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In the second of our industry-specific responses to the Budget, we look at how hospitality and leisure businesses can limit the impact of higher payroll costs on their prices.
Pricing, staffing, opening hours, rent contracts; companies in the hospitality and leisure industries will be putting every commercial and operational lever under review in response to the Autumn Budget.
Like retail, these sectors provide millions of part-time and relatively lower-paid jobs, and staffing will become more expensive when increases to the National Minimum Wage, National Living Wage and employer National Insurance contributions (NICs) kick in next April.
Unlike some parts of retail, however, the hospitality and leisure sectors may have less leeway to pass on the increase in costs to consumers. Groceries are an essential expense; a meal out or a pint at the pub are not. One publican in London told the BBC that the Autumn Budget would add 30 to 40 pence to the cost of a pint – an increase his customers might not want or be able to swallow. A 1.7% cut in alcohol duty on draught products, which will lower the price of a pint of beer by a penny, will be of little consequence in this new scenario.
UK Hospitality, the leading trade body, says increases to employer NICs and higher wages will add 10% to employment costs per person and £3 billion to the sector’s annual tax bill (which was £54 billion in 2022). Adding to cost pressures, most pubs and restaurants are facing higher business rates next year as discounts introduced during the pandemic are tapered off. Meanwhile, an overhaul of business rates, slated for 2026, is proposing increasing rates for businesses with a rateable value above £500,000, which could affect large, popular pubs in busy locations.
Fragile recovery in peril
Higher taxes come at a delicate moment for the hospitality industry. In the second quarter of 2024, our Hospitality Market Monitor detected a nascent recovery in the number of licensed premises, equivalent to five new openings a day.
However, year-on-year outlet numbers were still down by 1% – equivalent to nearly 1,000 sites – and remain almost 14% below pre-COVID figures. The reality is that the industry does not yet have the margin position to absorb higher tax, payroll, and business rate expenditures. However, pushing extra costs on to the consumer by raising prices needs to be carefully managed. Many locations are experiencing volume declines already and broad-based price rises may depress footfall further, which could in turn affect the viability of certain sites.
AlixPartners’ soon-to-be-published survey of more than 2,000 UK consumers reinforces these concerns. When asked about their dining out plans for next year, a large majority of respondents said they would be spending the same or less, which in an inflationary environment means less custom for restaurants and pubs. Respondents also said they would be travelling less, and this chimes with what hotels and travel agents are telling us: that consumers in certain demographics are displaying a greater sensitivity to pricing.
While the rise in minimum and living wages might lead to a short-term bounce in consumer discretionary spend that benefits restaurants and bars, our survey also showed that more than a third of consumers are more likely to save any extra income than spend it.
Optimising performance by business model and outlet type
There is no one-size-fits-all solution for these challenges because there are so many operating models in hospitality – small, family-owned premises, leased and tenanted businesses, and large, company-owned managed sites, to name a few. As a result, businesses need to analyse the net effect of the Chancellor’s Autumn Budget based on the kind of assets they own and the business models they operate.
Modelling the Budget’s impact should consider the type and size of each venue, how price increases might affect footfall and other changes to consumer behaviour. For example, customers might switch from drinking premium lagers to lower priced beverages, or they might drink less on a night out.
Modelling the interplay of these different factors will help businesses understand which sites have the headroom to absorb higher costs, which can afford to increase prices, and which have no leeway and require greater attention. Some sites may simply become uneconomic under the new tax regime and may need to close permanently or enter discussions with landlords to work out a life-saving solution. Indeed, we may also see a flurry of M&A activity come to the fore, as larger operators look to acquire smaller businesses that face financing challenges.
In addition, on the cost side, reducing opening hours or trading days might help to optimise the cost of labour (whilst closely analysing any effect on total demand and including customer feedback by outlet type). In the longer term, fast casual concepts with lower labour intensity may begin to proliferate. Tenants and franchise holders may also have the option of renegotiating rents with landlords.
Hotel groups tend to have higher margins than a majority of bars and restaurants, so they may have more room to absorb higher tax and payroll costs. Even so, staffing will be a concern, and before the Autumn Budget, hotels and leisure operators were reporting a drop in demand for in-house food and beverage services as the post-COVID spike in domestic travel ran its course. To compensate for this revenue loss, businesses should consider adjusting staffing and schedules, as well as optimising rates to maximise occupancy under a range of scenarios.
Without a doubt, the hospitality and leisure sectors are entering a period of heightened uncertainty. Their cost base has been dealt a sizeable price shock at a time when many businesses were just beginning to leave the lingering effects of the pandemic behind. They remain vulnerable to changes in consumer sentiment and the economic climate in general. This makes future performance hard to predict. Nevertheless, businesses can chart a way ahead by dynamically modelling the interplay of the factors that most affect them, defining the key actions they need to take – and where – in order to mitigate all of the additional costs from the Autumn Budget.
Read our Budget reflections for the Retail industry:
