Middle East conflict adds to cost pressures for UK hospitality

Planning to stay in the UK for your holidays this summer? The conflict in the Middle East means that there may be more British holidaymakers filling our beaches, cities and rural boltholes.

Warnings of flight cancellations, disruption and jet fuel price increases linked to the Iran war have made some people reluctant to make plans for an overseas trip. Or when they do, they opt for closer destinations like Spain or France. 

We saw an uptick in domestic holidays in Easter, when many operators found that British holidaymakers were keen to stay in the UK. There are now signs of stronger UK bookings for the May half-term and the summer. Airbnb, for instance, recorded a 15% year-on-year increase in searches for stays in the UK over the May bank holidays. 

As well avoiding the uncertainty of a trip overseas, there are financial reasons to stay within the UK, given the conflict has contributed to a 3.3% rise in inflation in the year to March. Fuel is expensive, but a car trip to the Lakes is likely to be significantly cheaper than a trip overseas.

However, it’s a little early to call this a staycation boom, as we’ve seen in the press. In reality, while some people are booking UK stays, we’re also seeing an increase in people choosing to wait until the last minute to book a trip. Some will be waiting to see what happens with the unpredictable British weather, and whether disruption caused by the Middle East conflict will abate, perhaps making them feel more confident about taking a trip overseas. 
 

Short-term relief

While signs of improved domestic demand are welcome, the conflict in Iran and the wider Middle East is also creating some significant challenges for the UK hospitality industry. Whether it’s a café or pub, self-catering accommodation or boutique hotel group, no business is immune.

First, there was the immediate impact on global energy markets. Increased fuel prices are affecting the cost of deliveries throughout the supply chain. Furthermore, firms could face higher energy costs for heating, lighting, refrigeration and cooking. It also has implications for the price of fertiliser, with the potential to drive further food price inflation. In the longer term, this could lead to more persistent inflationary pressures for the UK hospitality sector. 

Some businesses are suffering more than others. For instance, rural firms that rely on heating oil have seen prices soar, putting them at a disadvantage relative to urban competitors. I’m hearing that smaller operators feel particularly exposed. They typically have less bargaining power with suppliers and lack the ability to spread costs across sites in the same way that larger businesses or chains can.

Restaurants are also among firms that are particularly exposed. Profitability in food-led businesses is currently very tight and compared with pubs, restaurants tend to have more fixed menus and less flexibility.

Disruption to supply chains

The level of disruption to supply chains is still unclear, but businesses are clearly feeling the pinch of higher transport and logistics costs. 

There have been concerns too that a prolonged closure of the Strait of Hormuz, or restrictions on shipping passing through the channel, could lead to carbon dioxide shortages, which could impact food supplies. If this comes to pass, disruption to CO2 supply is more likely to reduce product variety rather than create widespread shortages, although it would still push costs higher. It does not take long for supply chain pressures to translate into higher prices for consumers in bars, pubs, restaurants and hotels. 

As a result, people become understandably more cautious about spending. Meals out and trips away are often among the first things to go when households are concerned that everything is getting more expensive and interest rates might rise. That has already shown up in the data – consumer confidence has “collapsed” since the start of the Iran war, according to the British Retail Consortium.

Unpredictability drains businesses 

In recent conversations I’ve had with people in the industry, what really stands out is frustration at the unpredictability of it all. Energy quotes, supplier pricing and even delivery schedules are changing week by week, making forward planning difficult.

It comes at an already challenging time for UK businesses, intensified in April with hikes to employment costs and business rates for many businesses, alongside the start of Statutory Sick Pay (SSP) from the first day of illness. Industry association UK Hospitality reported the results of a survey of 20,000 hospitality businesses showing that as a direct result of the cost increases, 64% planned to cut jobs, 42% would reduce trading hours and one in seven would be forced to close. 

So, we would already have been talking about job losses, cuts to investment plans and businesses closing their doors for good even without the conflict in the Middle East.

Plan for long-term volatility 

In the short term at least, domestic holidaymakers should provide some cushioning for businesses. But given we don’t know how this conflict will pan out, businesses should plan for volatility – across logistics, packaging, imported ingredients, energy, labour and supply chains. Even if the conflict ends tomorrow, volatility is likely to continue for months.

This could include securing costs on key items where feasible and working with suppliers on menus or product ranges. In addition, keeping a very close eye on cashflow is key. 

Overall, the businesses I speak to aren’t panicking. They’ve weathered so many crises recently. But they are focused on staying resilient and planning ahead.