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Introduction
This has been a challenging year for the Group, particularly in the second half of the year. Nevertheless, our performance has been resilient and we have continued to grow net asset value per share. Big Yellow has achieved substantial total returns to shareholders in the last five years with revenue, operating profit and net asset value increasing every year. These arise from a combination of factors including:
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a prime portfolio of self storage properties |
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successful acquisition and development of new stores |
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the strength of operational management |
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revenue growth |
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improving cash flow and margins |
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flexible and conservative financing |
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Business Objectives
In recent years, Big Yellow has established itself as the leading self storage brand in the UK (MORI National Survey, August 2007), a key objective set at flotation. The Group’s strategy is to continue to invest in quality assets at the premium end of the self storage market and to build on our brand leadership nationally. We intend to measure our progress by commissioning quantitative research each year. We opened our first store outside our core area, in Leeds in 2005 and now have sites under development in Manchester, Liverpool, Nottingham, Birmingham, Edinburgh and two in Sheffield.
The main elements of our strategy remain: |
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the roll-out of new freehold stores in major urban conurbations throughout the UK |
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retaining a focus on London and the South East in the core Group |
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conservative financing using flexible bank borrowings secured against a prime freehold portfolio, and more recently the Partnership with Pramerica |
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locating stores in visible, convenient and accessible locations |
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an unwavering focus on customer service |
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excellent operational and financial management generating strong cash-flow growth |
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innovative and creative marketing |
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an entrepreneurial and passionate culture, with accessible senior management encouraging innovation and dialogue throughout the business |
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recruiting and retaining quality people into the business |
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Financing Objectives
Big Yellow’s financing policy is to fund its current needs through a mix of debt and equity in building out the existing portfolio and achieving our strategic growth objectives, which we believe improves returns for shareholders.
We aim to ensure that there are sufficient medium term facilities in place to finance our committed development programme, secured against the freehold portfolio with debt serviced by our strong operational cash flows.
The core business is financed by a mixture of debt and equity which improves returns to shareholders. The level of bank debt in the business is closely monitored against the Board’s policy guidelines, which currently require that the ratio of net debt to gross property assets is no greater than 50% and interest cover not less than 2 times based on net operating income, comfortably ahead of its banking covenants. However, it is acknowledged that there may be limited periods where income cover temporarily falls slightly below 2 as a result of known factors, for example a number of new store openings, as new freehold stores make a loss for the first three to six months before breaking even at the net operating income level.
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Risk Management
The management of risk is a fundamental part of how we have controlled the development of Big Yellow since its formation in September 1998.
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Self Storage Market Risk
The economy grew satisfactorily in the first half of 2007, with consumer spending remaining strong. The credit crunch, which started in August 2007 has clearly impacted the availability of mortgages to home owners which in turn has caused a significant reduction in housing market activity. This came on top of the additional costs from increasing interest rates over the previous year, and more latterly rising energy, food and transport prices. The combination of these factors has impacted confidence and decision making, which has slowed demand. We believe however that the structural need for self storage remains. We have increased storage rents to customers by 6.1% from May 2008. Over the last six years average net storage rental growth has been 4.5%.
Approximately 50% of our customers are in some way linked to the housing market, for example with customers renting storage space between house moves or whilst moving within the rental sector. We estimate that 15% of customers rent storage space as a spare room for lifestyle purposes and approximately 20% of customers use the product because some event has occurred in their lives generating the need for storage; they may be moving abroad for a job, have inherited furniture, are getting married or divorced, are students who need storage during the holidays, or homeowners developing into their lofts or basements. The balance of 15% of our customers are businesses ranging from start ups and market traders to retailers and larger multinationals storing stock, documents, equipment, or promotional materials all requiring a convenient flexible solution to their storage either to get started or to free up more expensive space.
Self storage is an immature market with further opportunity for significant growth. Awareness of self storage and how it can be used by domestic and business customers is relatively low throughout the UK, although higher in London. The rate of growth in branded self storage on main roads in good locations continues to be limited by the difficulty of acquiring sites at affordable prices and obtaining planning consent.
Big Yellow only invests in prime locations, developing high quality self storage centres in the large urban conurbations where the drivers in the self storage market and the barriers to competition are at their strongest.
