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How can the hospitality industry survive rising costs and staff shortages?

The Hospitality Sector 2022

‘Now is the winter of our discontent…’

Throughout the Covid-19 crisis, hospitality venues displayed a remarkable degree of tenacity and resourcefulness: hotels used their facilities to provide accommodation for healthcare staff and self-isolating citizens, whilst restaurants adapted outdoor spaces, expanded takeaway services, and offered “finish at home” meal kits.

However, whilst necessity may be the mother of invention, the hospitality sector is facing an unprecedented crisis that demands more far-reaching and strategic solutions. From rising commodity prices to the curse of inflation, businesses in the hospitality and leisure market are feeling the pinch now more than ever. Every day, fresh reports populate the news, declaring Armageddon for pubs and restaurants up and down the country as they battle staff shortages and rocketing overheads. How, then, should businesses in the hospitality sector build resilience in the face of these extraordinary pressures?

Long-standing challenges

Hospitality businesses operate on very small margins and have low cash holdings, in part due to the high levels of fixed costs. This means that they are more vulnerable to income disruption. Moreover, even before the pandemic-induced turmoil, debt levels in the accommodation and food services sector were already high, with total outstanding debt in the hospitality sector averaging £27 million in 2019.

Soaring energy bills

The Rose and Crown pub in Bebington, Merseyside, recently published a viral tweet, reporting that the best energy deal available to a pub of their size was £61,667/year, and Night Time Economy Advisor for Greater Manchester, Sacha Lord, has warned that seven out of ten pubs will not survive the winter. Indeed, as business’ energy contracts come to an end, there are already reports of energy prices increasing by 300-500%. Some energy firms are even refusing to supply small UK businesses out of concern that they could go bust. At present, the government has offered very limited support to businesses, with the Ofgem energy price cap only protecting consumers.

Kate Nicholls, chief executive of UKHospitality, has said: “While the energy price cap doesn’t apply to businesses, this steep rise for already cash-strapped consumers means they’re likely to cut back on visiting hospitality venues or, worse still, stop going out altogether. […] Without an urgent and comprehensive government support package that helps both households and businesses, many hospitality venues are contemplating reduced trading, resulting in lower wages or lost jobs for staff who need their jobs more than ever if they’re to heat their homes.”

Tips and solutions

  • Urgent need for government intervention. Measures proposed by industry leaders have included a cut in VAT, an energy price cap for businesses (particularly for SMEs), an energy furlough scheme, and suspending business rates.
  • Energy monitoring and reducing consumption. The Federation for Small Businesses (FSB) recommends setting up an energy management plan to improve energy efficiency. An energy management plan involves monitoring the business’ energy consumption data before taking steps to reduce wasted energy. This might involve getting to know the recommended temperatures for specific areas in hospitality businesses, and then implementing an appropriate internal temperature. It might also involve installing low-energy lighting (LEDs), improving glazing, purchasing equipment with running costs in mind, and upgrading controls on heating systems.

Rising food prices

In June, the United Kingdom’s consumer price inflation was pushed to a 40-year high of 9.1%, the highest rate out of the G7 countries, and prices for food and non-alcoholic drinks rose by 8.7% in annual terms in May – the biggest jump since March 2009. Statistics from the ONS show significant price increases between April 2021 and April 2022 for a range of everyday groceries, with the cost of pasta jumping by 50% and bread by over 15%.

Kate Nicholls, chief executive of UKHospitality, has said, “These stark figures highlight the extent of the damage that rising costs are having on the hospitality and leisure market, engulfing and suffocating businesses and consumers alike. […] The impacts of rising costs are being felt across every facet of running a hospitality business, including on jobs and recruitment, economic stability, business viability, consumer confidence and willingness to spend.”

One reason behind rising food prices is higher fertilizer costs. For nitrogen-based fertilizers, the major cause of high prices is the rising cost of natural gas. The Russia-Ukraine war has also been an aggravating factor: Ukraine and Russia are significant sources of global exports, with 25-30% of the world’s wheat supply originating in these countries. Russia is also a leading producer of soybean and corn, as well as crude oil and natural gas, and both of the warring countries are major suppliers of fertiliser.

Tips and solutions

  • Communication. Customers value transparency, and announcing price rises on customer platforms and social media may well be met with a more sympathetic response than the “shrinkflation” trend.
  • Cost-cutting. This might involve identifying low-cost, high-profit items on your menu, or re-evaluating portion sizes, especially if you are consistently met with waste.
  • Marketing. Whether it be “meet the team” or “behind the scenes” posts, effective use of social media can help to foster intimacy between your business and your customers, and encourage loyalty during times of crisis.

Staff shortages

In July 2022, it was reported that even the heir apparent was struggling to recruit, with Prince Charles’ Rothesay Rooms restaurant in Ballater remaining closed due to a shortage of chefs and waiting staff. Indeed, according to data from the Office for National Statistics (ONS), the number of job vacancies in the hospitality sector reached 174,000 between March and May 2022. The ONS also reported in March 2022 that almost 100,000 EU nationals had left accommodation and food services in the two years to June 2021.

The recruitment crisis facing the hospitality sector is double-edged: on the one hand, our departure from the EU has seen an exodus of overseas staff, and on the other, British hospitality workers have, throughout the various lockdowns, found other less-demanding sources of employment. And the result is that thousands of operators are cutting trading hours — at a cost of £21bn in lost revenue.

Tips and solutions

  • Government review of point-based system for employment. UKHospitality CEO, Kate Nicholls, is calling on the government to review its current points-based system for employment in order to facilitate the entry of seasonal and lower skilled workers into the workforce.
  • Targeted recruitment. UKHospitality recently launched its Workforce Strategy, which involves working with colleges and universities to attract students into work. Furthermore, the organisation is pushing for a £5m cross-sector drive to recruit for roles in the hospitality sector, urging the government to enable businesses to use unspent apprenticeship levy funds, and actively promoting closer partnerships between local businesses and job centres.
  • Introducing incentives to attract and retain staff. Pay increases are not the only tool that hospitality businesses can use to attract employees, they can also embrace flexible-working, improve shift rotas, invest in staff welfare, introduces bonuses and boost pension contributions.

If you would like to speak with an adviser about your business plans or if you are planning for a possible sale, contact us today or fill in the form below. We can help with finance solutions, exit planning and business sales. Arrange a call back today to see how we can help.

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