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Hospitality Business Leaders report: Costs keep operators awake at night

22 August 2019 by
Hospitality Business Leaders report: Costs keep operators awake at night

Ask hospitality leaders what concerns them the most and you get a clear answer: labour costs, food costs and business rates. Those three areas stood out against all the other pressures respondents to The Caterer and CGA's Business Leaders Report were asked to consider, such as energy costs, tourist taxes, market saturation, interest rates and the impact of terrorism.

It makes sense to professor David Russell, chairman of hospitality consultancy The Russell Partnership. "In a business where 60% of your costs are made up of labour and food, you are going to worry about them first. We are all reasonably aware that bank rates aren't going to shoot up and issues like terrorism are things that people don't tend to worry about until they actually happen. It is too unpredictable so it doesn't fall into our everyday risk register," he explains.

Nonetheless, the climate of uncertainty – both political and economic – combined with government policy on areas like wages and immigration has undoubtedly heightened operators' chief concerns, with 97% declaring themselves moderately concerned, concerned or very concerned about food costs. That figure rises to 99% when it comes to labour costs.

Mitigating costs

But is there anything operators can actually do to mitigate these costs? Not an awful lot unfortunately, in the estimation of most of the industry experts The Caterer spoke to. "It is difficult. These are structural costs," says hotel industry consultant Melvin Gold. "Labour is being driven up by regulation – the National Living Wage and Minimum Wage. You then have to increase the salary of all of your supervisors because there is a cascading effect upwards. But the second aspect is a labour shortage in general, especially in some skilled roles. There isn't an easy answer other than becoming more efficient and I am not convinced that hoteliers are sitting around with loads of staff on their books just because they can."

Peter Martin, vice president of CGA, is of a similar view. "In the short term there is probably not much businesses can do," he says. "I sit on the advisory council of UK Hospitality, where Kate Nicholls is doing an excellent job. All conservative MPs are saying you need root-and-branch reform of business rates but what does that look like? Basically it isn't going to happen any time soon and it is the same with people costs. There is a sense from this government that people should be paid more and we want a high-wage economy so I think we are still going to see that pressure. There is a lot of lobbying to do and even if reform is on the horizon, it won't come quickly."

When it comes to food costs, foodservice consultant Chris Stern asserts that any price rises will simply have to be passed on to the customer or client. "Operators won't have to pick it up. I am not sure it is such a big deal," he says.

In any case, Russell argues that Brexit hasn't yet had the inflationary effect that some feared it might, and that there are ways businesses can put a lid on those costs. "Although we are conscious that Brexit might cause an issue, we are not actually feeling it that much. Purchasing consultancies provide independent advice on food costs to businesses who probably haven't previously approached it in a strategic way," he says.

Similarly, Julian Fris, managing director of consultancy Neller Davies, points out that while operators can't control food costs, they can control waste. "People don't seem to realise how much of a saving can be made there," he says. "As an example, we work in healthcare and did some research for a major London NHS trust which spent £11m on patient catering. Because of the way it was delivered, 36% of it got thrown away. That equates to £4m which could be saved and reinvested elsewhere."

And on the subject of investment, Russell recommends that businesses do whatever they can to retain and train their staff. While this doesn't directly address the issue of labour costs, he claims that businesses, and particularly independent restaurants, that train staff well will see a growth in average customer spend. "If people are trained more effectively and trained to upsell and understand why they are upselling, the business they work in will definitely see growth in average spend," he says. "People are demanding more but they are willing to pay more if the value of the product is there."

Sustainability back on the agenda

When it comes to how significant business leaders think certain social and political issues will be for the sector this year, the picture is much the same, with labour shortages, pay levels and immigration levels occupying the top three spots.

But close behind are the two issues of plastics and packaging, and sustainability. Russell sees it as an area that hospitality operators have recently been very alive to anyway. "Many of us have been very vocal about this for a long time," he says. "Programmes such as Blue Planet have brought issues like the way we use single-use plastics up the agenda. Sustainability is big and I think it is going to grow."

"The industry is on the front food and can lead the debate," adds Martin. "The Sustainable Restaurant Association has been around for a while and the pub trade has been leading on eliminating plastic straws. I don't think there's a feeling of ‘oh God, we have to do this'. I think the industry wants to do this and we could do with more support and better understanding when it comes to recycling in terms of what can be recycled and what goes to landfill."

In the catering arena, clients may be even more keen on issues like packaging and sustainability than operators, says Stern. "Social enterprise and corporate social responsibility (CSR) is all clients are interested in, certainly in London. It dominates everything," he says. "Clients will pay more for a caterer that is good at it than one that doesn't take any notice of those things. The problem is they want it all for nothing so it's an interesting issue when contractors are having to deal with issues like paying staff a lot more because of the London Living Wage and the National Living Wage."

Respondents to the survey also clearly think that suppliers have a role to play in helping them to address the issue of sustainability and in particular packaging and food miles. And Russell advocates using their expertise to help. "If you are dealing with a food supplier who manages transport costs well, produces as much locally as possible, or is able to introduce you directly to the farmers for example, then that will produce the greatest returns for you. Get them to focus on what they are particularly good at for you," he says.

While being part of an industry that is on the front foot on sustainability may come as scant comfort to businesses grappling with rising costs, the only other consolation is that operators find themselves broadly in the same boat. Rising labour and food costs may be robbing business leaders of some sleep, but they at least know that their competitor is likely to be having a similarly restless night.

Reasons to be cheerful

A list of business leaders' concerns doesn't always make for the most uplifting reading if you are in the hospitality industry. But there are plenty of reasons to be cheerful too, as our experts point out:

  1. Site availability: You still have to be careful about whether or not it fits your business, but there are more sites, particularly restaurant sites, available, with landlords prepared to offer nil premiums and better rent deals. "Premiums are coming off in London a bit and certainly outside of London so there are deals to be done," says Martin.
  2. Strong offerings will out: When trading gets tougher, it is the best operators who shine and gain customer recognition, helping to improve standards across the sector, says Melvin Gold: "If you have an imbalance of supply and demand, people will exercise more choice on the basis of quality. The strong will survive and thrive and others will see what is working and follow."
  3. Growing premiumisation: The market should be excited about growing levels of premiumisation, says Russell. "The opportunity to find a unique experience targeted to a certain demographic is having huge success whether that's a pop-up or a secret dining concept," he argues, citing the success of Tom Kerridge's Pub in the Park. "It's a really creative, niche product that people were just waiting for," he adds.
  4. Brexit bounce: Julian Fris expects a Brexit bounce as more people staying in the UK gives rise to a stronger tourism industry and more food festivals centred around British produce, giving smaller catering operators another chance to find their way into the market.
  5. Entrepreneurial spirit: Hospitality continues to be an industry that draws in some of the best and brightest entrepreneurs, making for a vibrant, exciting sector, says Martin: "The enthusiasm and passion for the sector is great. You see new tastes and ideas coming through and it brings people into the industry. If you look at the overall eating and drinking out market, it is pretty healthy."

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