Last week I had two consecutive video meetings with hospitality operators. The first was the CEO of a business that owns all its real estate, has the minimum of debt, a customer proposition that is simple to operate, and a client base that is primarily mature people enjoying their leisure time.
The second was a catering business focused on office accommodation, with a major restructure under way to rebuild a balance sheet laden with debt, and a proposition reliant on high volumes that have yet return fully from their kitchen tables.
Pre-pandemic both were successful hospitality businesses optimistically planning their bright futures. They were both well led and seemed to have the world at their feet. Yet the contrast between them now is truly dramatic – one profitable and growing fast, the other fighting to survive.
A wave of change during 2023 has created yet another crisis for the beleaguered hospitality sector of a similar scale to the pandemic, only a little more selective over who it chooses to hurt.
At the heart of this wave, of course, is changing diner behaviour, fuelled initially by lifestyle changes created by the pandemic, and latterly by inflation and mortgage rate rises, both creating new demand patterns.
But it’s been a huge reset of operating costs that has been the biggest challenge. Labour, energy and food/drink led the charge, added to more recently by rising interest rates.
All businesses need to make a profit to survive and to grow over the medium term. But in today’s environment a lot of hospitality businesses have substantially increased prices yet are still earning less or even losing money.
There have even been comments in the mainstream media claiming that hospitality is exploiting a high inflation environment to fill its boots with cash. And of course, such operators do exist, particularly at the luxury end of the market where at times prices seem to be progressing in multiples rather than incremental percentages. But these are the exceptions in my experience, and the mainstream media is all too often lazy and ill informed.
The economics of running a hospitality business can be brutal. The CGA Prestige Foodservice Price Index basket in April was 21.4% inflation. That’s somewhere between 5% and 8% points of gross margin.
So, a restaurant with say £1m of revenues loses £50k-£80k of cash contribution, even before the additional (c10%) labour, higher interest rates on debt and a probable doubling of any newly contracted electricity costs. The overall shift of cash margin on a £1m business can reach as much as £300k.
To stand still this business must therefore raise its prices by up to 30%, generate greatly increased volumes of diners or find ways to mitigate the wave of extra cost it faces. The alternative is to fund the losses through debt or equity.
Many of our sector’s restaurants are now walking an increasingly narrow tightrope between raising prices, mitigating costs, and losing volume.
With 1.4m low interest fixed-rate mortgages set to expire in 2023, and a similar number in 2024, the impact on consumer spending will certainly be felt by hospitality operators.
To all businesses cash is the oxygen that keeps the heart pumping. Right now, many are slowly choking to death through lack of cash, even though revenues are increasing. Independent operators in particular are feeling this pain.
With the government now openly saying that the magic money tree has shed all its leaves, it may be hard to get them to see reason, but reason does exist.
We are all now seeing hospitality businesses failing. A cull of weak businesses must surely always be a good thing. But for the large part these have already gone, and many of those left standing now are actually fundamentally sound and well managed businesses doing their best to emerge from the toughest three years in hospitality history.
To allow them to fail would not only be a tragic loss but would lower future tax revenues for an already weakened exchequer.
Action on VAT now would save businesses, save jobs and ensure our ability to maximise future tax revenues. A wise move and a no brainer.
