Fall in incomes hits hospitality as operators absorb costs

By Jo Gilbert

Published: 03 July, 2023

New data has highlighted the effect of rising cost of borrowing on spending in the hospitality sector, as consumers’ real income falls.

According to The Bank of England’s latest monthly Money and Credit data, consumer borrowing fell from £1.5bn in April to £1.1bn in May. At the same time, consumers withdrew the highest level of household withdrawals on record from banks and building societies (£4.6 billion), suggesting households are using savings to reduce debt, which has become much more expensive recently.

All of this is having a dampening effect on consumer spending in the on-trade, with operators in restaurants largely absorbing the costs.

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Paul Newman, head of leisure and hospitality at auditing firm, RSM UK, said: “Rising interest rates are casting a dark shadow on both operators and consumers alike as the increased cost of borrowing takes a tighter grip on finances and debt.

“With double digit food price inflation, wage increases and still higher than normal energy prices, it’s a heady cocktail of costs. Throw in the latest rise in interest rates to 5% and many debt-loaded operators are now faced with another increasing cost line that puts a further squeeze on what are already tight profit margins.”

He went on to say that restaurants, in particular, do not seem to be passing on the full extent of rising costs to consumers. Looking at the Producer Price Index in December, food peaked at 16.8%, but the Consumer Price Index for restaurant operators came in well below this figure at 10.1%. In real terms, this means operators absorbed 6.7% of the costs they incurred in rising food and drink prices in one of their peak trading months.

“In the current economic climate, many operators are prioritising sales, customer satisfaction and menu value leading to an inevitable squeeze on margins,” Newman said.

Thomas Pugh, economist at RSM UK, added some much-needed optimism for the second half of 2023.

“Inflation should fall sharply by the end of the year and households’ real incomes should start to rise again,” he said.

However, he added a sobering qualifier, with regard to the delayed impact of skyrocketing interest rates.

“The lagged effect [from this], combined with the risk of further rate rises, [could] tip the economy into recession, either later this year or in early 2024.”

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