most difficult part of the equation isn’t anything to do with room rates or menu prices, however. It is the cost of financing, be it rent or bank debt. Most businesses, argues McKenzie, are going to be straddled by their inability to pay these infrastructure costs.

“How we have done better over the last few years is our cost of borrowing has reduced dramatically. We had a big hedge when we went into the recession because we were safeguarding the fact that we didn’t want interest rates to soar above an unaffordable level but we were stuck with a bank rate for five years that was much higher than the base rate. We refinanced more recently and that saved us upwards of £1m a year in bank outgoings, but if we hadn’t done that in this day and age I don’t know where we would be. It is very difficult and there are a lot of independent operators who are, I think, spending savings and hoping that things will turn out alright. An interest rate correction upwards would cause havoc across this industry,” he warns.

The Vineyard’s refinancing offers a sobering glimpse of the areas that hotels need to comprehend outside of their core business if they are to remain financially sustainable. McKenzie admits the cost of funding is probably one of its most critical triggers of all.

“Hotels are sort of two businesses — they are operating businesses and they are property businesses. We are a slightly different set-up than some in that we are 100% owned by one individual with no plans to sell, but we are financed by equity and debt, again like many others. We have got some plans to expand and develop as well, which we will take advantage of through a benevolent relationship with our bank HSBC, who we work very closely with.”

The Vineyard is part of a portfolio that includes Donnington Valley Hotel and Spa, Donnington Valley Golf Club and The Vineyard Cellars, while the group also manages a small group of hotels on behalf of a property fund, trading as Sonoma Hotels. At Barns Hotel in Bedford, which it bought two years ago, it is about to seek planning permission for an event space and additional bedrooms, which will take it from 48 rooms to 84, while at Donnington Valley the group intends to build a wedding barn venue, increase its room capacity by 30, double the size of the kitchen and enhance its MICE proposition.

There are no such grand plans for The Vineyard, but that is more to do with the improvements that have already taken place and its consistent trading performance than any perceived lack of ambition.

“Hotels like this are a bit like the Forth Road Bridge, you’ve just got to keep at them and if you let up for any length of time it is very hard to catch up again. It is a greedy animal on CAPEX. What we have tried to do while still trying to keep it very upscale is to make it more accessible and less stuffy. We want the wine and foodservice to be a little more engaging than perhaps it was five years ago. We used to have two Michelin stars here and that stage I think everything was more formal and people found it a little more daunting whereas we have now got a great new young chef who is doing great things. The food is less intricate, but it is all flavour-led and texture-led. We try and hire people who have got that enthusiastic gene in them and our wine team is fantastic. Wine is really at the heart of everything we do. We offer everybody, from the chambermaids to the guys in accounts, the opportunity to undertake Wine & Spirit Trust (WSET) training.”

The Vineyard’s five-star spa facilities, including a jacuzzi, circular pool with massage jets and steam room and sauna, remain a popular pull for overnight guests and day visitors, while last year it acquired a nine-hole golf course on neighbouring land after it became available when the owner passed away. All this plays nicely into its hands given that McKenzie has observed some hesitancy in corporate bookings over the past 12 months. “We have had a couple of company annual events and away day-type bookings that have decided not to come this year and I can’t put my finger on whether that is Brexit or not, but I think the indication is that people are sitting tight. I will imagine by the end of this year that our corporate business will be down but I think our leisure business currently is slightly up.”

Uncertainty is never a good thing for hospitality businesses, but McKenzie has been around long enough not to panic. Irrespective of how the economy or financial markets are behaving, hotel-keeping is all about focusing on the detail and giving guests a memorable experience.

“I always say to people that our business is not complicated, it is just not easy. There is not a lot to it really, you tell people you exist, you give them a good time when they are here and then you charge them when they go. But there is an awful lot of moving parts in the middle! It’s the old swan effect — on the surface it looks all great but below the water it is all kicking about.”

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