House of Commons - Public Accounts

Select Committee on Public Accounts Fourth Report

THE RENEGOTIATION OF THE PFI-TYPE DEAL FOR THE ROYAL ARMOURIES MUSEUM IN LEEDS

FORECASTING VISITOR NUMBERS

Visitor numbers

19. As with the Millennium Dome, the museum's financial problems were caused primarily by visitor numbers being much lower than previously estimated. By 1999, visitor levels were around a third of what the museum needed to break even and only a sixth of the numbers expected.[17] When asked whether there might be other attractions which had received lottery funding and were in the similar position of being at risk because of low visitor numbers, the Department said that there were lottery-funded projects, such as the new art gallery in Walsall, the Lowry at Salford, and the Tate Modern in London, where visitor numbers had outstripped what the Department and Lottery distributing bodies had predicted, as well as some which had fallen short. The Department were therefore getting together with the Lottery distributors, other visitor attractions and the English Tourist Council to see whether there were best practice lessons to be learned, and to help the Lottery distributors in particular in assessing the visitor projections which came forward with bids for funding.[18]

20. The Royal Armouries said that there was a range of explanations for visitor numbers being so low. Between 1990 and 1992 both the Department and the Royal Armouries had employed four sets of consultants—Peat Marwick, Grant Leisure, PA Consulting and MORI—to look at the number of visitors who were likely to come to this attraction, and they had offered projections of visitor numbers varying from 900,000 to 1.3 million a year. RAI's own consultants, MEW, had subsequently forecast less than 600,000 to over 1 million visitors a year, depending on the entrance fee charged.[19]

21. The Royal Armouries admitted that at the time they had also made comparisons with museums and attractions outside London, such as the Jorvik Viking Centre and the National Railway Museum in York and the National Museum of Photography and Film in Bradford. The Jorvik Centre had been very popular for a considerable time, getting 865,000 visitors in 1990 but had then gradually become less popular and was currently getting between 400,000 to 500,000 visitors a year.[20] Warwick Castle had been getting 625,000 visitors a year, and was now getting over 800,000, although it was a well-established attraction and not a new venture.[21]

Pricing policy

22. The Royal Armouries were asked whether the low numbers of visitors might have been due to the level of the charges for admission to the museum and what information they had sought from consultants on the probable level of visitor numbers at differing pricing levels. The Royal Armouries agreed that ticket price was one of a number of potential contributing factors to the low visitor numbers. Peat Marwick had been concerned that the museum was likely to be price sensitive. MORI's research had suggested that the projected visitor level would be extremely price sensitive with a sharp drop-off in visitors once entrance fees for adults exceeded £5. They had predicted that the new museum would receive about 1 million visitors a year at a £5 adult admission price but that visitor numbers would be worse and fall to around 250,000 if the price was set at £6.95. In contrast, RAI's consultants, MEW, had assumed less price sensitivity, although visitor numbers decreased as the entrance fee increased.[22]

23. We asked therefore whether the Royal Armouries had in effect ignored MORI's advice, which had effectively predicted what had happened, given that the initial admission price had been set at £6.95.[23] The Royal Armouries said that it was the private sector's responsibility for taking account of that research when putting together its business plans.[24] The Royal Armouries told us that they had been concerned about the ticket price and had made these feelings known to RAI. However RAI had placed reliance on the MEW research which did not bear out the Royal Armouries' view, as well as on advice from other consultants which was not the same as MORI's.[25]

24. RAI told the Committee that it had set the admission price at £6.95 following the advice of six consultants which they had commissioned, three before the museum's opening and three after. The Department had commissioned Gardner Merchant before the deal's signature to carry out its own validation of RAI's business plan and visitor numbers. Gardner Merchant had forecast 650,000 visitors for 1996, rising to 1 million a year from 1999 onwards, and had been prepared to invest £1 million in RAI on this basis. Prior to opening RAI had also commissioning Barrington Johnson Lorenz, a well respected northern based leisure marketing organisation, who had forecast 800,000 visitors. Finally they had commissioned MEW in January 1995 to conduct a 1500-person survey nationally, specifically to establish the visitor numbers and pricing. MEW had forecast that an admissions price of £6.95 in 1996, when the museum actually opened, would deliver 850,000 visitors.[26] RAI also told us that they had had discussions with Tussauds about their joining the project as the operators of the museum for RAI. In these discussions Tussauds had been talking of visitor numbers of up to 600,000.[27]

25. The Royal Armouries also agreed that free tickets were extremely important as part of promoting the museum. Their policy was to give free tickets when it was advantageous to do so and the level of free tickets had changed every year in line with the changes in the museum's marketing policies.[28] RAI had attempted many ticket prices between 1996 and 1999 in an attempt to reverse the decline in visitor numbers. Thus, although the adult price had been £7.95 in July 1999, RAI had also introduced a number of season tickets which had been cheaper, and a winter off peak price of £4.95 in 1998. The price for the car park had remained the same as at the museum's opening and RAI's food prices had only moved broadly in line with inflation.[29]

