Leisure and hospitality industry outlook : Summer 2023

12 July 2023

With the cost-of-living crisis and the current inflationary pressures dragging on balance sheets in the first half of the year, it is likely there will be some relief for operators in the second half - at least on the supply side. Inflation should gradually begin to ease, minimising some of the costs pressures the sector has experienced in the last 12 months.

However, on the demand side, rising interest rates are now the cause for concern, ahead of inflation, with market analysts predicting a peak of over 6%. This is great news for savers but will hinder the prospects of stronger consumer spending in the second half of the year due to the delayed impact of rising mortgage rates. For many operators who have been relying on a more positive trading environment in the second half of the year, this is unwelcome news.

Read our analysis of these themes and more below in our latest leisure and hospitality outlook.

Outlook for sales: Winners and losers in post-pandemic behaviour change

The latest CGA Coffer Business Tracker illustrates that like-for-like sales in May were up 5.6% on the year prior, but still below inflation, undermining any growth on the whole. Several factors are hitting sales margins, most notably new, post-pandemic consumer habits.

Bars in particular are feeling the pain. People have shifted away from night-time activities. Compounding that, regular customers to bars, for example students, have relatively fixed incomes and are being hit hardest by the cost-of-living crisis. The night-time economy is suffering as a whole, consistently performing below the rest of the market.

On the flip side, benefitting from this change in behaviour are pubs. Pubs are often seen as offering better value, a particularly appealing factor in the current climate.

Our latest consumer sentiment survey revealed that 30% of consumers are planning to seek out special offers to help reduce their expenditure on dining and drinking out over the next three months.

As we move into summer, it’s likely pubs will continue to reap the rewards of warmer weather, as this trend towards more frugal activities becomes entrenched.

Food inflation weighs on restaurant margins

Restaurant operators are under intense pressure as weaker consumer demand and rising costs start to properly kick in. In May, like-for-like sales saw a modest increase of 2.7%, which was 2.9% lower than the sector average. Consumers are moving away from food-focused venues in search of better value, opting for drink-focused operators or again, seeking out special offers to support reduced discretionary spend. On top of this, restaurateurs have been grappling with mounting input costs since inflation surged in late 2021.

Putting aside energy bills, what stands out the most for these operators is the substantial rise in raw material prices, particularly food. Back in December, food output inflation skyrocketed to 16.8%, and has only gradually receded over the first part of the year, to 11.5% in May.

On the other hand, the Consumer Price Index (CPI) for restaurants and cafes reached 10.1% in December 2022 and 9.3% in May. This fails to reflect the actual rise in food costs experienced by these businesses during the same period.

In a bid to protect sales volumes, many operators have opted to absorb a portion of their rising input costs thereby shielding consumers – but ultimately reducing profit-margins. Many will have decided it’s better to lose margin in the short-term rather than risk losing custom from increasingly price-conscious consumers in the long-term.

Energy bills. To fix or not to fix?

For the past 12 months, every Finance Director has had energy prices at the front of their mind. It represents the largest year on year incremental cost base increase. Whilst wholesale energy rates have come down from their peak in August 2022, they’re not yet back to pre-pandemic levels. This leaves many operators second guessing whether to fix energy bills with their providers, or whether to hold out to see if prices go any lower.

The fact is, in the current climate, no one can second guess where energy prices will go. The variables are too many to be able to forecast with any accuracy. In the UK, weather is one of the biggest factors impacting where gas prices might go. In the event of a very hot summer (with homes and businesses cranking up the aircon) combined with a very cold winter (meaning they crank up the heating), this increased demand will see further spikes in energy prices.

Another factor to not lose sight of is the geopolitical climate. As long as Russia is at war with Ukraine there’s a risk premium when it comes to natural gas prices. Any escalation in hostilities could see countries like India look to move their gas supply away from Russia, creating further pressure on prices. Equally, recent events on home turf in Russia also indicate other volatilities associated with the region that could also have a knock-on impact on oil and gas prices.

Overall, energy prices will remain above their pre-pandemic levels. There’s no reason to expect them to surge again; however, the outlook is extremely uncertain and prices are expected to be much more volatile than normal. On the positive side, it’s unlikely we’ll see the same spikes we saw last year again. As time goes on, additional infrastructure in Europe is improving in addition to increased storage capacity, import and export terminals and better options in terms of renewable sources.

The real impact of interest rates

With persistently high inflation, the Monetary Policy Committee (MPC) took decisive action in June by unexpectedly raising the base rate by 50 basis points (bps) to 5%, marking the highest level in fifteen years.

The MPC's objective is to curb demand in the economy and alleviate inflationary pressures. However, given the slower-than-expected decline in inflation, it is likely that this rate hike will not be the last one this year (read our economist’s outlook here).

As mortgage renewals draw near, both homeowners and renters will experience the consequences as landlords begin to raise rates, placing additional strain on household budgets. The operators targeting the demographics highly affected by these challenges will face a more significant decline in demand compared to those catering to demographics insulated from rising mortgage rates. For instance, operators targeting Gen Z consumers still living with their parents, older generations who have paid off their mortgages, or individuals in the luxury market segment will be less impacted.

It is also important to consider that rising interest rates come at a real cost for businesses with many lending covenants coming with an interest cover test. A failed covenant at a time when some banks are looking to reduce their lending exposure to the sector is another potential headache that many Finance Directors would not have foreseen only 18 months ago. The cost of energy crisis that has occupied the thoughts of many in the sector could quickly end up being replaced by a cost-of-borrowing crisis.

Vacancies falling but challenges remain

The food and accommodation sector saw a 7% decrease in vacancies between March and April 2023, reaching a total of 132,000. This figure reflects a 22% decline compared to the same month in 2022, indicating a positive trend away from peak vacancies. However, it is important to note that vacancies remain significantly high, standing at a staggering 56% increase in Q1 compared to Q1 of 2020.

These statistics reinforce the sector's call for increased government support. Possible initiatives could involve relaxing regulations concerning migrant labour and implementing broader societal benefits, such as affordable childcare support to facilitate the re-entry of parents into the workforce. In the meantime, operators are adopting various strategies, such as limited opening hours and technological investments, to alleviate the pressure caused by vacancies.

Another challenge in the employment market is the persistent wage growth as businesses strive to protect and retain talent. Average earnings increased to £471.55 in Q1, a notable 4.9% increase compared to the previous quarter. Furthermore, these earnings exhibited a 7.4% growth from the same period last year. However, wages are not the sole factor in attracting talent. The concept of employer branding plays a vital role in persuading workers to choose one establishment over another, and many operators are now revaluating their benefits to entice in potential employees.

Get in touch

To discuss this analysis, or any business issue you may be facing in the current climate contact our experts:

Paul Newman
Partner, Head of Industries
Robyn Duffy
Robyn Duffy
Consumer Markets, Senior Analyst
Paul Newman
Partner, Head of Industries
Robyn Duffy
Robyn Duffy
Consumer Markets, Senior Analyst