Hospitality sector sees inflation impact its post-pandemic recovery

In the midst of a post-pandemic, high-inflation economy, and against the backdrop of Russia’s invasion of Ukraine, the restaurant industry is faced with all of its most significant costs rising faster than the headline CPI figure, with every sign that this situation will continue over the summer.

So what are the main factors impacting the restaurant industry as businesses consider how much of these cost increases they can pass along to customers?

Ingredients

Despite an increasing number of vegan or plant-based offerings, the main menu choices in UK restaurants are still meat, poultry and fish.

In order to feed us, the animals themselves must first be fed, and these feed costs are undergoing steep rises due to the invasion of Ukraine and subsequent sanctions imposed on Russia.  Sunflower meal and wheat, which go into chicken feed, were previously imported from Ukraine and Russia but are now either unable to leave a warzone or subject to a trade embargo.  This has led to Steve Murrells, chief executive at the Co-op, predicting recently that chicken could become as expensive as beef.

The UK’s fish and chip shops are also facing a steep rise in the cost of their produce, with Russia having supplied around 40% of our cod and haddock, which remain the firm favourites.  The previous reliance on sunflower oil imports from Ukraine and Russia have seen he costs of both this and its alternatives such as rapeseed oil soar, as fryers try to secure a supply.

Labour

Even if the restaurant industry could have insulated itself from the effects of Brexit and the pandemic on the UK labour force, it still would have endured an increased payroll bill in April as both increased minimum wage rates and the 1.25% Social Care Levy added to national insurance took effect.  Whilst measures were announced to shelter some employees from the new levy, the same cannot, generally, be said for employers’ share of the new ‘tax’.

However, just having enough staff on the payroll has been the main concern for many businesses in the restaurant industry, tipping wage negotiations in the favour of the employee.  Disrupted more than most due to lockdowns, Covid-measures and the impact of government guidance on consumer confidence, a proportion of the hospitality workforce didn’t return to the sector following the end of furlough.

When replacing the leavers, the cumulative effect of Brexit and onerous Covid restrictions saw under 35% of 2021’s new starters in hospitality coming from the UK, compared to almost half in 2019.

For some of the industry’s part-time workers, potentially working a short evening shift after college, they may also need to consider if it is worth it after taking into account cost of getting to work, with prices at the pumps continually rising despite a fuel duty cut.

Overheads

UK energy prices have been headline news for a number of months now, and commercial customers are being impacted as well as domestic users.  A joint survey by trade organisations UK Hospitality, the British Institute of Innkeeping, the British Beer and Pub Association and Hospitality Ulster found that 76% of businesses in the sector were taking measures to reduce their energy requirement, with 38% doing this by reducing their trading hours.

For businesses currently on fixed contracts, they face a dilemma as to whether they gamble and try to fix again at today’s prices for certainty, or risk coming off their contract when costs could potentially be far higher.

Over recent months, the Bank of England has looked to combat inflation by increasing the base rate of interest.  This has yet to slow down inflation, but will have a knock-on effect for businesses which require an overdraft facility or need to secure new lending.  For the many hospitality businesses which don’t own their own premises, rising interest rates could potentially mean higher rents as index-linked periodic increases are applied or landlords look to service higher lending costs on commercial mortgage.

What can be done?

Even the harshest critics of the Chancellor would admit many of the commercial factors above are outside of the UK government’s control. However, there are a number of options, some of which were heavily championed prior to March’s Spring Statement, which could partly alleviate the pressures on the hospitality industry highlighted above.

1.      A reinstatement of the temporary reduced hospitality VAT rate; be it at the previous rates (5% then 12.5%) or another reduced rate.  With the vast majority of meals taken being inclusive of VAT, the reduced rates often weren’t reflected in the menu prices, but they relieved the proportion of the bill which was paid to HM Revenue & Customs from the 1/6^th which applies as the standard rate of 20%.  At present, a dish needing to be increased by £2.00 to cover increased input costs would need to go up by £2.40 to take into account the VAT element which the restaurant collects on the Treasury’s behalf.

2.      A reversal of the increased national insurance rates. Although businesses are now in receipt of an increased £5k annual allowance against employer’s national insurance, having the rate at which this is paid increase to 15.05% is likely to negate any benefit on larger payrolls. The much-heralded increases to national insurance thresholds coming in from July do not include the amount from which employers pay, meaning the business pays the government to employ someone before the employee pays their contribution.

3.      Extension of the Retail, Hospitality and Leisure Relief Scheme for business rates. In place as a temporary measure for 2022/23, this scheme gives eligible business a 50% discount. The business rates system was successfully used during the pandemic to support the sector, both through rates holidays and the administration of grants to businesses on the rates register and could once again be used to show longer-term support at local authority level.

We have a team of professionals who specialise in the hospitality sector.