Hospitality businesses at crisis point

In the wake of the Coronavirus pandemic, the hospitality sector was brought to its knees by the crippling impact of lockdowns, forced closures, and travel restrictions.

As movement within the UK and internationally became difficult, staycations enjoyed a renaissance, paving the way for some recovery for hospitality businesses.

However, as time moved on and the pandemic had less of a hold on everyday life, the hospitality sector began to flourish once again as businesses reopened and gained new types of business due to the changes in consumer habits.

Although the wave of emerging challenges, and the aftershocks of the pandemic and Brexit cannot be ignored as they have created a challenging environment, the industry as a whole is taking this in its stride and progressing regardless. In this feature, we will delve into how hospitality firms have fared, where the challenges lie, and what opportunities businesses have in the coming 12 months.

How the hospitality sector has fared

The challenges facing the hospitality sector are having an impact on the functionality and profitability of businesses within the industry, with the ongoing cost of living crisis expected to dampen consumer spending.

Since the pandemic, the hospitality sector has navigated unprecedented challenges and undergone a substantial transformation to try and survive amid the post-pandemic challenges as well as the current cost of living crisis. Lockdowns, travel restrictions, and health concerns brought travel and tourism to a standstill, leading to the closures of hotels, restaurants, and entertainment venues. The impact on employment was profound, as countless workers lost their jobs or faced reduced hours.

However, as restrictions eased, the sector gradually adapted to these challenges by implementing health and safety measures, such as social distancing, with demand returning to pre-Covid levels for some businesses.

The sector also witnessed a surge in digital innovations, with online ordering and shopping becoming the new norm, contactless payments becoming many people’s method of choice, and virtual experiences such as dinner over Zoom becoming prominent in our daily lives for a time. In turn, this had a positive impact on businesses within the hospitality industry as the lockdowns encouraged people to order food online. This resulted in businesses gaining profit through adapting their practices to incorporate takeaway services with the number of people in the UK ordering takeaways increasing by 317% from February 2021 to February 2022.

The takeaway market is becoming the hospitality sector’s biggest success story, with food and drink businesses that offer takeaway services increasing revenue and expanding their customer base and the takeaway market being worth £21.4bn in 2022. Therefore, for businesses to progress, introducing takeaway services in addition to their current work would be a huge step in the right direction to increase profit and desirability.

Labour Shortages

The UK hospitality industry is currently tackling significant labour shortages for various reasons. One prominent factor is the aftermath of the COVID-19 pandemic, which resulted in workforce disruptions due to lockdowns that were put in place to preserve the health of the country. Many foreign workers who once constituted a substantial portion of the industry's workforce returned to their home countries during the pandemic and have been hesitant to return.

The industry's reputation for long and irregular hours, on top of arguably low wages, has also made recruitment and retention difficult, with a high turnover rate fluctuating between 5.4% and 6.4% in the last year. As a result, businesses within the hospitality sector are now competing for a smaller pool of available workers. The reasons behind staff shortages has resulted in £21 billion being lost for the sector, according to recent sector news.

Nevertheless, with over 220,000 businesses, the hospitality sector is the industry with the third highest employment rates in the UK, and provides a wide range of opportunities for those seeking employment. Despite labour shortages, there are opportunities for businesses to make proactive moves towards safeguarding recruitment and therefore preserving the security of their business such as initiatives to attract local talent, offering more competitive compensation packages, and improving working conditions to make the industry more appealing to a diverse workforce.

Energy Costs

Rising energy costs have become a growing concern for businesses across the UK, driven by a combination of factors including supply chain disruptions, geopolitical tensions, and sustainable shifts towards renewable energy sources, the current energy costs are a contributing factor to the decline of the hospitality industry.

Energy costs are up by an average of 80% and as businesses battle with these higher costs, they may face challenges in maintaining profit margins, potentially leading to price increases for consumers or cost-cutting measures that can impact employment and growth.

The worries over current energy costs are a source of anxiety for many in the hospitality sector, with UK Hospitality research showing that almost a third of its members are worried about collapsing in the next year, with the majority citing energy as their main concern.

However, many hospitality businesses are using the current cost of energy crisis to their advantage to strive for more sustainable practices within their business. Research shows that 58% of British people want to stay in accommodation with environmentally friendly practices, so sustainability is a huge influence within the industry. Many UK SME’s are using the Environmental Sustainability Guide with the aim to reach net zero by 2040, a practice that should be adopted by all enterprises to incorporate sustainable standards in their work, resulting in the sector becoming greener overall.

Changing Consumer Habits

The pandemic has resulted in changing consumer habits with many people now sitting outdoors for consumption, this has resulted in an increase of outdoor hospitality such as mobile food and drink businesses. There are ways for businesses to adapt to these changes such as opening outdoor areas in their establishments if possible, therefore increasing profit through encouraging more customers.

People are also changing their spending habits as a result of the cost of living crisis, but also because of natural evolution. We’ve seen mid-range chains struggle while fast food, drive-throughs and up market restaurants are coping better. Pubs are also facing challenges despite performing better than restaurants overall. Recent reports revealed that five restaurants close every day in the UK, showing the current hardships that the hospitality sector is facing.

Our report shows that the number of restaurant insolvencies is at a decade high with 569 in Q1 2023 and 2,028 in the 12 months to March 2023, a 55% increase on 2022. This can be attributed to inflation devaluing the worth of money meaning that people will be spending more money on products that are worth less. This has resulted in the number of licensed premises in the UK declining by 4,593 in the year to March 2023, suggesting an average of 12.6 closures a day within the sector.

However, there is still hope for the sector. With 65% of UK consumers admitting to eating at restaurants or food outlets to ‘treat themselves’, the hospitality industry can overcome the challenges of inflation by appealing to the wants and needs of their customers. Businesses that have safeguarded their finances will be in a better position to do this, but struggling businesses can also work to regain the loyalty of their customers by re-evaluating what they are offering through the use of customer surveys to ensure their services are relevant for the consumer.

Conclusion

Despite the efforts made by the hospitality sector to revive after the impact of the pandemic, many businesses faced financial strain, and some had to resort to shutting down permanently because they couldn’t keep up with the demands that came with the aftermath of the pandemic and the current cost of living crisis. Although the road to recovery has been challenging, the resilience and adaptability shown by the hospitality sector offer hope for its eventual revival as there are still opportunities for those who are more agile and can adapt to market conditions. Our trade credit insurance provides a vital safety net, ensuring that hotels, restaurants, and other hospitality businesses are financially protected against potential losses arising from insolvency. Ultimately, in an industry where trust and reliability are paramount, trade credit insurance enhances the hospitality sector's resilience and ability to flourish in a competitive market.