Hospitality industry update: a summer of sunshine and storms

• Demand is very uneven across the hospitality sector, with leisure travel returning, but fewer business trips
• Higher costs are a problem everywhere, along with staff shortages, and weakening consumer confidence
• Insolvencies are high, and may rise further. Be alert to the risk of a large trading partner failing
  

A strange year lies ahead for the hospitality sector. While some parts are experiencing a boom, the industry as a whole is seeing more insolvencies than in the depths of the 2020 lockdown.

“Business is uneven - and will probably become more so,” says Kieron Franks, Assistant Head of Risk Underwriting at Allianz Trade UK & Ireland.

As the hospitality industry is a significant customer for many other parts of the economy, from transport to online advertising, anyone doing business with the sector should be aware their customer may fail, he warns.

Prediction is complicated by varied trading conditions across the sector. On the positive side, TUI, Europe's largest tour operator, has predicted "a strong travel summer in 2022", with the UK market among its most robust. This is great news for restaurants and hotels in holiday hotspots.

But business travel is still slow to recover. Data from travel analytics firm CoStar, puts business travel booking in Europe at only 60% of pre-pandemic levels, a major problem for conference centres and some city-centre accommodation.

The hospitality industry and inflation

Kieron notes the hospitality industry is also wrestling with higher costs. Industry data shows food prices up 17%, drink prices up 14%, and energy prices up 95% in a year.

In addition, from the end of March 2022, the UK’s hospitality industry was back to paying VAT at the full rate of 20%, after nearly two years of reductions as part of the government's Covid-19 support package.

Kieron also notes that many people enjoying their 2022 summer break will pay for it, at least in part, with vouchers or discounts they earned from cancellations in 2020 or 2021.

The hospitality sector staffing crisis

For UK employers, staff shortages are an additional problem. Even those businesses seeing soaring demand may not be able to capitalise on it if they can’t get enough workers. Even before the summer, official data showed that around one in 13 jobs in the accommodation and food services sector were not filled – about 171,000 vacancies.

Jane Pendlebury, chief executive of HOSPA, the UK’s Hospitality Professionals Association, said in a recent interview: “I’ve lost count of the hoteliers and restaurateurs commenting on mass no-shows having set up interviews – that’s if they even manage to get candidates that far in the first place!

“The situation is likely to get worse before it gets any better.”

Plans to solve staffing shortages are likely to mean a further increase in labour costs.

The new outlook for the hospitality sector

In December 2021, Kieron predicted a mixed 2022 for the sector and warned firms to keep a careful watch on cash flow.

Since then, changes have been mostly negative – with a faster-than-expected decline in consumer confidence as inflationary pressures pile up, accelerated by higher energy bills and mortgage payments.

“The cost of living crisis is clearly going to hit the hospitality sector,” Kieron says. “People just won’t have the disposable income to splash on meals out.

“As the year progresses, you’ll probably see consumer confidence plummeting and disposable income being restricted,” he warns. “And that will make people change their habits.”

He notes that restaurants will likely be caught in the vice of higher prices and reduced demand.

Rising insolvencies

While bustling city centres may seem full of consumers spending their cash in bars and restaurants – insolvencies are rising fast.

According to ONS data, firms in the hospitality sector made up 11% of insolvencies in the first quarter of 2022 in England and Wales, even though they make up just 3% of companies.

More firms in the sector became insolvent in the first quarter of 2022 than in the darkest days of the first lockdown in 2020, when restaurants closed to diners for around three months.

In 2020, of course, the sector had access to furlough payments, government-backed low-interest funding, and other forms of support. In 2022, firms need to sink or swim on their own.

Many have additional debts and are running low on working capital - UK Hospitality says one in three firms in the sector have less than a month of cash reserves. Clearly, there is a rising risk of an insolvency domino effect in the sector.

Kieron says it is vital to watch how the hospitality sector's insolvency trend develops as consumer confidence dims, and to protect against major customers failing to pay invoices. "We talked about an increase in insolvencies, and that's clearly come through. It's important to see whether that growth continues," he says.