The implications of the carbon tax on Clubs

Written by Geoff Wohlsen | Director | geoff@dws.net.au

The Gillard Government pushed the carbon tax legislation through Parliament in November last year. The controversial tax will be imposed from 1 July 2012.

Hospitality venues across Australia are calculating the impacts but it’s a question of simple economics versus crystal ball-gazing as managers and owners wonder what competitors will do.

We are all aware of the key elements of the package but some are worth mentioning:

• The tax will be on carbon emission at a commencement rate of tax of $23 per tonne
• The tax will only apply to Australia’s major emitters; probably about 500 companies eventually but only about 330 companies so far have been identified as being liable to pay the tax
• The scheme will transition to a market-based emissions trading scheme by July 2015
• The set price of carbon will increase by 2.5% per annum over three years then the ETS will commence
• Treasury expects the ETS starting price in 2015 to be around $29/tonne
• $1.5b in cash handouts will be made in May/June 2012 before the tax is introduced
• Low income households will receive a tax benefits
• There will be additional cash assistance for pensioners and families with children
• The overall cost-of-living is expected to increase by $10 per week for the average household
• However electricity prices are likely to increase by 10%
• Almost 70% of households will receive assistance by way of cash and tax benefits that together will at least compensate for the increase in cost of living
• There is no compensation for business under the scheme
• Fuel for motorists is exempt from the tax but other cost impacts will likely flow through to the petrol pump

There will be two impacts for hospitality venues:

1.    The revenue impact
A carbon tax will have an influence on the household weekly budget. Cash benefit payments may provide a short term boost to discretionary expenditure. When the larger bills come in during the latter parts of 2012 and then 2013, households that haven’t budgeted for the impact will find it more difficult to pay increased costs for electricity, gas, food and other household items. We might see a short term marginal increase in demand from the cash payments and then a settling or decline in demand in hospitality as household cost increases become more apparent during late 2012 and 2013.

2.    The cost impact on hospitality businesses
DWS financial modelling for clubs, hotels, casinos and restaurants suggests that operating costs are likely to increase by between 2.0% and 2.5% as a direct consequence of the introduction of a carbon tax in 2012/13. But this impact is assessed across a range of cost items, some of which won’t be immediately impacted, such as finance (interest) costs, depreciation and wages. If these items are excluded from the assessment, the real impact of the carbon tax on operating costs will be more like 3.0% to 3.5% in the initial year, increasing to as high as 5% when the ETS is operational and depending on how businesses restructure for the tax.

Hospitality venues have only a few avenues to neutralise the impacts of the tax on the bottom line in the short term. Cost control is one avenue but the major area for adjustment will be in pricing and gross profit levels.

Our assessment indicates that clubs, pubs, restaurants and casinos will need to improve gross profit margins by between 4% and 8% on food and beverage to absorb the impacts and preserve the bottom line. This means that venues operating on food and beverage gross profit levels of 60%, for example will need to set prices and margins to over 65% to neutralise the impacts. And this means that prices in food and beverage might need to be increased by as high as 10%. This level of increase will be needed by some venues with high overhead costs.

With the new poker machine arrangements set to be implemented over the next three years, club, hotels and casinos face some challenges in restructuring their business operations to limit the impact of these reforms on bottom line performances.

What should venues do now to address the issues?

1.    Prepare business budgets and operating plans to assess the impacts on your business

2.    Reduce consumption of goods and services that will be impacted by the new tax and consider low-carbon options

3.    Graduate gross profit levels over time so that the impact is not immediate but phased in over the next six months or longer

4.    Communicate with your customers so that they know that changes are in response to the new regulatory environment but watch the regulations on this. The ACCC has produced guidelines on what venue businesses can and can’t claim when adjusting prices for the carbon tax (refer to www.accc.gov.au)

5.    Revise all costs and critically examine the discretionary items

6.    Endeavour to renegotiate longer term contracts and lock in contract prices

The best way to tackle these challenges is to meet them head on. No doubt some businesses will be poorly prepared and fail to adjust for the changes. Hospitality managers are left to contemplate the challenge where their competitors will do nothing and notice the erosion of margins when it’s too late.

 DWS has developed a one-day business planning package to direct venues through these challenges. Please email us at geoff@dws.net.au for an outline and more