We have a large current storage customer base of over 30,000 spread across the portfolio of open stores and many thousands more have used Big Yellow over the years. In any month customers move in and out at the margin resulting in changes in occupancy. This is a seasonal business and typically one sees growth over the spring and the summer months, with the seasonally weaker periods being the winter months. The performance in terms of occupancy, revenue and EBITDA of our stores can be seen from the Portfolio Summary on page 16.
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Property Risk
We are continuing our expansion in key cities in the Midlands, the North of England and Scotland, with a target of opening a total of 25 stores in the next five years. We also retain our focus on growing the core business in London and the South of England, through the acquisition of key strategic sites. We continue to face significant competition for sites for these quality main road locations from other uses such as residential, hotel, car showroom and offices. We believe the current difficulties in the banking and capital markets clearly make access to capital required to fund growth more difficult and will slow down the growth in self storage store openings in the market generally. We believe that we are in a relatively strong position because of our strong balance sheet underpinned by our freehold property assets, with available banking facilities and an ability to access more if required.
The planning process remains difficult with planning consents taking approximately twelve months to achieve on average. In this competitive environment, we do take planning risk as it is necessary for us to acquire sites unconditionally, with planning and other property due diligence carried out under tight timescales. A slowing property market will provide opportunities to buy certain sites on a conditional basis, as we have with two of our recent acquisitions.
Big Yellow’s management has significant experience in the property industry generated over many years and in particular in acquiring property on main roads in high profile locations and obtaining planning consents.
In the year under review we were successful in acquiring 10 sites, four in London and sites in Camberley, Reading, Birmingham, Edinburgh and second sites in Guildford and Sheffield. We now have a portfolio of 70 stores and sites (and one extension site) of which 48 are currently open and a further 10 have planning consents. We have surplus land of £29.4 million. Included in this is our second site at Bow, which was acquired at a time when our existing store was subject to a compulsory purchase order for the Olympic Zone. This order has fallen away, so we have made the decision to dispose of the site. Additionally, we have decided to sell our site in Blackheath, where we were unsuccessful in achieving planning permission.
We manage the construction of our properties very tightly. The building of each site is handled through a design and build contract, with the fit out project managed in-house using an established professional team of external advisors and sub-contractors who have worked with us for many years to our Big Yellow specification.
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Treasury Risk
The Group borrows in sterling at floating rates of interest and uses swaps to hedge its interest rate exposure. The Group has derivatives in place to ensure at least 40-50% of bank borrowings are hedged, the balance is left floating paying margin over LIBOR. At March 2008, we have hedging instruments in place over 67% of our outstanding bank borrowings. During the second half of the year, we have been paying over 1 month LIBOR, rather than 3 month LIBOR which has been at elevated levels due to the illiquidity in the inter bank lending market.
Our portfolio is relatively high yielding and we believe this flexible approach to our hedging is appropriate for our strategic aims, given our conservative balance sheet.
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Interest Cover and Balance Sheet Risk
The Group reviews the current and forecast projections of cash flow, borrowing and interest cover as part of its monthly management accounts. In addition, an analysis of the impact of significant transactions is carried out regularly, as well as a sensitivity analysis assuming movements in interest rates and occupancy in the stores on gearing and interest cover.
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Credit Risk
Our customers are required to pay a deposit when they start to rent a self storage unit and are also required to pay in advance for their four-weekly storage charges. The Group is therefore not exposed to a significant credit risk. 75% of our customers pay by direct debit. Since the commencement of the credit and liquidity issues since last August, we have not seen any increase in bad debts and arrears.
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Taxation Risk
The Group is exposed to changes in the tax regime affecting the cost of corporation tax, VAT and Stamp Duty Land Tax (“SDLT”). We regularly monitor proposed and actual changes in legislation with the help of our professional advisors and through trade bodies to understand and, if possible, mitigate or benefit from their impact.
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REIT Risk
The Group converted to a REIT with effect from 15 January 2007. The Group is therefore exposed to potential tax penalties or loss of its REIT status by failing to comply with the REIT legislation. The Group has internal monitoring procedures in place to ensure that the appropriate rules and legislation are complied with. To date all REIT regulations have been complied with.
