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Morning Briefing for pub, restaurant and food wervice operators

Fri 11th Mar 2022 - Friday Opinion
Subjects: Ukraine crisis is a paradigm shift, the price of coffee and croissants, from one crisis to the next, being a female co-owner in 2022
Authors: Paul Chase, David Read, Gareth Ogden, Alison Wilson

Ukraine crisis is a paradigm shift by Paul Chase 

John F. Kennedy said: “You cannot negotiate with someone who says, ‘All I’ve got is mine, but all you’ve got is negotiable’.” And yet that is precisely the position that Russia has put Ukraine in. The terms set by Russia for ending the conflict appear to be that Ukraine should concede territory – the recognition of Russia’s annexation of Crimea, which was occupied in 2014 – together with recognition of the “independent republics” set up by the Russian separatists in the Donetsk and Luhansk regions. Plus, the resignation of President Volodymir Zelensky, Ukraine declaring its neutrality and giving up on NATO membership. The fighting will stop, and the serious negotiation begins when both sides decide there is no further advantage to be gained by continuing the conflict.

I don’t know how this crisis will be resolved, but I think it is clear that it will have profound political and economic implications for us all – not least for those in hospitality who are struggling to recover from the depredations of the covid pandemic. It is good to hear that footfall and revenues are regenerating since the end of Plan B restrictions, but there are enormous headwinds for our sector to overcome, and this applies not just to our sector, but to British industry in general, as well as households. Much of this has to with energy and the green agenda.

Energy and fuel costs are rocketing, and this will impact our sector in two main ways. Firstly, it will impact on consumers’ discretionary spend, as heating their homes and running their cars will eat up a bigger percentage of their incomes. Secondly, it will impact directly on the cost base of hospitality and licensed retail businesses – already struggling with a debt burden from covid. The excess growth in broad money that financed the cost of covid lockdowns is now coming home to roost in the form of rising inflation, which is likely to reach double figures later this year. Unfortunately, the Bank of England is infested with Keynesian economists who have spent their entire careers being wrong about the causes of inflation, but who will soon have to grapple with the fact that while interest rate rises may take some of the air out of asset bubbles, it won’t be sufficient to curb a rise in the level of average prices. The cost-of-living crisis is a big threat to hospitality, and there is no end in sight.

The spectre of war in Europe and Europe’s reliance on Russian gas and oil will create political dilemmas for our government and governments across the continent. This will create short-term as well as long-term impacts for hospitality. Much as I dislike government tax interventions because I don’t believe government distributes resources as efficiently as the market, I think the case for a windfall tax on energy companies to ease the short-term burden of price rises on our businesses and households is strengthening by the day. 

In the longer term, there will have to be a paradigm shift in our energy provision policies. The costs of achieving net-zero carbon emissions, already huge, are simply unsustainable in this new world of energy shortages caused by political instability in Europe. We are likely to see a demand for greater energy self-sufficiency and for reliable sources of energy – and that means fossil fuels, not wind power or other unreliable renewables. Expect greater emphasis on nuclear power and shale gas extraction. In the context of the cost-of-living crisis, the government’s tax rises seem very difficult to justify or implement without massive political blowback. But the dilemma will be how to reduce broad money to curb inflation. A dash for growth may well be our best chance of escaping “stagflation” – stagnant economic growth combined with high inflation.

So, in addition to a seismic shift in how we generate energy, there will need to be a fundamental review of the role of the state. Currently, in the UK, 80% of our taxes are spent of three things – the NHS, the welfare system and state pensions. This leaves 20% to be spent on everything else, including defence. I have long been an advocate of a negative income tax policy to replace our complex and expensive benefits system, which is simply unsustainable. Unless we reduce the size of the state, there is no headroom for tax cuts.

But we must recognise the brutal realities of power and create, across the democratic world, some meaningful military defence deterrence that takes us beyond Pax Americana and reliance on the nuclear shield. A smaller state that does less but does it better paves the way for lower taxes in the medium to long-term, and this could be a key that unlocks profitability for hospitality businesses that are struggling with the costs of political foolishness in relation to covid, as well as the energy cost increases resulting from the ambitions of a small, psychopathic man with dreams of reconstituting Mother Russia.

Greater profitability through lower taxes also helps counteract the negative effect on sector investment that is inevitably the result of the political and economic instability caused by war in Europe. Putin understands how power works. He is a bad man, not a mad man. We need to wake up to the realities of how power works too, review our defence needs in the light of current threats and end the ceaseless culture wars that are just the luxury beliefs of those who take freedom and democracy too much for granted.
Paul Chase is director of Chase Consultancy and a leading industry commentator on alcohol and health

The price of coffee and croissants by David Read

When Russia started its invasion of Ukraine on the morning of 24 February, I was 1,500 miles away, sipping espressos and eating croissants in the safety of a plush hotel lounge in the West End of London, alongside the chief financial officer of a major UK hotel group. Such was the overwhelming sense that this was the beginning of a seismic shift that even our Polish waiter paused alongside us to watch the TV coverage, no doubt feeling the ominous echoes of 1939. This morning, less than two weeks later, my chief financial officer friend sent me a WhatsApp message containing Lenin’s famous quote: “There are decades where nothing happens, and there are weeks where decades happen.”

