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How can hospitality companies tough out inflation?

Author: ICAEW Insights

Published: 07 Oct 2022

As research shows that two-thirds of the UK’s Top 100 restaurant businesses are losing money, we look at what hospitality companies can do to survive rising inflation.

A record two-thirds (64%) of the UK’s Top 100 restaurant companies are running at a loss: that’s the stark finding of recent research from chartered accountants UHY Hacker Young.

In its latest, annual assessment of the hospitality sector, the firm concluded that spiralling food inflation, together with a fall in consumer spending as a result of interest-rate rises, have severely hindered restaurants’ efforts to return to profitability in the wake of COVID-19. In addition, labour shortages have forced restaurants to restrict covers, leading to a reduction in the amount of revenue they are able to generate at peak times.

According to UHY Partner Peter Kubik, anxiety runs high in the sector over a further potential fall in consumer confidence in the event of a recession, which would put profits even further out of reach.

In a statement, he said: “The restaurant sector has been left reeling by successive economic setbacks. The pandemic, shortly followed by soaring inflation and supply chain issues, hit the sector when many restaurant groups were already vulnerable.”

However, Kubik pointed out, promising signals are coming through, and many restaurant groups are expected to return to profitability in the long term. “The success of restructuring campaigns being undertaken, unprofitable branches closing and debts shed through CVAs brings hope for a sunnier future for the restaurant sector,” he said.

Fair enough – but what can smaller hospitality businesses do in the meantime to weather the inflationary storm?

Core concerns

In the assessment of UHY’s specialist Hospitality and Drinks Partner Martin Jones, as every company in the sector has its own quirks, it is important for every owner to undertake a detailed review of their business to determine what it needs on its own terms. “You really have to take a closer look at your strategic options,” he says. “For example, focus on your core business and divest anything peripheral.”

With that in mind, he says that a lot of this will be about getting back to basics. Excellent customer service, getting your staffing right, providing a high-quality product and presenting a well-managed brand to the world are going to be doubly important for drawing people to your restaurant, hotel or pub. The same applies to your digital channels, he says, which must be robust and accessible.

In addition to those brass-tacks measures, Jones points out: “Take a look at the mix of foodstuffs you are ordering in and where you are sourcing them from. Do some research around suppliers, costs and availability and see what scope you have for shifting towards substitute products that would enable you to get a better deal.

“That’s quite a lot to think about – particularly for smaller outlets, where owners will already find the process of running their businesses all-consuming. But it’s important not to underestimate the impact that further energy price rises will have on that end of the sector. Larger companies will be able to absorb them more readily, purely because of their scale.”

Cash-flow forecasting, Jones stresses, will be a valuable tool. That’s still the single biggest pain point for SMEs, he says, with 82% of companies that go out of business citing poor cash-flow visibility and management as the root cause. “I would suggest that having a forward focus on the amounts of money you are likely to have coming in will be more important at this point than worrying about historic numbers.”

The hospitality sector has been increasingly moving towards cloud accounting and the use of apps to manage internal processes and information flow. There are numerous award-winning forecasting and scenario-planning tools available – such as Float – which automatically import invoices and bills to track against projections, providing more accurate visibility of the business’s financial future.

“Do seek help and advice from your accountants on any issue you may be stuck on. Overall, this will be a matter of focusing on strategy and pushing through it.”

Radical convenience

However, instead of thinking exclusively about preserving what they have, shouldn’t owners actively contemplate growth? That’s the strategic outlook of Darren Sweetland, Managing Director at Mollie’s Motel & Diner, a combined restaurant and hotel experience with outlets in Oxfordshire and Bristol and one on the way in Manchester. “No one is immune to the current challenges,” he says. “But what we can do is shape the lessons learned from them into the foundations of what we intend to be a large, scalable business.”

With that goal in mind, Mollie’s is investing in its people and technology as it builds its development pipeline – and has already made striking advancements in the second category. “In the hospitality industry, digital innovation has been lacking for quite some time,” Sweetland says. “So, we scratch-built an integrated digital ecosystem with best-in-class technology partners, all connecting with each other via customised APIs.”

The objective: radical convenience. “We wanted to remove complexity and automate a host of functions on the back end to provide an excellent customer experience on the front,” he explains.

“So, when you download the Mollie’s app, you can check in at a time that works for you before you arrive. You can drive up in your electric car, plug it in and activate the charger from your phone. You can pick up your room key via your phone and, once you get to your room, your Netflix and other TV services are automatically paired – and you can use your phone as a TV remote. You can order food to your room through the app, and we’re working on a whole bunch of other innovations to further enhance the customer experience.”

Smart working

A similar approach oils the company’s operational wheels and culture. Back-end processes run on intuitive technology optimised for staff efficiency, opening up more time for value-creation activities, such as focusing on guests. Staff are empowered to identify and share areas for improvement. And housekeepers are equipped with an app linked to the booking system that enables them to see which rooms they will need to clean days in advance, and to swap shifts with colleagues.

That zeal for smart working also extends to the company’s corporate governance. ICAEW-trained, Sweetland enjoyed a successful finance career at RSM (formerly Baker Tilly) and BDO before becoming Head of Finance at Tesco and then CFO at Soho House. Hardwiring Mollie’s with a streamlined accounting system has been a valuable investment.

“All our systems will automatically feed into our financials with real-time reporting that’s fully accessible on your phone or PC,” he says. “We’ve tried to automate as much as possible so time can be spent taking valuable actions on the numbers, as opposed to just preparing them. Getting that right has been a crucial landing for our business – so that investment has really stood us in good stead as we continue to scale up.”

Visit ICAEW’s Inflation hub for a closer look at the impact of inflation on people, businesses, accountancy and the wider economy.

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