30 January 2023
Following the announcement of the winter budget on 17 November, RSM polled 1000 consumers to gauge their sentiment towards discretionary spend in 2023. You can find the full results of our survey here.
There’s no doubt that consumers are being hit hard by the cost of living crisis, with 98% of respondents saying they are concerned about the cost of living crisis and 37% saying they have no money left at the end of each month after paying for food, energy and household bills. Below, you’ll find our analysis of how these findings fit into the broader leisure and hospitality landscape in 2023, taking a multitude of industry challenges into consideration – including inflation, input costs, insolvencies and employment.
Demand to eat out wanes but health and fitness wins out
When it came to making spending cuts to manage rising costs, our survey found that consumers ranked eating out less as a top priority to support minimising costs. 41% of respondents said they ate out less in the last three months, and 40% said they would continue to eat out less in the next three months. Cutting back on takeaways came in closely behind at 34%.
Plans to cut back in leisure and hospitality
Conversely, consumers are reluctant to reduce leisure time spend. Respondents ranked fitness and wellbeing as the last thing they would choose to cut back, with only 6% choosing to do so in the last three months and 7% planning to in the next three months. This drops further to 1% when viewing the over 55s in isolation. These results indicate that the fitness and wellbeing industry continues to benefit from health and wellness trends that snowballed during the pandemic.
Hospitality is taking a hit, but pockets of opportunity remain
Our findings reveal hospitality is likely to be the front-line business casualty of the cost of living crisis, though there will be some operators who feel the pain less.
Businesses that may suffer less include those serving higher income households, and venues consumers deem as a one-off ‘treat’ for special occasions. Supporting this, our research shows that households earning under £30K per year were the group who spent ‘a lot less’ on eating out in the last three months (31%), whilst this number goes down to (8%) for households earning more than £60K per year.
Adamant about keeping their table reservations, Gen Z were least inclined to reduce frequency of eating out – at 41% compared with 50% of respondents across all other age groups. Equally promising, 20% of over 55s said that they had no intention of reducing their eating out spend. Consumers in the 35-44 age range were front of the line when looking for value with 37% seeking out special offers when socialising out of the home.
Consumer appetite for sustainable foods is growing
The public’s eating habits continue to evolve as they become more educated about their environmental footprint and the impact of agricultural processes and long-winded, energy-emitting supply chains.
Our survey found that more than a third of consumers said they would pay more for restaurant food that had been locally sourced, which was matched by more than a third of consumers saying they ate a lot less meat than they did a year ago, particularly as a way to reduce their impact on the environment. Hospitality businesses should take advantage of these new behaviours in a cost crisis where the price of a UK chicken has gone up 59% between 2019 and 2022.
The challenge will be understanding these new behaviours and what the appeal is for consumers in terms of alternatives. Will customers be drawn to naturally plant-based whole foods, such as vegetables, grains and pulses, or will they be looking for meat replacement products? The key to success will be for operators to be nimble and understand their core audience at each site. Regional, demographic and socio-economic splits in audience will all play into localised consumer habits. For example, when cutting our survey data by demographic, 49% of respondents that earn £60K and over, ate less meat than they did a year ago, and 43% of under 45s would pay more for food in a restaurant that has been locally sourced. Regionally, those based in the South East (41%) and London (44%) were more prepared to pay for locally sourced ingredients in a restaurant when compared with the rest of the country.
Locally sourced ingredients have been a growing trend for years, with consumers enjoying the community spirit that these operators often bring. Operators can make gains in this market by taking advantage of minimised costs associated with reducing lengthy supply chains and offering smaller menus with greater margins on high-end produce.
Outlook for hospitality sales performance
The latest CGA Coffer Business Tracker, (the industry sales barometer for the UK hospitality industry) indicates that December 2022 sales ended a massive 15% up on December 2021, which came as welcome news to the sector. Indeed, with consumers enjoying their freedom post-Covid, sales at the end of last year were consistently higher than a year earlier defying dire levels of consumer confidence. But the sting in tail comes when we compare industry sales in 2022 with 2019 levels. Hospitality sales performance in the last quarter of 2022 averaged only 4% higher than 2019, meaning any growth in real terms was cannibalised by inflation. This indicates that the sector is still yet to get back to pre-Covid performance.
Despite inflation falling for the first time in November 2022 to 10.7%, from its peak at 11.1% in October, it still remains incredibly high at 10.7% as of December 2022. Added to this, there are other factors at play which mean the first half of 2023 will be challenging. Rail strikes leading up to the Christmas period factored into weak sales in December (up 2% on 2019) and will continue to impact performance in 2023. Many operators will be hoping cancelled Christmas parties are merely postponements, and that these events will take place in the early months of this year. However, rail strike action will continue to have a major impact on sales performance and the sector must remain nimble and hope that a resolution can be found quickly. Otherwise, uncertainty over travel plans will start to swallow margins.
The increase in energy prices will continue to be a concern for consumers in 2023. From April, the typical household’s annual energy bill will rise from £2500 to £3000, and grants to low-income households will be worth only £900, down from £1300 at present. As mentioned previously, many households are seeking out special offers for eating out (29% across the board) as a result. While this is no surprise as budgets continue to dwindle, operators must be cautious with regard to discounting and instead stand together to avoid the promotional black hole that dominated pre-Covid. For a low-margin sector in an environment where input-costs are especially high, entering a competitive discounting spiral could be the death nell for many businesses.
