As many businesses in the hospitality sector face a perfect storm of rising costs, staffing issues, and the effects of a slowing economy, we consider some steps the sector can take to keep on track.

With food inflation hitting 16.4% 1 in October 2022, its highest since 1989, and energy prices surging despite the introduction of energy guarantees, many hospitality businesses are feeling the pressure. Even businesses that are eligible for the government scheme are aware that it won’t last forever, so they’re having to think ahead.

Climate of rising costs

Interest rate rises to combat inflation, mean that businesses with funding linked to the base rate are also facing a squeeze. In a sector that typically operates on tight margins and where competition is high, decisions to absorb or pass costs onto customers are tough. 

This is more pronounced now that consumer confidence is falling, and customers are counting every penny.

Labour shortages

Rising costs come on the back of a difficult few years for the sector. The UK’s withdrawal from the EU, combined with the pandemic, has created staffing issues. Paul Keaveney, Relationship Director, SME Banking at Lloyds Bank,  explains: “It seems a lot of people left after the referendum vote, then others went home to be closer to their family during the pandemic and now it’s not easy to return. The pool of migrant workers that hospitality depends on has significantly dried up.”

Keith Barr, CEO of the InterContinental Hotels Group, agrees. He has noted that the UK hospitality sector relies on 62,000 2 new EU migrants each year – but with many industry roles not meeting the post-Brexit salary requirement set by the government, there is a shortfall, increasing competition and salary expectations, which impacts margins.

Innovative thinking

Despite being hit hard by the pandemic, many businesses showed remarkable resilience. “Businesses that survived were those that adapted their business models. It’s drawing on that kind of innovative thinking, and focusing on business fundamentals, which will help them meet these latest challenges,” adds James Davies, Relationship Director, SME Banking at Lloyds Bank. So, what steps can the sector take to manage these challenges?

  • Add value to staff. Pay is important, and there will always be staff chasing the highest offer, but additional benefits can help attract and retain staff. Training and development opportunities, pensions or other financial incentives, or even allowing staff to take a meal at work or take surplus food home can be cost-efficient ways to make your business more attractive.
  • Technology can help you run your business more efficiently. Embrace it. Digital stock systems, online banking services, or accounting software, can reduce admin time and costs, and help you keep track of spending more effectively. James Davies comments that “There are Apps available that can help you get hold of staff at short notice if business peaks unexpectedly. QR codes and mobile ordering can also reduce demand on waiting staff, freeing them up to do other things.” What’s more, gathering data and using it to help understand productivity, customer footfall and spending patterns can help you plan shift patterns, product offerings or opening hours. An estimated 1 in 20 3 hospitality firms plan to reduce trading to lower energy costs, so knowing where to cut can be useful.
  • Seek opportunities to diversify and innovate. Themed events, live cooking demonstrations or cocktail masterclasses can attract new business. Serving take-out as well as eat-in and using delivery services can help reach new clientele. “One of our clients operates Chinese restaurants, and by setting up a dark kitchen, where they prepare delivery-only food, they now cover an extra third of London,” adds James Davies. “Plus, many of the delivery services have a big advertising spend that you can piggy-back on.”
  • Running a business can be lonely, particularly when times are tough. Working with others within your sector, attending industry events and speaking to your Relationship Manager can offer you new insights and support. It can also help you stay up to date with industry changes, such as the business rate relief, announced in the Autumn Statement.
  • Being more sustainable can often also help you be more efficient and attract customers. Tackling food waste could reduce costs, and energy-efficiency changes such as installing solar panels could have an impact on future bills, plus funding could be cost-effective through schemes designed to support businesses to become more sustainable.

No matter what you do, it should be tailored to you and your business. Remembering this, and not losing focus on the operational fundamentals, should serve you well as you continue to manage the challenges facing this important sector.

Managing business costs and uncertainty

Managing business costs and uncertainty

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