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Hospitality’s biggest challenge isn’t demand – it’s margin

Walk into a busy restaurant on a Friday evening and you could be forgiven for thinking everything is going well. The tables are full. The atmosphere is lively. Staff are rushing between covers, and the kitchen is working at full pace.

From the outside, the business appears healthy. Ask the owner how things are going and you’ll often hear a different story.

Today’s challenge isn’t necessarily attracting customers, it’s the fact each customer represents a smaller profit margin than ever.

Demand remains strong, winning it and affording it has become tougher. Being busy and being profitable now have little in common. For a growing number of operators, that’s becoming one of the defining realities of running a hospitality business today. Walk into a busy restaurant on a Friday evening and you could be forgiven for thinking everything is going well. The tables are full. The atmosphere is lively. Staff are rushing between covers, and the kitchen is working at full pace.

Resilient, but under pressure

Hospitality has always been one of the UK’s great success stories. The sector contributes £69.5 billion to the economy, supports 2.6 million jobs and accounts for more than 7% of all UK employment. More than 176,000 hospitality businesses operate across the country, including over 81,000 established businesses employing between five and 250 people.

These businesses are often the backbone of local high streets, town centres and visitor economies.

It’s also a sector that’s proved remarkably resilient. Over recent years, operators have adapted to the pandemic, changing consumer behaviour, inflationary pressures, labour shortages, and rising operating costs without losing their ambition to grow.

That resilience is still evident today. Speak to hospitality business owners and you’ll find plenty who are still looking for opportunities to improve, invest and grow. They’re having to work much harder to protect profitability, though, and that’s not easy.

Customers are still spending - just more selectively

Consumer support for hospitality remains strong. People still want to eat out, celebrate milestones, meet friends, take breaks away and enjoy memorable experiences. But what we want and what we can afford aren’t always connected. How we choose to spend has changed.

Research highlighted in Allica Bank’s Hospitality Sector Spotlight found that 38% of consumers are eating out less frequently as they become more budget conscious. Meanwhile, 68% of younger consumers say the current economic climate has reduced their spending on nightlife and evening activities.For operators, every booking now matters more.

Customers are weighing up where to spend far more carefully and expecting greater value when they do. The competition isn’t simply the restaurant down the road or the hotel across town. Increasingly, hospitality businesses are competing with a much wider range of leisure and entertainment options for consumers’ time and money.

Greater competition to win customers is the last thing operators need, but it’s the reality in a cost-of-living crisis.

The real squeeze is behind the scenes

At the same time as businesses are working harder to attract customers, they’re also facing significantly higher costs.

For many operators, this is where the real pressure lies, especially as employment costs continue to increase, most notably National Insurance changes. Energy costs are historically high, and business rates continue to burden many in hospitality.

None of these challenges are new on their own, but their cumulative weight has become a real strain on businesses.

Hospitality has always operated on relatively tight margins. As the cost of attracting customers becomes more competitive while operating costs continue to rise, those margins become even thinner.

This creates difficult decisions for operators. Prices can’t go up dramatically or too regularly, standards need to be maintained while costs need controlling, and long-term planning remains essential even when risks and uncertainty abound.

These questions aren’t being answered in plush boardrooms, they’re being sweated by hospitality business owners after a late close or on a precious day off.

Investing with greater focus

Faced with these pressures, it would be easy to assume many operators are putting investment plans on hold. The evidence suggests otherwise.

Perhaps the most encouraging finding from Allica Bank’s Hospitality Sector Spotlight is that operators haven’t responded to pressure by standing still. They’re becoming more selective about where they invest.

95% of hospitality businesses say they plan to invest in customer service. 71% are planning refurbishment projects, while many continue to invest in improving their operations and customer experience.

Those aren’t the actions of a sector in retreat, they’re the actions of businesses that understand their customers and their discernments.

As Adrian Harvey of Suburban Inns in Bury St. Edmunds explains in the report:

We’re still investing, but much more selectively, focusing on experiences that keep our venues busy.

That approach feels increasingly representative of the wider sector: ambition has become intently focused on the areas that can improve margins, covers, and experience.

Looking beyond today's pressures

Hospitality has always been a sector built on resilience.

Operators are facing intense pressures today which shouldn’t be underestimated, but nor should their determination in responding to them. They’ve done it before, time and time again, and it’d be foolish to bet against them now.

The strongest operators aren’t simply chasing more customers, they’re finding smarter ways to retain and attract the right ones. They’re investing where it makes the biggest difference and protecting profitability for the long term.

Hospitality is being defined by operators’ ability to capture demand in the market and maintain sustainable margins. That’s a story worth paying attention to – and that we all must support.

If you’d like to read the report in full, click here.