Energy remains crux of rising costs
In the now famed ‘mini budget’, Liz Truss and Kwasi Kwarteng unveiled crucial support for businesses and their energy costs into 2023. This support was signalled to taper off from April this year to be replaced with targeted provision for certain sectors, with hospitality name-checked at the time. In Jeremy Hunt’s November budget, local pubs did not get a mention and in January, the worst was confirmed. There will be no targeted support for the leisure and hospitality industry. Instead, a new energy support scheme will be introduced with businesses set to receive a discount on wholesale prices rather than their costs being capped as under the current scheme.
This new arrangement will lead to major discrepancies across the sector, where some operators are subject to much higher bills than others. Wholesale electricity prices have averaged at round £270 per MWh over the last six months but went as high as £550 in December, meaning if a business secured a two-year electricity contract in that period, they will be facing sky-high bills. This compares to current wholesale electricity prices which now sit at around £160 per MWh, below where they were before Russia’s invasion of Ukraine. These prices have yet to feed through to supplier contracts, but businesses who are due to renew their contracts in the coming months are likely to luck-out. Nevertheless, energy bills will still be on average three times higher than pre-pandemic and many operators will continue to feel the heat (or not) in their bills through 2023.
Some relief might be found in other areas in terms of the government’s £13.6bn package of support for business rates, where many will see reduced rates in 2023. However, this won’t make up the losses caused by energy bills and is nowhere near enough for energy guzzlers like leisure centres who are already feeling the pressure acutely. For example, at the end of 2022, Better Leisure announced the reduction of opening hours for many of its sites due to spiralling energy bills. They reported the average cost of heating a swimming pool had tripled since 2019, up from £100K to £300K. Of course, this is sad news for centres that act as a local hub for communities.
Leisure and hospitality operators should follow Better Leisure’s example and evaluate every area of energy usage in a 1970s style attack on consumption. With the cost of living crisis ramping up at the start of the year, and as annual events like dry-January and Veganuary take hold, some operators may decide to close their doors in the early months – seeing little point in heating empty sites.
Staff shortages and wages remain a central concern
The latest labour data released by ONS for Q4 in 2022 showed vacancies in the accommodation and food services sector had dropped since September 2022, but they were still 41% higher than the comparable quarter pre-pandemic.
Despite a drop in earnings for the sector quarter to quarter, the huge shortfall in staff is causing operators to raise salaries in a bid to retain employees. Earnings were up 23% year on year in Q3 which is the latest available data, when compared with the UK national average increase of 5%. For a sector already operating on slim margins and with wages often representing at least a third or more of top line sales, these kinds of uplifts will have hit some in the sector hard.
The government’s increase to the National Living Wage (NLW) from £9.50 to £10.40 will be compounding concerns around staff pay for some businesses. However, with the uplifts already seen across leisure and hospitality pay packets in 2022, many operators will have already absorbed the Chancellor’s proposed increases.
Insolvencies seeing an uptick
CGA and AlixPartners latest Market Monitor indicates there was a sharp drop in licensed premises in 2022 with Britain seeing a net decline of 4800 premises, or 4.5% of its total last year. More than three quarters of these closures—3,841 premises—occurred in the second half of the year as pressure on businesses intensified.
There is a toxic mix of factors at play in these alarming closure statistics. Debts accrued during lockdowns, increased energy prices, and rising costs across everything from staff wages to raw ingredients, not to mention staff shortages and the ongoing industrial action, is proving too much to bear for many hospitality operators. These pressures will likely take a serious toll on small and independent businesses who are already operating to fine margins.
With investors taking the long-term view that consumer demand will remain stable and current headwinds will begin to abate towards the end of 2023, we anticipate larger, managed groups with increased economies of scale to weather the storm better. Indeed, consolidation in the industry is likely as those groups seize opportunities to grow by acquiring struggling operators.
The dialling back of CVAs since late 2020 may also begin to reverse in 2023. As small-to-mid-tier operators begin to react to the forecast decline in disposable income, these businesses will need to address their cost base and assess options. We are now entering another period of unrest like we saw in 2020, where CVAs spiked late in the year as a result of uncertainty surrounding the pandemic. It’s likely many in the sector will conclude that the only lever they have left to pull is to exit loss-making sites and reduce rental costs in their retained portfolio.
Insight from RSM UK’s Head of Leisure and Hospitality, Paul Newman:
‘We anticipate the trading environment to remain challenging in the first half of 2023 when the cost of living crisis will really begin to bite. Operators should spend the typically quieter months at the start of the year assessing every area of their cost-base to ensure economies are made, from energy consumption and rents, to menu options and staffing costs. A focus on forecasting and cashflow management will be essential for businesses to trade through this tough economic landscape.
Those that can navigate these challenges should see some silver linings as we approach summer. The warmer months will reduce energy costs for customers and operators alike, inflation will fall as increased costs become embedded, and stabilising interest rates will give consumers confidence to loosen their purse strings. Operators that can survive this period of uncertainty will be rewarded with less competition for staff and customers, and cheaper opportunities to expand their estate in the medium term. The short-term outlook is undoubtedly difficult for the sector, but there are signs for longer-term optimism as we step into 2023.’