Brace for impact: the worst is yet to come with the cost of living crisis

27 September 2022 by

Just when the industry was picking itself back up after Covid and Brexit, it's back to square one with energy costs. We take a look at CGA's research into what business leaders are anticipating

Optimism in the future of the hospitality sector has fallen substantially in the past year, with 43% of business leaders saying they feel actively pessimistic.

The Business Leader Survey 2022, produced by The Caterer and CGA, revealed that just 40% of respondents felt optimistic about the industry's prospects in the next year, compared to 80% in 2021. It's a stark difference in just a 12-month period.

In 2021 the industry was emerging from the pandemic with demand reflecting a pent-up desire to socialise. A year on and a cost of living crisis is threatening to hamper demand, costs are increasing across the board and the industry has found itself in the midst of a staffing difficulties.

Leaders' confidence in their own enterprises held up slightly better, with 51% of respondents saying they were optimistic about their own businesses in the next 12 months, compared to 81% a year ago.

Charlie Mitchell, research and insights director at CGA, said: "I think this time last year there was probably a slightly inflated sense of optimism because of where we had been and the light on the horizon. If you fast-forward the last 12 months, that inflated optimism has been well and truly shattered.

"I think while we've not seen much of an impact in terms of consumers just yet, we are seeing that people are really concerned about the impact the cost of living crisis is going to have."

Shattered confidence

Nine out of 10 respondents said their businesses were in profit when responding to the survey in July and August this year. However, the weeks that have followed have seen dramatic increases in inflationary pressures and, of course, energy costs (see special report pages 19-27), so it must be anticipated that profits will have decreased.

The cost of living crisis clearly weighed heavy on operators' minds when completing the survey, with 52% saying they were very concerned, 30% concerned, and 13% were moderately concerned. Food and drink inflation meanwhile had 51% of leaders very concerned, 36% concerned and 10% moderately concerned. However, fears of Covid-19 further impacting trade were far less pronounced, with just 5% of leaders saying they were very concerned about the infection's impact in the UK, and 12% very concerned it could negatively impact inbound tourism.

For business leaders the biggest issue they were facing in 2022 was labour shortages, with 81% of respondents saying the problem was "very significant". However, it can be assumed that for many increasing energy costs will now be their primary concern.

Mitchell added: "It shows that energy costs were not concerning when we put this together – it was concerns about inflationary pressures in terms of food and drink. Now energy costs are spiralling and having a big impact on margins and profit levels.

"The good news is that when we did this, not so long ago, people were in profit, so the hope is there's still some way to go before people start operating at a loss or breaking even, but energy prices will certainly have a huge impact.

"We've definitely not seen the last of the closures, but we saw the best operators surf the waves of the last few years. One thing we've learned over the last two years is that it's an innovative sector and a resilient sector and there are always new entrants. I think we'll see a net decline [in sites], and my prediction is that those that leave the sector will be the lower-quality outlets. Although there will be some really good operators that have to exit, I think they will be replaced by a similar, innovative and new operators as well."

Playing catch-up

Customer service and food or product quality were the areas of their businesses leaders felt most confident in: 80% of respondents felt they were market-leading in customer service, with the same level of confidence seen in food quality. Less confidence was apparent in delivery and food-to-go offers, where 63% felt they were behind the market while 19% felt they were behind in terms of technological innovation.

While there are many concerning headwinds facing the industry, a quality offering, that respondents have shown they are confident in will continue to draw people in. Peter Backman of Peter Backman Foodservice Consultancy said: "The industry is robust, innovative, entrepreneurial and it will find its way through, all be it, it might emerge smaller. Costs are going up massively, inflation in operator input costs could be 21% or even more when you take everything together. You can be pretty certain that the overall amount consumers have to spend is going to fall. So the question is how much of that reduced consumer spending is significant for the sector.

"There's a feeling that when people have less money and go out less, they expect more so that says they will tend to go to more expensive places, or go to the usual place and spend more. At the other end there may be more of the cheaper buying, which suggests the middle is going to be squeezed."

The figures show that since the start of 2022 like-for-like sales have consistently performed in line with or ahead of 2019 levels. Mitchell said: "The sector is resilient and when people are having a hard time they go out and have a drink, when they're celebrating, they go out and have a drink. The research we've done shows that what people are prioritising in terms of discretionary income is eating and drinking out.

"People have realised what a big part of their lives it is and we're yet to see huge decreases. In fact, our most recent research shows the most frequent visitors to hospitality have increased their visits and any drop is coming from consumers who were lower frequency anyway. Operators can take heart from that."

To view the full report form the Business Leader Survey go to www.thecaterer.com/insight

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