How much does it cost to run a hospitality business?

Almost 5,000 licensed outlets and 357 hotels contributed to a benchmarking report compiled by UKHospitality and Christie & Co; which found the average overheads associated with running a licenced premises had increased by 2.7 percentage points (ppts) since the last survey in 2019, to stand at 55.2% of annual turnover before rent the highest total recorded since 2007.

I don't think any of us know what the next six months will look like

Stephen Owens, managing director of pubs and restaurants at Christie & Co, said: "It's a while since we've done the benchmarking for obvious reasons and it provides a snapshot in time. It's no surprise that costs have increased, but the interesting thing is the shape of how that's impacted various subsectors and like-for-like sales. It reinforces our view that not everyone has come out of the pandemic in the same way.

"There are going to be further cost headwinds but there are so many moving parts at the moment that trying to piece all that together and make predictions is really challenging. I don't think any of us know what the next six months will look like and things could change dramatically."

The six-month period to December 2021, suggested that accommodation had emerged from the pandemic as the most resilient subsector in terms of demand. Across the entire survey, the sector was trading 2.3% below 2019 levels, but accommodation-led businesses saw like-for-like sales record a 9.8% increase thanks to a boom in staycations. Despite this, increasing cost pressures appear to have dented the conversion of demand to profit, with the accommodation sector recording the highest cost base as a percentage of turnover within hospitality at 59.8%.

Owens said: "Accommodation appears resilient, partly due to the staycation impact and I think as we move forward we're seeing that people are more inclined to holiday in the UK. We see now the challenges around international travel with the delays, so I think people are more minded to take short breaks in the UK, rather than short breaks abroad. Whether that's here to stay, only time will tell, but absolutely the beneficiary of that has been accommodation."

Food and drink sales did not stand up as strongly as accommodation, although this can be partly accounted for by the emergence of the Omicron variant, which dented Christmas trading.

The percentage of wet sales recorded as a total of hospitality revenue stood at 43.2%, the lowest since the survey began 13 years ago, and a significant drop on the 57% seen in 2019. Food sales also showed a 5.2ppts fall to 31.3%.

Mounting costs

The increases in overheads were driven by the rising cost of utilities, operations and premises; which were equal to 5.1%, 7%, and 5.4% of turnover respectively. Utility costs saw the sharpest rise, increasing 2ppts, however, it can be assumed that a further steeper increase will be seen in the next survey. Rent as a proportion of turnover had also increased by 1.2ppts to 10%.

Payroll costs averaged 28.3% of turnover, a decrease of 1.2ppts on 2019. The decrease has been attributed to a reduction in bar, kitchen and floor staff with the majority of respondents saying 20% of roles were vacant, outweighing the increase in management salaries also recorded.

Owens said: "These costs are not sustainable unless there are other moving parts, such as incremental increases in gross profit margins. Costs are only one part of the operational model, along with gross margins and headline turnover, so by definition if those are static and costs are increasing, that's going to lead to distress. I think the size and impact of that depends on the wider economic situation and whether operators can drive up gross profit margins."

Gross profit margins on food sales and wet sales improved by 3.1ppts and 0.5ppts respectively in comparison to 2019. This is believed to be down to price increases and the temporary VAT reduction during the survey period, which has since reverted to its pre-pandemic level of 20%.

Other forces

Owens warned that inflation, driven by the lingering effects of Brexit and Covid-19 as well as the recent impact of Russia's invasion of Ukraine, should be the biggest concern for operators. The impact on overheads has been seen directly in relation to the supply chain and staffing issues as well as indirectly through declining consumer confidence and spending.

But, despite an increasingly challenging trading environment Owens said the number of businesses exiting the market was, and continues to be, low.

He explained: "There's a little uptick in distress at the moment, but it's not at the levels that had been predicted, it's probably at a historic low. This was partly due to government support but even with that gone we've still not seen the level of distress coming through that a lot of commentators predicted. I think the interesting period will be the last quarter of this year. Hospitality generally trades well during the summer period and we have the World Cup, which will assist some businesses in November and December, but I think that the autumn period is probably going to be the time those costs bite.

"Good operators always thrive irrespective of market conditions and we're seeing good operators find a way around some of these issues. We've seen operators, because of the challenges getting staff, being more innovative about how they do things, reducing menu sizes, using technology, we've seen a move to more premium products understanding that while people might go out less when they do go out, they're looking for a more premium offer.

"I think there will be opportunities but equally there will be areas where it's going to be challenging. But the sector, if nothing else, has shown it's pretty resilient."

Owens' feeling was echoed by respondents to the survey with 61% predicting they would see moderate growth in 2022.