26. When asked why the headline price had not come down, despite the low numbers of visitors, but had gone up from the initial price of £6.95 to £7.95,[30] RAI explained that two of the three reports which had been commissioned after the museum's opening had been independent of RAI and had been commissioned by RAI's investors and their bank. Both the reports had demonstrated that the pricing levels had been appropriate.[31] Exit surveys of people who had visited the museum had shown that three quarters of visitors believed the museum was excellent value for money. Ninety five per cent of visitors had said that they had had a wonderful day out; the museum had also won a number of awards since its opening.[32] In all, the market research that RAI had undertaken subsequent to the museum's opening the price issue had not figured prominently.[33]

27. One of the first things the Royal Armouries had done on taking over the museum had been to reduce the admission price for adults in December 1999 from £7.95 to £4.90. The new museum was on course to meet the projection of 180,000 visitors for 2000-01 which the Royal Armouries had made in August 1999. The Royal Armouries was very hopeful that the reducing prices and changed marketing, under which attempts were being made to target audiences so as to increase the level of return visits, meant that the corner had now been turned. Royal Armouries believed that a lower admission price, although it reduced the amount of ticket revenue, was in the long-term interests of the museum.[34] Royal Armouries had also accepted the Government's offer of increased funding and would be introducing free entry for children and senior citizens from April 2001 and then "Quids In" for adults from September 2001. On the basis of this new pricing policy the Royal Armouries' new strategic plan now anticipated an increase of forty per cent in the number of visitors to 250,000 by 2003-04. The Royal Armouries' eventual hope was for visitor levels somewhere between 300,000 and 400,000. However the Royal Armouries needed to be realistic as it was about to enter a period of three to four difficult years, since the area round the museum would be a building site as the dock redevelopment began. It was planning, therefore, for 200,000 visitors in 2001-02, 250,000 visitors in 2002-03 and 260,000 by 2003-04. Larger numbers of visitors were not being predicted until the external factors necessary for such numbers, such as the redevelopment of the Dock and the new light rail system, had occurred.[35]

Marketing

28. The Royal Armouries agreed that the marketing of the museum had been important. The need for the museum to be marketed well had been an issue raised by most of the consultants.[36] We therefore asked why expenditure on marketing had been reduced and what impact this had had. The Royal Armouries said that in 1999 KPMG had compared spending on marketing in the Royal Armouries with like attractions and found that the Royal Armouries was one of the highest spenders. Because of their financial difficulties RAI had not had the cash to sustain that level of marketing. For a new attraction, the marketing budget would normally start at a high level and then reduce, so the reduction in expenditure on marketing had not necessarily been a contributing factor to the low visitor numbers, although the Royal Armouries and RAI would have liked to have spent more if possible.[37]

29. RAI confirmed that they had cut marketing expenditure by over half, from over £1 million to under £500,000, and that, at the same time, the fall in visitor numbers had reduced RAI's income from ticket receipts, catering and retail sales by almost £1 million.[38] The cut in the marketing budget had been in line with usual practice when launching a product and creating brand awareness. RAI had committed approximately £1 million at pre-launch to be spent on television. They had then reduced the marketing budget because a switch had been made to the use of more focussed, direct marketing on those who were likely to visit the museum. Direct marketing was a more cost-effective way of doing this than expensive media expenditure.[39]

30. RAI confirmed that two reports commissioned by their investors and bank after the museum's opening had supported this marketing strategy. The consultants had wanted RAI to widen the appeal of the museum and reach more of a family market. This RAI had attempted to do with its programme of exhibitions. Seventy-four per cent of people attending the museum lived within one hour's travel time from Leeds, but once the local people had visited the museum, they would only pay a return visit when there was something new. Bringing in the exhibitions had been a way of attempting to refresh the product.[40]

31. RAI's information had also shown that there had been little scope for immediate growth in the local market. The museum's penetration rate in their primary market had been 5.28 per cent, compared with the London national museums who had been achieving 5.5 per cent in their primary market. As for the museum's other markets, the tourist market, which made up 14 per cent of the museum's attendance, had a penetration rate of 0.97 per cent, while the rate for the secondary market, defined as within one to two hours of Leeds and constituting 12 per cent of its attendance, had been 0.43 per cent. This compared to the regional UK museum's secondary market penetration of one per cent on average and to London national museum's 5.3 per cent penetration. RAI's strategy therefore had been to target the one-hour-plus market, as this was a major catchment area and offered the potential for immediate growth, and to seek an increase in the penetration rate in this market to the regional average of one per cent.[41]

Other reasons for low visitor numbers

32. The Committee asked whether the choice of Leeds for the museum's location had contributed to the museum's failure. RAI agreed that Leeds was off the beaten track for tourists and the tourist component was a major factor in visitor numbers and the propensity to visit for museums.[42] The Department told us that the Government had taken the decision to move the Royal Armouries out of London on the basis that there were many other national museums and galleries in London and that moving out would improve the public's access to the national collections in other parts of the country.[43]