After two years of pandemic, Putin’s decision to invade Ukraine delivers yet another unwelcome layer of instability into our already chaotic world. Brexit and covid had already set us on a journey to the highest levels of inflation for more than a decade, but the combination of Ukraine’s damaged food exports and Russia’s increasing isolation from global markets looks set to raise inflation to levels not seen since the early 1980s. It’s hard to believe now, but it took a decade of interest rates above 8% to bring 1980s inflation under control. Indeed, at one point, they were as high as 17%.

The CGA Prestige Foodservice Price Index showed a sharp acceleration of price increases during January, with year-on-year inflation of food and drink running up 7.9%, more than twice the rate in December. For the first time since its inception in 2016, every category in the index showed a month-on-month increase, with food as a whole leaping 4.4% compared with just one month earlier. I expect February and March numbers to climb further.

These unusually high levels of inflation were, of course, recorded before the Russian invasion of Ukraine, which will further exacerbate the situation. The rising cost of energy, petrol and diesel continue to dominate. Last week, wholesale gas prices for delivery to UK suppliers crashed through the £5 per therm mark, higher than the previous peak experienced in January. The price of Brent Crude (oil) has climbed 70% since the beginning of last December. Oil and gas have a fundamental impact on inflation as they are utilised throughout our entire supply chains, from farm to plate.

Ukraine has some of the most fertile soil on the planet, and is a tremendous exporter of wheat, sunflower, sunflower oil, barley, corn, potatoes, and rice. While we don’t import much product directly to the UK from Ukraine, global markets in these categories will likely rise, which will, of course, impact UK prices. 

Western sanctions on Russia are already affecting the importation of metals, where aluminum is a key part of soft drinks, beer and canned food production, as well as fertilisers. It seems unlikely that we will see significant short supply in these areas, but higher prices are already feeding through. At the time of writing, it is far from clear how the situation within Ukraine will play out, and over what period. The consensus among political analysts is that this is likely to be an extended conflict, with a significant risk of it extending beyond the borders of Ukraine alone.

For our sector’s operators, these unwelcome developments seem likely to be a precursor to yet another challenging period, where operational costs rise sharply and consumer demand is squeezed as they grapple with (probable) higher interest rates and a painful squeeze on the cost of living. The unfortunate fact that the pandemic wiped out many of our weaker operators will help with maintaining demand for those that survived, but inflation and relatively low growth looks unappealing as an environment to recover quickly from the balance sheet impacts of the pandemic.

The key to negotiating this period will be a fierce determination to manage margin – pulling the levers of volume, price and cost in the most effective way to preserve profit, cash and customer delight. Of these, the mitigation of cost will be the most essential – creating a strong demand for procurement talent in 2022-23. So, I don’t expect the price of my coffee and croissants to be the same the next time I meet my chief financial officer friend. Good job it’s his turn to pay!
David Read is founder and chairman of Prestige Purchasing

From one crisis to the next by Gareth Ogden

Just as the impact of the covid-19 pandemic begins to properly tail off and it feels as if we are returning to some sort of normality, so arises another crisis which threatens to cast a shadow on the recovery. What is it about frying pans and fires with the hospitality industry? While no-one is suggesting that the terrible events in Ukraine will adversely affect the sector to anywhere near the extent of the pandemic, there will be consequences on top of already existing headwinds.

We currently rejoice in signs that life as we knew it is returning, such as Pret A Manger reporting that its stores in London’s financial districts are trading at up to 79% of pre-covid levels. Research by Greene King tells us that 85% of office workers are looking forward to a return to the office, with social events in local bars and restaurants high on their agenda. Revolution Bars have seen a return to profit, with sales up 6% on 2020 equivalents since the withdrawal of “Plan B” restrictions. Many also report a “post-covid restrictions bounce”, with venues booked up for previously cancelled Christmas parties and other socials.

However, the direct and indirect impact of rising energy and fuel costs, already seen towards the end of 2021, threatens to be exacerbated by the Ukraine situation. The crisis will make certain foods more expensive and harder to source. Ukraine itself is not known as the breadbasket of Europe for nothing, supplying approximately 10% of the world’s wheat exports, according to the Food and Agriculture Organisation of the United Nations. Russia itself contributes 20%. Combined, they account for some 13% of global wheat production, while both are also major suppliers of vegetable oils. The impact of disruption, sanctions and retaliatory measures will impact both price and availability, with potential knock-on implications for other countries and products reliant upon steady supply.

The pressure on food prices is likely to be accompanied by rises in interest rates and a decrease in consumer confidence due to inflationary fears. The pending VAT increase and end to business rates relief, combined with an already challenging recruitment market, will provide a check on even the most optimistic appraisals for the sector.

Just like their reaction to the impact of the pandemic, operators can’t afford to sit by idly by and take the pain. There are pre-emptive actions that can be made in order to continue riding the wave of recovery.

In order to control costs, it will be important to revisit forecasts and monitor these closely as events unfold, and their impact is properly understood. Common sense would dictate that alternative sources of supply for key products should be researched and prepared, as well as buying a little extra, if resources and logistics allow. 