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Human Resources Risk
At Big Yellow we have developed a professional, lively, enjoyable and fun working environment and believe our success stems from attracting and retaining the right people. We encourage all our staff to build on their skills, through appropriate training and regular performance reviews. We believe in an accessible and open culture and everyone at all levels is encouraged to review and challenge accepted norms, so as to contribute to the performance of the Group.
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Reputational Risk
Big Yellow’s reputation with all its stakeholders is something we value highly and will always look to protect and enhance. We aim to communicate clearly with our customers, suppliers, local authorities and communities, employees and shareholders and to listen to and take account of their views. Big Yellow’s Intranet and Website (bigyellow.co.uk) are important avenues of communication for both employees and shareholders.
We have signed two international franchise agreements in respect of the United Arab Emirates and Bahrain. We carried out due diligence on our local partners and were advised on the Development Agreement by the Eversheds Franchise Team, now part of Field Fisher Waterhouse. The Development Agreement provides the requisite controls typical of arrangements of this nature to protect our reputation and brand. We have appointed an experienced International Franchise Director with over 15 years experience in franchising, who is responsible for growing this aspect of our business.
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Corporate Social Responsibility
The Board has appointed a Corporate Social Responsibility Manager during the year. We have adopted a formal corporate social responsibility (CSR) policy during the year. This is shown below.
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Corporate Social Responsibility Policy
The Board recognises that high levels of corporate social responsibility (CSR) linked to clear commercial objectives, will create a more sustainable business and increase shareholder and customer value. This Policy will cover all of Big Yellow’s operations, as both a self storage developer and operator. Big Yellow is seeking to meet the demand for self storage from businesses and private individuals providing the storage space for their commercial and / or domestic needs, whilst aiding local employment creation and contributing to local community regeneration.
The Board commits itself to:
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Complying with relevant social and environmental legislation |
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Establishing a formal integrated CSR management structure to implement “best practice” |
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Preventing pollution and the waste of resources to protect the environment |
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Consulting with stakeholders on social aspects to improve their services to the Group |
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Providing capital for sustainable development that is economically viable |
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Reporting annually on improving ethical, community and environmental performance |
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Operationally, Big Yellow commits to: |
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Development – to address relevant issues on local community and climate change aiming to achieve best practice on sustainability checklists and local planning guidance |
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Design – to minimise its carbon footprint as far as practicable through the application of passive building principles, viable renewable energy and other sustainability criteria |
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Construction – to aim for build site sustainable practices by raising environmental and health and safety standards through the Considerate Constructors Scheme |
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Estates and Facilities – to monitor energy, waste and water provider performance in order to identify areas for operational efficiency improvements |
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Operations – to keep store managers and customers informed of the ethical, safety, security, energy use and waste minimisation aspects of storage and packaging |
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Sales, Marketing and Customer Care – to facilitate external communication of sustainability and ethical market differentiation and improve customer satisfaction |
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Human Resources – to integrate the Group CSR policy within all training programmes, employee communications, and benefits initiatives, whilst continuing to promote charitable giving, employment creation and staff retention |
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Office Management and Information Technology – to facilitate internal communication of environmental performance and cost effectiveness of energy usage, waste paper reduction, recycled paper usage, and the recycling of waste paper |
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The CSR Manager will facilitate the Board and Group Operations to achieve these commitments by establishing more specific objectives within the existing management structure and implementing guidance to meet agreed continuous improvement targets. The CSR Manager is also responsible for recording key performance indicators for annual reporting and review by the Board.
A detailed review of our work in corporate social responsibility is included within the CSR Report on pages 24 to 30. |
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Stores
During the year we opened six stores, all in London (at Sutton, Ealing, Barking Central, Balham, Merton and our flagship 139,000 sq ft store at Fulham). We also closed our store in Sheen for comprehensive redevelopment into a new 60,000 sq ft store due to reopen in November 2008. These store openings bring the number now trading in the Group and the Partnership to 48. The available net lettable space increased by 458,000 sq ft over the year to 3.0 million sq ft with the opening of these six stores.