33. The Royal Armouries explained that there were a number of other factors contributing to low visitor numbers. There were more visitor attractions and therefore more competition, and the increases in visitor numbers which had been expected during the 1990's had not occurred. Visitor numbers at the Armouries Museum might also have been affected by people's views on firearms after the Dunblane tragedy, which had occurred just before the museum opened. The Clarence Dock development, which had been expected to attract people to the area surrounding the museum, had not yet occurred. Finally, it had originally been intended that there would be better access to the museum by means of a light rail transport system bringing people directly from a large car park by the M1. This has not yet occurred.[44]

Contingency plans

34. The new museum involved significant commercial risk, as it was a new attraction in a redevelopment area with no proven track record of visits by the public.[45] We asked why there had been no contingency plans for this project when it was such a high risk venture and in financial difficulties from the outset. The Royal Armouries told us that it was because RAI had borne the risk.[46] We questioned, however, whether risk had been transferred fully to RAI as this had been an important public project where the public sector had not wanted the museum's closure and therefore had had to step in and take it back. The Treasury acknowledged that, if the complete failure of a project was not an option which the public sector could tolerate, then the risk of failure became a risk that had to remain with the public sector.[47]

Conclusions

35. As with the Millennium Dome, the deal for the new museum had foundered because of lower than expected visitor numbers. According to the Department there were also a number of other attractions which had received public funding and were also at risk because of low visitor numbers. We therefore welcome the Department's attempts to identify, along with a number of other bodies, good practice when reviewing visitor projections for proposed projects.

36. The actual number of visitors to the new museum was much less than any of the consultants commissioned by the Department, Royal Armouries and RAI had forecast. However those forecasts were based on a certain pricing assumption and the consultants warned that the actual number of visitors would vary, depending on the admission price charged. In particular, MORI appeared to have forecast accurately what actually happened with its predictions of the level of visitors at the admission price eventually chosen.

37. Departments should therefore ensure that they have a clear understanding of what it is exactly that their consultants are telling them when providing forecasts of future visitor numbers, in particular with regard to the sensitivity of those forecasts to different pricing levels. Departments should assess the reasonableness of these projections by comparing them with the performance of comparable existing attractions.

38. Departments should also ensure that the capital structure of a proposed deal is consistent with the riskiness of the project. If the project involves a high degree of commercial risk, the project needs to be financed with a high level of risk capital relative to bank debt. If it is necessary to proceed with a project in the absence of adequate levels of risk capital, the sponsoring department should plan for the contingency that extra funding will be required.

39. The warnings on pricing appear to have been ignored by RAI. RAI had placed reliance on their own consultancy advice and had charged a high entrance fee of £6.95. Visitor numbers had then collapsed. In response RAI had taken a number of measures to boost attendances, including price discounts and a programme of major exhibitions. It is surprising that RAI increased the full adult entrance price from £6.95 to £7.95. One of the first things that the Royal Armouries had done, on taking the museum over in 1999, was to reduce this entrance fee to £4.90.

40. The reduction in the entrance fee appears to be working, as recent visitor numbers have been up on the similar period twelve months ago. It is likely that this improving trend will continue as the Royal Armouries are planning, in line with government policy, to introduce free admission to the museum in 2001. Despite these actions, the Royal Armouries have prudently based their future strategy on cautious estimates of future visitor numbers in line with the museum's past experience in Leeds.

41. There were a number of other factors, in addition to the pricing policy, which contributed to visitor numbers being less than forecast. The included an increase in the number of other, competing, visitor attractions and delays in the development of the Clarence Dock area surrounding the museum. Expenditure on marketing had also been reduced over time in line with the planned strategy for the museum.

42. This was a high risk project as it involved the establishment of a new museum, in a redevelopment area, with no proven track record of visits by the public. The Royal Armouries nevertheless had no contingency plans in place, as they considered that the risk of the project's failure lay with RAI in the private sector. However, on this deal the business risks ultimately lay with the public sector as the Department and the Royal Armouries had been unwilling to countenance the closure of the museum and had therefore stepped in to rescue the project. In considering future PFI projects, therefore, departments should consider where the business risks ultimately lie and draw up their own contingency plans accordingly.

17 C&AG's report, paras 6, 1.36, 1.40, and Figure 2 Back

18 Qs 1-3, 150-153, 157-158 Back

19 Qs 6-7, 11, 35, 153-154, and Evidence, Appendix 2, p21 Back

20 Qs 22-26 Back

21 Qs 64-65 Back

22 Qs 8-11, 29-30, 36, 80-81, 155, and Evidence, Appendix 2, p21 Back

23 Qs 9-11 Back

24 Qs 82-83 Back

25 Qs 32, 156, 216 Back

26 Qs 51-52, 120, and Evidence, Appendix 2, p21; Appendix 4, pp 33-34 Back

27 Qs 55, 64 Back

28 Qs 43-45 Back