Mitigating cost increases by negotiation with current suppliers goes without saying, but all new contracts should be carefully considered and drawn up to take account of anticipated price increases, and include clauses for the implications of supply issues. In respect of anticipated interest rate increases, it might be the opportune time to bring forward a proposed refinancing, or to arrange extra finance before interest rates rise further.

There is, of course, the dilemma of whether or not to pass on additional costs through price rises. Pret recently hiked coffee prices by up to 50% in some stores, and others have found some sort of price increase unavoidable. The alternative is to hold prices and accentuate competitiveness versus rivals, with a view to compensate for cost increases by driving frequency and volume. At a time of declining consumer confidence, this is not an unreasonable approach. Fostering repeat visits is a key aim for operators currently, with loyalty incentives prevalent. McDonald’s have recently introduced a loyalty programme, and Leon and PizzaExpress both have new app-based reward schemes. 

A similar approach is the subscription model. This was introduced successfully in 2020 by Pret on its coffee and hot drink products in an effort to win back business lost during the lockdowns – albeit, somewhat ironically, the price of this subscription has recently been increased.

Otherwise, be excellent. That means be an excellent employer – look after the staff, train them, support them and they will look after the business. Happy, motivated staff give good service. Good service drives those repeat visits. Furthermore, a shortage of available labour means workers can currently pick and choose who they work for, and they will gravitate towards the best. And happy, motivated staff will stick around. Two birds, one stone.
Gareth Ogden is a partner at sector specialist accountancy firm haysmacintyre

Being a female co-owner in 2022 by Alison Wilson

The hospitality sector is the third-largest UK employer, according to research by the UK Hospitality Workforce, and represents 3.2 million jobs, with women accounting for approximately 60% of its workforce. Nationally, the data also indicates that the number of women in management positions is on the rise, according to The Change Group. For example, the number of women publicans and managers of licensed premises has increased by 133%, from 9,000 to 21,000 workers. Similarly, the number of women estimated to work as catering and bar managers has grown by 52% to 44,000, while the number of men working in these roles has stayed the same, at 35,000. So, while there’s still clearly a lot of progress to be made in gender equality, it’s incredible to see the hospitality sector leading the way, and it’s a privilege to fall into that bracket. 

After graduating with an honour’s degree in business studies, I joined the National Freight Consortium as a graduate management trainee. My early career involved working on some high-profile contracts, including Harris Queensway, Argos and ICL, and I went on to run the prestigious BMW parts delivery contract from BMW’s UK head office, in Bracknell. While running the contract, we introduced the first overnight car parts delivery operation in the UK.

In 1992, I met my husband, Chris Wilson, and we acquired our first business, the Rose and Crown Hotel in Tring, and I ran the business as a proprietor/manager for three years. In 1997, we acquired Balmer Lawn Hotel, making Brockenhurst and the New Forest our home with three children. Amazingly, we’ve been running the now-four silver stars hotel for more than 25 years. In that time, we’ve restored the venue and now employ a team of more than 90 staff. In the last three to four years, I’ve gotten more involved in the wider hospitality industry, with roles such as director for the community interest company, Go New Forest, and board director on the Solent Local Enterprise Partnership. In my 25 years running Balmer Lawn, I’ve overseen substantial change. What I enjoy most is that we are thriving in a dynamic industry, where our flexibility and ability to adapt to a constantly changing environment has ensured the hotel’s survival and progression.

Looking at the national statistics, I feel very fortunate to be a female co-owner. In saying that, I’ve always believed this to be an achievable goal, regardless of gender. In hospitality, we are working to offer equal opportunities for all, although sadly, more needs to be done. One area I am passionate about is that of female chefs, as it was a sorry reflection to see the latest Michelin guide 2022. Two female-led restaurants were awarded three Michelin stars in the Michelin Guide for Great Britain and Ireland 2021 – Core by Clare Smyth and Hélène Darroze at The Connaught. However, this year, despite 19 new one-star restaurants, five new two-star and a new three-star, not a single new star or award was given to a female chef. This has to change.

Gender roles are changing, but there is always more that can be done. As previously mentioned, we should be seeing more female chefs, and perhaps more male housekeepers too! I do feel the hospitality industry is already on the right path to taking women in leadership more seriously. With that in mind, the female leaders in our industry need to continue to nurture and foster strong leadership roles for women. This is especially important for the next generation of leaders to come. Placing women in high-level leadership positions needs to become more standardised, and we need to ensure all the tools are in place for the next generation of female talent to succeed. I do think mentoring would be a really positive move to help female leaders in hospitality achieve their potential, which, in turn, ensures more successful business.

Overall, working in hospitality is extremely rewarding, regardless of gender, and I recognise I have been fortunate not to have experienced the challenges of inequality. This is an exciting time to be in the industry, as we look to move forward to the next phase with spirited hope. My message to any young aspiring women thinking about pursuing a career in hospitality would be to think big, back yourself, find a mentor, listen, learn and, ultimately, enjoy the ride. 
Alison Wilson is the co-owner of Balmer Lawn Hotel & Spa

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