The maturity profile across the 47 wholly owned stores open at the end of the year is set out in the Portfolio Summary on page 16 and shows a blended occupancy for the portfolio of 62% (1.8 million sq ft occupied), with the 32 stores more than two years old at an average occupancy of 82%, consistent with the prior year. The closing occupancy at 31 March 2008 was 79% against 82% in the prior year, reflecting the more difficult trading conditions experienced in the second half of the year.
There are a further 22 freehold sites (including five sites within Big Yellow Limited Partnership) and an extension site at Richmond. These sites are at various stages of planning and construction which, when fully developed, will increase the total capacity of the portfolio to 4.5 million sq ft.
10 of the 22 sites in the development pipeline are located in Greater London, which we believe will continue to improve the quality of our store portfolio. We have continued with our stated intention to acquire sites in key Northern cities, the Midlands and Scotland and set up Big Yellow Limited Partnership in the year with Pramerica Real Estate Investors to fund this expansion. We now have seven sites in the north, which will trade in the Partnership when open: in Birmingham, Edinburgh, Liverpool, Manchester, Nottingham and two in Sheffield. In addition, our 72,000 sq ft store in Leeds was acquired by the Partnership in November 2007.
We continue to work on obtaining planning consents for all future stores. We expect to open six stores in the current financial year, three within the core Group, and three within the Partnership.
During the year we moved in over 40,000 customers taking 2.4 million sq ft compared to 42,000 customers taking 2.5 million sq ft last year. This resulted in the stores increasing occupancy by 37,000 sq ft (150,000 sq ft last year), after adjusting for the sale of Leeds and the closure of Sheen. Of the 48 stores open at the year end 43 are now trading profitably with the other five being the most recent to open.
The Big Yellow store model is now well established. The “typical” store contains 60,000 sq ft and takes some 2.5 to 3.5 years to achieve 85% occupancy. The average room size is some 60 sq ft and the average net rental achieved last year across the 47 wholly owned stores was £25.38 per sq ft per annum (the average rent in London is higher at £27.93 per sq ft per annum). The store is initially run by three staff – adding a part timer once the store occupancy justifies the need for the extra administrative and sales workload. Given that the operating costs of these assets are relatively fixed, larger stores in bigger urban conurbations, particularly London, drive higher revenues and higher operating margins.
The drive to improve store operating standards and consistency across the portfolio remains a key focus for the Group. Excellent customer service is at the heart of our business objectives, as a satisfied customer is our best marketing tool. From our surveys 98% of customers would recommend Big Yellow to a friend. We measure customer service standards through a programme of mystery shoppers and ex-customer surveys. We have in place a team of Area Managers who have on average been with Big Yellow for six years. They develop and support the stores to drive the growth of the business. Adrian Lee, Operations Director, is the Board member responsible for dealing with all customer issues.
The store bonus structure rewards occupancy growth, sales growth and cost control through setting quarterly targets based on occupancy and store profitability, including the contribution from ancillary sales of insurance and packing materials. Information on bonus build up is circulated monthly and stores are involved in preparing their own targets and budgets each quarter, leading to improved visibility, a better understanding of sales lines and control of operating costs.
The Group manages the construction and fit-out of its stores in-house, as we believe it provides both better control and quality, and we have an excellent record of building stores on time and within budget. The total construction spend in the year was £47 million. We currently have seven new stores on site, six of which will open in the financial year 2008/9.
We opened our Fulham store in March after our most complicated construction project to date, involving a six month demolition and an 18 month construction period. The new store incorporates retaining a Victorian façade and a significant element of glazing, a double basement and five floors above ground. We have also developed Big Yellow Wine Cellars, the first wine self storage in the UK, with 480 private climate controlled cellars with the same benefits as self storage, including accessibility, flexibility and convenience. The cellars were formally launched on 13 May 2008, at a wine tasting launched by Oz Clarke, the celebrity wine personality.
We believe that as a customer facing real estate business it is paramount to maintain the quality of our estate and customer offering. We therefore continue to invest in a rolling programme of store makeovers, preventative maintenance, store cleaning and the repair and replacement of essential equipment, such as lifts and gates. |
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Sales and Marketing
During the year we completed a strategic review of our Marketing programme and we rolled out our new Brand proposition “Get some space in your life.” This involved a complete re-design of our marketing materials, and was launched in April 2007 with an award winning TV, press and online advertising campaign. Our TV advertisement has won multiple awards including ‘New Advertiser’ and ‘Best 30 second TV ad’ at the British Television Advertising Awards. We have now integrated the new designs into all our marketing materials, including an updated signage package for new stores.
