Surviving The Cost of Living Crisis in Hospitality
If you spend much time reading news reports and opinion pieces on how the cost of living is impacting hospitality, you might be growing tired of seeing the word ‘resilience’.
After several challenging years, hospitality owners and operators are looking for signs that the time is coming when they aren’t just stubbornly surviving. But is recovery and growth possible in a world where the cost of living continues to rise, customers are more conscious than ever about how they spend their money, and retaining quality staff is becoming increasingly challenging?
In this article, we’ll tell you why we’re confident that the answer to that question is ‘yes’, and we’ll share practical guidance on the measures you can take to protect your hospitality brand from the challenges imposed by the rising cost of living in 2024.
Key challenges in hospitality
The challenges facing the hospitality industry have been well publicised, and the issue certainly isn’t limited to the UK. Rising costs from energy to food to staff, combined with a cost of living crisis that has left consumers struggling to justify the cost of certain ‘luxuries’ have created a perfect storm that has resulted in a large number of high-profile restaurant closures.
For hospitality businesses, the key to surviving the cost of living crisis lies in understanding what current trends are telling us about what’s likely to happen next. In looking to the future, we can find opportunities to:
- mitigate new challenges
- improve cost management
- identify where investment is most likely to add long-term value
Inflation
Spiralling operating costs have hugely impacted profit margins across the industry.
Between December 2021 and December 2023, the price of food rose by over 26.2%, and 2022 saw energy prices rise by an average of 238% for hospitality. Inflation reached a 41-year high in October 2022.
Since then, it has been generally slowing, and the outlook is somewhat positive as it held steady at 4% in December 2023 and January 2024; economists are optimistic that throughout 2024, it will continue to slow, with predictions by the end of the year sitting between 2% and 3.1%.
Staffing levels
Recruitment, retention, staff turnover... These were always an important focus in the hospitality industry, but they are now words that likely haunt the dreams of hospitality operators.
The cost of turnover in hospitality is huge. It’s not just the hiring, onboarding, and training costs to consider; there’s also the impact on customer service, and additional pressure on existing staff during the process.
According to UK Hospitality, as of July 2023, 42% of hospitality staff leave their roles in the first 90 days. Combine that with the fact that in 2024, hospitality vacancies are still more than 25% higher than pre-pandemic levels, and it’s easy to see why staff shortages are one of the key challenges facing hospitality businesses.
Wage increases
In April 2024, the national living wage will increase by 9.8%, and will now include 21- and 22-year-olds. At the same time, the national minimum wage for 18–20-year-olds will rise by 14.8%, and for 16- and 17-year-olds will rise by 21.2%.
As the cost of living continues to impact employees, many are looking for higher wages, and employers who wish to retain talent will have to respond accordingly.
Consumer spending
Rising costs over the past few years have seriously reduced consumer spending power, and as we enter 2024, and inflation slows, rising interest rates are putting further pressure on consumers, who find themselves with even less disposable income.
Despite all of this, The CGA RSM Hospitality Business Tracker has shown increased confidence in the industry, and year-on-year sales growth figures in November and December 2023 were 4% and 8.8% respectively.
And CGA has further good news in the form of their Business Confidence Survey, with 84% of hospitality leaders saying they operated at a profit in the second quarter of 2023, and 44% of customers saying they plan to prioritise visits to hospitality premises in the next 12 months (this is higher than another discretionary spending like clothing, holidays, vehicles and home improvement).
While confidence is returning, it’s vital to stay competitive. It’s becoming clear that customer expectations of hospitality establishments have shifted; they increasingly want experiences when they go out. It’s not all about the food or drink, and hospitality businesses need to deliver. Finding ways to elevate the customer experience from the moment they enter your premises is vital. Prioritising staff training and customer service and creating an inviting and inspiring environment will give people a reason to come back time and again.
New regulations
Savvy hospitality leaders will be keeping a close eye on government legislation and calculating the potential costs of new laws to their business.
Administration costs may be on the rise for many, particularly businesses operating across multiple sites, as the Employment (Allocation of Tips) Act 2023 comes into force on the 1st of July 2024.
In Scotland, the current Minimum Unit Pricing provisions are due to expire in April 2024. The Scottish Government is highly likely to continue and expand on this legislation.
Regional variations
Hospitality cost of living challenges also vary by region. For businesses operating multiple sites across the UK, it’s important to understand the shifting trends and available support to allocate resources over the coming years.
As more people return to work in the office, cities and town centres are busier again. But they haven’t fully recovered, and, likely, we’ve now settled into a new ‘normal’. Towards the end of 2023, rush hour footfall in London on weekdays remained at 80% of pre-pandemic levels. Office vacancies are at 10%, compared to a fairly steady 6% before Covid.
Meanwhile, tourist-dependent areas may feel nervous about the tightening legislation on short-term lets. Whether this will have a detrimental effect on tourist towns or a positive effect on hotels in those areas remains to be seen.
