We are a few weeks into the new world. Although the impact of the Budget was well signposted, the sector now finds itself in a strange period: only too cognisant of the triple dose of bad news via the rise in national minimum wage, the change in the percentage on national insurance contributions and the thresholds. 

 

However, right now, what is less clear is the positive improvement that may come through from demand, which is one possible effect of the national minimum wage increasing (and beyond that, a rise to many people’s wage to “maintain the gap”). This structural wage inflation is happening across various industries, and the scope for this to drive more positive demand conditions is there, but yet to be determined fully. It is also worth noting that, in part due to a rebasing of utility costs, household disposable income in general is recovering, with Office for National Statistics data showing an increase in non-essential spending in recent months.  

 

To try and understand the immediate impact on company financials, it is worth examining the listed hospitality groups’ expectations on Ebitda margin, contrasting projections from before and after the Budget. 

 

What we found was a reduction in margin equating to losing almost a percentage point, which is feeding through to a 5% to 6% decline in absolute profit figures for the sector. Unfortunately, that has weighed on these companies’ share prices, which, at 18 March, had reduced by an average of 14% since immediately prior to the announcement of the Budget last October. For clarity, this share price analysis was conducted before President Trump launched his trade tariff offensive on the world and set shares tumbling across all markets (to avoid this noise in the data).

 

Most importantly – and the question we are asked a lot, given how much margin management and profitability feeds through to the ability to raise finance or transact in investment and M&A scenarios – is what are businesses doing to mitigate the impact?  

 

To understand this, we worked through an example site P&L, looking at what would potentially happen to its profitability if no mitigating actions were taken following the impact of the April changes. At the outset, we can see increases coming through in gross margin, given suppliers are also experiencing this increase in cost and necessarily passing some on to their customers (with the potential to be even greater depending on the longer-term impact of US tariffs). 

 

We modelled the blended total increase in direct labour at between 9% and 10%, after taking into account the likely staffing model at multi-site operators, which include a combination of full-time and part-time staff, which means a business is potentially losing about three percentage points in site margin here. There are other costs, including changes in property costs and rents, to feed through too. When these elements are factored in, you can see that operators are potentially facing losing up to five percentage points of site margin, which could mean a third reduction of absolute site profit, if no action is taken, which is stark. 

 

Of course, no operator in the sector is sitting on their hands. So, what are people doing? First, and unsurprisingly, we're seeing a further wave of menu price rises. We think, on average, operators have put price increases through of around 3% – although it should be noted that this is very much an average. We are seeing different pricing strategies being adopted in terms of quantum and timing of any increases. Some groups are choosing to hold prices and promote value with the aim of taking market share. On the procurement side, accessing cost savings are possible but tougher to deliver, given the supply chain is in this moment still quite squeezed. 

 

More widely, operators are once more reviewing their site portfolios, evaluating the new economics of their sites – what's viable and what's not – and we are already seeing some further estate consolidation taking place. As costs increase, we see a trend of needing larger sites in order to maintain acceptable levels of profitability. As ever, there is a focus on labour productivity, but operators are very mindful of not simply stripping out labour to the detriment of guest satisfaction. The name of the game is much more around the scheduling of labour to match new demand patterns. It is as much about having more of the team in the site during peak times to maximise revenues as it is about reducing labour in the quieter shoulder periods. We are also seeing increased interest in the role that technology can play here.

 

The other strategic route that is gaining traction with corporate groups is a fresh look at central costs, and what is really needed to enable a business to run a quality operation without unnecessary (and ever increasing) costs. In this area, it is important to adopt a zero-based approach to assessing what is actually required from the centre to support the front-line business, and not just strive for a percentage reduction in what is already there. 

 

As ever, there are no simple solutions out there that on their own solve the problem. It’s not easy, and these changes to the cost base have probably set operators back 12 months in terms of profit growth. But there are still levers to pull that can help ease the undoubted pain being felt. The biggest lever of all, of course, and one somewhat beyond the sector’s control, is the consumer. Operators will be hoping that as the sun starts to shine, that hospitality consumers will be minded to loosen their purse strings. The one consistent we see is that consumers will always flock to high-quality hospitality – those businesses that do this well will continue to thrive, albeit it might take a little longer to hit the profit forecasts that were set 12 months ago.    

Breakfast at Maison Francois in London’s St James, just around the corner from Fortnum & Mason, was not the quiet affair I was expecting as the room was packed at 8.30am on a Tuesday morning, with upbeat hedge fund types enjoying the likes of eggs benedict at £14, or a punchy £24 for both sides of the muffin with accompanying egg and ham.

 

Volatility in markets is the bread and butter of hedge funds that thrive on price movements and uncertainty. This is the polar opposite of regular consumers who worry about job prospects when things are unsettled. In the US, there is evidence in the recent results of McDonald’s that these uncertain times are leading to people cutting back on visits to the fast-food brand. It has just reported its biggest drop in sales since the height of the pandemic five years ago.

 

McDonald’s chief executive Chris Kempczinski says many people are now having breakfast at home rather than visiting his stores. This scenario is undoubtedly also being playing out in the UK, despite the sausage and egg McMuffin meal deal being a veritable bargain at £2.49 (when using the app) – for both sides of the muffin, no less.

 

Highlighting the competitive nature of the market right now is the battle being fought out for the first meal of the day by the value-focused players. JD Wetherspoon pitched in with a breakfast deal that included a muffin and a drink with unlimited refills for £2.99 or less, while Greggs had its breakfast roll and a drink at £2.85. At these ultra-competitive price points, it would be reasonable to believe there is little to choose between these options for even the lower-income consumer.

