According to the 2018 UKHospitality Christie & Co Benchmarking Report, which surveyed 40 companies covering a total of 3,548 managed outlets for the year ending September 2017, controllable costs have risen to an average 52.5% of turnover – the highest in the report’s 12-year history.
The single largest cost for eating and drinking-out businesses – payroll costs – now stands at 29.4% of turnover, an increase of 1.5 percentage points in 12 months.
The report reveals that like-for-like sales across the hospitality sector that have risen 1.1%, below inflation of 3.9% in the period.
Accommodation-led businesses, which saw 4.1% like-for-like growth, were the only market segment whose growth outstripped retail price inflation with community locals the next highest, seeing growth of 2.6%.
In a section titled ‘Analysis by ownership model’, the report highlighted that commercial leases showed improved margins at the cost of higher rent.
Total operating cost, before rent, was 46.6% for leasehold estates with predominantly tied premises, slightly lower than the 51.2% for those of majority free-of-tie estates.
Moreover, gross profit margins on wet sales for estates with primarily commercial leases were higher than tied counterparts, revealed to be 71% and 62% respectively.
The report also found that the appetite for taking the market-rent-only (MRO) option remained high among tenants. However, of the 668 responses to MRO notices issued between the pubs code’s introduction in July 2016 and July 2018, only 53 new MRO tenancies had been agreed.
The report summarised: “The pubs code was in itself a compromise between the objectives of Government and the needs of many different stakeholder groups, and yet many are suggesting it has failed to meet its objectives, with some resorting to demonstrations in Parliament Square, calling for urgent review. This remains a possibility during 2019.”
Christie & Co director Ramzi Qattan, who is the report’s author, said: “This year’s results reflect the continuing evolution of both the UK consumer and investor landscapes.
“Food sales have reached a new highwater mark, and room revenues continue to grow at a strong pace as more operators are attracted to high-margin letting rooms.
“From an investor perspective, we are well past the peak of the investment cycle, with capital expenditure now more subdued.
“Structural issues such as oversupply of restaurant space on the back of private equity-funded brand rollouts have created further challenges although, thankfully, rent levels on the high street are now also well past their peak.”
Need for ‘immediate reform’
UKHospitality chief executive Kate Nicholls said: “The results of this year’s UKHospitality Christie & Co Benchmarking Report make for sobering reading for eating and drinking-out businesses.
“Costs continue to rise for pubs, bars, restaurants and nightclubs.
“At a time of political and economic uncertainty, the Government must provide support to help address spiralling costs that threaten the future of the hospitality industry in the UK.
“Additionally, 40% of businesses surveyed reported a hike in their business rates and 20% have reported that they have had to cut staff numbers to address cost rises.
“The Government must immediately commit to reform of a broken business rates system.”
The report, which also gauged business confidence before Brexit, found that 40% of business believe that the UK’s departure from the European Union will negatively impact business.
Moreover, respondents stated that recruitment has already become more challenging with one in five employers reporting that EU nationals have already left the businesses as a direct result of Brexit.
Nicholls said: “Brexit continues to cause concern for many businesses in the hospitality sector.
“The effects of leaving the EU are already beginning to be felt by some employers.
“If the Government wants to make a success of Brexit then action to reduce costs now, to mitigate the impacts of leaving, is absolutely necessary.”
Qattan added: “The outlook for next year is mixed. We are anticipating further cost rises above the rate of inflation, and at a time when operators must also prepare for the challenges and opportunities arising from Brexit, which is an extremely challenging task given the prevalent uncertainty surrounding what will happen on and after 29 March 2019.”
The full report can be found here.
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