We are at the forefront of online innovation in the self storage industry, and during the year we launched the UK’s first self storage online reservation and real-time pricing system. As a result of this, online enquiries now account for the majority of our sales prospects, and an increasing number of our customers are completing their reservations online. We are constantly looking to improve our e-commerce proposition and we will continue to lead the industry in this area.
We carry out annual awareness surveys and our Brand continues to grow strongly. Highlights from this year’s survey include: |
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We have achieved Brand awareness of 60% – 70% in our target groups in London & the South East, an increase of 30% over the previous year |
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Our Brand awareness is now three times the level of our nearest competitor |
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80% of our customer base continues to fall within the top three ACORN customer categories |
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Big Yellow leads the industry in terms of Brand preference, with more potential customers expecting to use Big Yellow than any other Brand |
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Source: Ipsos Mori, August 2007 |
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A thorough understanding of self storage (ie a full awareness of the service provided and its benefits) remains relatively low at approximately 30%, and educating the public about our top quality service and facilities continues to be at the centre of our Marketing programme.
We continually monitor local market conditions and review our promotions regularly. Our strategy is to offer targeted promotions to ensure we are offering the best value available to our customers, whilst ensuring that we achieve our rental yield objectives. During the year our competitors have increased discounting significantly in order to attract new customers. Big Yellow continues to operate at the quality end of the market and, in spite of the competitive environment, we have controlled our discount level from scheduled rents to an average of 9.1% for the year.
Local marketing, selling standards and customer service at store level are also critical to building the brand and achieving customer loyalty and recommendations. We invest significantly in training and have a reward structure and performance monitoring systems which focus specifically on achieving sales and customer service objectives.
During the year the Group spent approximately £2.6 million (4.6% of our turnover) on marketing, in line with the previous year. It is our intention to continue to invest 4.25% to 4.5% of our turnover to increase awareness of Big Yellow in existing and new markets, particularly as we expand into new cities across the country.
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Security
The safety and security of our customers and stores remains a key priority. To achieve this we invest in state of the art access control systems, individual room alarms, digital CCTV systems, intruder and fire alarm systems and the remote monitoring of all our stores out of our trading hours.
We have implemented customer security procedures in line with advice from the Metropolitan Police and continue to work with the regulatory authorities on issues of security, reviewing our operational procedures regularly. The importance of security and the need for vigilance is communicated to all store staff and reinforced through training and we have continued to run courses to enhance the awareness and effectiveness of our procedures in relation to security, entitled “You and your customer”.
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People
At Big Yellow we aim to provide a lively, fun and enjoyable work environment, without losing our commitment to the best customer service and standards of performance.
As the business has grown it has been necessary to formalise the means by which ideas and policy changes are communicated and discussed with employees. We hold regular consultation meetings with employees, both formally and informally, and our Directors and senior management spend significant time in the stores and are accessible to employees at all levels. An annual Employee Attitude Survey provides the management with key feedback and guidance as to where to focus its resources in each year.
We encourage a partnership culture within the business and believe in staff participating in corporate performance through share incentives. Many employees have benefited, or continue to benefit, from share options granted in previous years and from an HMRC approved Sharesave Scheme. This provides an opportunity to invest in the future success of Big Yellow at a discount to the prevailing share price at the date of each invitation.
In addition, a stakeholder pension scheme managed by Friends Provident provides pension provision within the Group and has been taken up by 70% of employees eligible to join.
We had 248 full, part time and casual employees in the business at the year end (2007: 226 employees), and recruiting and retaining the right calibre people remains critical to the continued success of Big Yellow. We promote the individual development of staff through training and regular performance appraisals and delivered over 700 days training to employees in the last year, equating to an average of approximately 3 days training per employee. In the stores over 60% of the managerial posts have been filled by internal promotions. We have a policy on flexible working to meet individual needs where possible, without compromising corporate objectives.
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