 

Not so. At this most price sensitive end of the market, dining decisions are turning on a sixpence for an increasing number of people. This is reflected in the fortunes of Greggs, which has, over recent years, enjoyed value dominance in the market – which has in turn driven both a store opening frenzy and an impressive share price trajectory. But this is now under increasing pressure.

 

According to a report from Peel Hunt, the game could be up for the company as it has been unable to maintain competitive pricing for its benchmark sausage roll versus the basic McDonald’s hamburger. Multiple price increases pushed the renowned roll to £1.30 versus £1.19 for the hamburger that has been held at this price point for some time. 

 

Another increase will be introduced on 15 May that will magnify the issue, according to Peel Hunt, which reckons the growing price gap is a very worrying turn of events for Greggs. This is highlighted in a recent The Sun newspaper poll that found 40.7% of people now believe it is “not worth the money”, while another 15.9% say they “haven’t been in there for a while”, which might well be down to the pricing. The remaining 43.4% says it’s “still good value” but erosion is a distinct possibility when you have McDonald’s pushing out more promotional deals including its latest £5 meal deal (cheeseburger, fries, drink and four McNuggets anyone?)

 

The City firm stated: “Value credentials are central to Greggs’ branding and business image…price increases should be approached with caution. While they can provide short-term relief to like-for-like growth, the signs that core customers are sensitive to the price increases concerns us.”

 

This will be far from music to the ears of all operators. Whatever the travails of those at the most acute end of the value chain, there is undoubtedly some trickle down – or should it be trickle up in this case? It presents a troublesome backdrop for the hospitality industry while cost pressures persist. Without passing on price increases, the books clearly have to be balanced through other routes. The creativity and ingenuity for which the sector is renowned will absolutely continue to be a key requirement of all operators.

At some point before I came here, the rest of the city began calling this steep hill to the east Muesli Mountain, a dig at the right-on cosmopolitan middle classes who painted their terraced homes in a proud rainbow of different colours, like a cool and bohemian version of Pete Seeger’s Little Boxes.

 

I moved here for the pubs. It must be among the most densely populated pub areas of any city. There’s an old map that plots one on nearly every corner, like knots in the net of narrow streets, and a surprising number have survived, though we’ve lost a couple in recent years.

 

In 2017, I got involved in a campaign to save one of the more famous pubs that seemed under threat. A group of locals got together to raise the money to buy it, partly from grants, but the support of the community would be vital. We made a bid, though we knew it wasn’t enough, and we were beaten to it by an established operator that, thankfully, has made it into a viable business.

 

We’d run a good campaign, but we’d been disappointed by the lukewarm response from most of the residents. There was curiosity. At sparsely-attended open days, baffled people would ask why we wanted to do it – aren’t there enough pubs around here? To which we gave an equally baffled reply – how can you have too many pubs?

 

The experience went some way to confirming my suspicion that the concept of “community” was a fiction. There was nothing holding these people together, no sense of solidarity. They just happened to live in the same part of town.

 

Pubs are fond of the word “community”. In preferring it to the word “market”, they reveal an aspiration that goes beyond simply selling stuff to people who live nearby. It was none other than the King (Charles III, not Elvis) who, according to John Longden, founder of the organisation that took the name, as Prince of Wales (plenty of pubs named after him) coined the phrase “pub is the hub”, meaning the centre of the community.

 

I suppose that when royalty looks down at the madding crowd from the palace balcony, they must wonder who are all these people? What do they do? And the idea that they must form a community rather than an anarchic rabble (or, still worse, a working class) is a comfort.

 

But there are moments when my cynicism cracks. Earlier this week, I went to the wake of someone I’d met in the pub campaign, a singular chap and someone who did things and made his mark. He will be much missed. The wake was held at one of my locals. It was supposed to be in the upstairs function room, but by the time I arrived, it had spilled out into the bar, the garden, everywhere. We had taken over the whole pub.

 

The British, traditionally, have done death badly, with funerals that are sombre, buttoned-up affairs, followed by tea and cucumber sandwiches in someone’s musty parlour that only opens up for such occasions. This, though, is changing. More often, funerals have become celebrations of a life, events that bring people together in a shared sadness, to be sure, but there can also be something joyous about them. 

 

So it was the other day. There was laughter, camaraderie and much admiring of each other’s hats. Everyone sipped on negronis, the deceased’s favourite drink. Some declared it the best funeral they’d ever been to, then looked a little guilty. We’re not quite out of the old ways and nobody’s sure what to wear, but it’s progress.

 

And pubs are, indeed, at the hub of this new movement. Anecdotal evidence suggests that wakes give a significant boost to midweek trade for many, and it shows they are trusted with making the event “go off” in the right way. After all, you only die once. Unless you’re Doctor Who.

 

While post-funeral teas can be subdued, nervous affairs, drinks at the pub give people permission to be more expansive and sociable, mingling readily with old friends and swapping stories, while they can also find the space to escape that relative they’d rather not be cornered by.

 

This is community, but it’s not always there. Or, rather, it lies dormant until, in this case, it is aptly woken by a wake. The lesson for pubs, I believe, is that you can’t take the community for granted. It’s not sitting there ready to hammer down your doors. It only really comes alive when you do something to make it happen. And you don’t have to wait for someone to die.