The cost of Business Rates also varies depending on location. In England, Business Rates Relief is still at 75%, but in Wales, this support has been cut to 40%. In Northern Ireland and Scotland, there is no rate relief at all (apart from the Scottish islands).
Could a reduction in VAT help?
UK Hospitality is campaigning for a reduction in VAT rates for the hospitality industry. The campaign is backed by several high-profile MPs, most notably night-time economy adviser Sacha Lord. The UK currently has one of the highest rates of VAT for hospitality in Europe and as other costs squeeze profit margins, a reduction in VAT could offer a huge boost.
A reduction in VAT would allow hospitality businesses to offer more affordable and attractive pricing at a time when the cost of living is continuing to impact consumer spending.
UK Hospitality’s report points to the impact the same measure had on the economy during the pandemic. As a result of reducing VAT to 5%, over a third of businesses saw an increase in trade during that period.
They also point out that the increase of VAT in hospitality added 1.4 percentage points to the national CPI rate in the 12 months to September 2022. By extension, a VAT reduction could have a positive overall effect on inflation.
The same report predicts that increased turnover and jobs would lead to “Net present value fiscal gains for HM Treasury over 10 years – accounting for higher taxes through growth.”
Lower VAT rates would also allow the UK to be more competitive for tourism and help us to return to pre-Covid levels of foreign visitors.
A digital future in hospitality
As the cost-of-living crisis continues, more and more hospitality businesses have seen the potential of technology to help them navigate their current challenges. Many are taking advantage of new technologies to upgrade the customer experience, increase staff retention, improve their procurement practices, and ultimately make the business more efficient and profitable. Those who don’t are likely to be left behind.
Here, we will look at some of the key steps you can take right now to secure the future of your business.
Reduce food waste
Food waste is a massive issue in hospitality, with many businesses quite literally throwing their profits in the bin each month. Utilising Food Waste Management Software can help you track waste across multiple menus and sites, to identify opportunities to save money.
The right technology can help with ordering, stock control, and inventory management, giving you the information you need to cut down on food waste.
Review your procurement processes
Centralising your procurement across sites gives you better economies of scale, meaning you can negotiate better deals with suppliers. It’s also important to regularly review your supplier list to ensure you’re getting the best value for money.
By adopting hospitality procurement software, you centralise and simplify the entire procurement process, helping you to reduce food costs and manage invoices and costs from one place.
By taking some time to ensure your procurement processes are optimised, you will save money and find ways to reduce waste and overspending.
Menu engineering
Technology can help you to optimise your menus by tracking the best performing items and measuring sales and pricing against food costs.
Menu Engineering allows you to be responsive to shifting trends, fluctuating costs, and customer demand. For hospitality businesses who are concerned about cost of living challenges, menu engineering software can offer significant opportunities for maximising profitability.
Forecasting
82% of companies that go out of business say that cash flow management was the reason. That’s a sobering statistic, and it makes it clear why it’s so important for hospitality businesses to plan and stay on top of their forecasting.
By making use of accurate reporting, you are in a better position to forecast customer demand and revenue and adapt accordingly. Purchase-to-pay software can support you with all of this.
Building operational resilience
With so many factors influencing whether a business survives or thrives in the current landscape, implementing robust maintenance software can be a strategic asset for mitigating risks and optimising expenditure. Facilities management software enables operators to pre-emptively identify and address potential equipment failures before they escalate, minimising downtime and costly repairs and prolonging the lifespan of their business-critical assets. When technical or structural disasters do occur, operators that have identified and mitigated risk can secure faster call-outs and fixes with reduced operational disruptions.
Optimising operational efficiency
We can all agree that contingency planning and risk mitigation is a good survival strategies, but in a climate where costs need to be kept low and customer experience is critical to success, increasing operational efficiency across the board is a must. Hospitality checklist software enables businesses to standardise and digitise routine checklists that keep operations running smoothly. Not only does this enhance the efficiency of staff keeping on top of daily tasks but improves visibility of task completion, meaning your venues are cleaner and safer for guests. With a digital overview, operators are also able to identify areas that need improvement or that are taking a lot of time away from teams delivering service to your guests.
Improve your staff onboarding processes
We’ve already mentioned that there is a huge rate of turnover for new starters in the hospitality industry. If you can get an employee to stay beyond 90 days, you are 50% more likely to keep them. So, the onboarding process is a critical part of any good recruitment and retention plan.
If you are struggling with turnover costs in your business, and you want to know if your onboarding process is part of the problem, the first thing to do is seek feedback from your staff. Gathering anonymous feedback can help you to see where the gaps are and build a more robust process.
Through better onboarding and training, your staff will also be able to deliver a superior customer experience, helping you to build better brand loyalty.
What next?
In this article, we’ve explored some of the key challenges that the cost of living has inflicted on the hospitality industry. It’s clear to see that while there have been far-reaching consequences for the entire industry, there is light at the end of the tunnel. Now is the time for hospitality businesses to look for innovative solutions to some of these challenges to ensure their survival.
If you are ready to review your technology needs and explore the best software solutions to help you to survive the cost of living crisis, get in touch with us.
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