THOUGHT PIECE the carling team
Woe, Woe, Thrice Woe…
IS THE HOSPITALITY INDUSTRY FACING AN EVEN BIGGER THREAT THAN COVID?
The situation in Britain’s pubs remains parlous. We got used to drinking cans and bottles at home and we liked it. There are far fewer pubs in a trend which started long before Coronavirus. According to the Altus Group UK the number of pubs in England and Wales has fallen to 39973 against some 47080 a decade ago. Now food and energy inflation enter the equation.
Some correspondents are using the term ‘extinction event’ for the hospitality industry. Will Brits suddenly wake up and discover that their beloved pub is no more? It was hard enough working through covid times when the government forced their closure and then imposed onerous rules when they started up again. Pubs were operating on slim margins even before inflation took off.
The Guardian wrote that about 160 small brewers had been lost during the coronavirus lockdown and that at least another 40 had been forced to close this year. Those that survived emerged with average debts of £30,000. UHY Hacker Young revealed that the total number of breweries across the UK had increased to 2426 an increase of some 200. These can only be the optimistic or else their planned projects took a long time to get to the marketplace.
A further study by the British Institute of Innkeeping (BII), UK Hospitality and BBPA shows that only 37% of pubs are currently turning a profit. Staff are hard to get on the wages they were paid before the lockdowns when many EU workers returned home and now immigrant quotas do not allow them back again. Job vacancies in the sector have increased by more than a third against last year according to ONS figures while the average monthly wage of the hospitality workers has increased by 6.4%. An industry petition calls on the government to create a special visa for people from the EU to come and work in the hospitality sector for two years rather like the seasonal work visa for horticultural and poultry processing workers.
The global economy geared down during the pandemic when consumption of just about everything fell. As vaccines took effect the rebound was too rapid and there were inevitable shortages. Then Russian president Vladimir Putin began cutting off gas flows to Europe as he waged his war in Ukraine. LNG has to be transported by boat and far eastern economies have long term contracts with Qatar and Australia as they cannot be supplied by pipeline. Happily the UK has contracts and three bulk LNG terminals but only storage for four or five winter days consumption; Germany in contrast has few contracts but 16 times as much gas storage. There is little risk of a UK gas shortage according to the Government but the problem is high gas prices set by international markets.
Just last month the BII called for government support to ensure the future survival of pubs as the sector remains extremely fragile. It urged a VAT reduction for hospitality and an energy price rise cap for pubs, full cancellation of business rates up to 2024, grants to invest in energy saving equipment and further beer and cider duty cuts for draught products. There is no current price cap on energy supplied to businesses.
Some 15% said their businesses were no longer viable and will be selling up shortly. Another survey by the Morning Advertiser suggested two thirds of UK pubs may not survive the winter. Due to staff shortages, half of the pubs surveyed were having to reduce trading hours with one in four having to close their doors for at least one of their trading days. 70% had business debts and a quarter of them over £50000 with banks not showing much inclination to support ongoing borrowing.
That was fomenting even before a looming beer shortfall which could put more strain on supply chains and force prices even higher. The recent hot weather reduced cereal yields and hop plants failed to get enough water. Raw grain prices had already increased as Ukrainian wheat was unable to move to market. Russia and Ukraine have been major exporters of fertilisers as well.
Add to that the UK’s last fertiliser plant at Billingham has temporarily stopped production saying it is not economic with the higher gas prices. While the world continues to rely on the energy intensive Haber-Bosch process, the Fertiliser Encyclopedia estimates that perhaps 5% of the world’s natural gas is used to make fertiliser. CF in Billingham produces carbon dioxide as a byproduct and while it will import ammonia to continue supplying its fertiliser contracts, brewers are going to go short. CF did three deals with the UK government up to February this year to keep going and during the summer closed its other UK plant at Ince in Cheshire. CF supplies some 60% of Britain’s carbon dioxide and apart from beer and soft drinks, the gas is used in meat packaging and abattoirs. After previous shortages, the big brewers have installed recovery plants to become self-sufficient, a luxury not afforded to smaller producers. The push amongst micro brewers to get into smallpack beers in order to become less dependent on the pub trade is going to face a considerable set back.
Consultancy company CGA has warned that beer prices will increase to £9 a pint in London by the end of the year – the current cost is around £5.50. As an aside, some journos got the wrong end of the stick and predicted beer at an alarming £25 a pint after Octopus Energy founder Greg Jackson said IF beer had gone at the same rate as gas it would be that much!
The CF case indicates the vulnerability of relying on global trade routes and outsourcing the production of staples abroad. As Tory leader hopeful Liz Truss has said on numerous occasions, the nation must invest in long term sustainability of energy capability by extracting more gas from the surrounding seas and keeping the aging nuclear plants going while building new ones. Currently expensive tidal and geothermal power, which would be independent of the wind, become attractive as energy prices rise and they can secure investment for development. Fracking shale gas less constrained by rules on seismic events provides further opportunity while reopening coal fired power stations would stop wood chip fuel being transported half way around the world.
The UK household energy cap is now set at £3549 with a further rise due in January. Consultancy Auxilione has predicted the price cap on energy bills could reach a record £6,089 in April. Inflation is tipped to reach 18% by Christmas. Any process which uses energy or fertiliser will see a knock-on effect on shop prices. Food retailers are concerned as well since they do not want to lose customers so they are quite keen to maintain downward pressure on prices. That creates a pressure in the food chain all the way back to the farmers. Forget about cheap food from those well trumpeted post Brexit trade deals, the cost of transportation from further afield probably negates any cheapness and drives our own farmers out of the market. We shall probably see government plans to pay farmers for looking after the environment and green supplements to existing power bills put on hold but Whitehall is never very good at juggling conflicting policy goals.
Britain’s independent brewers have urged ministers to step in to save the sector, if it turns out that 70% of pubs do not expect to survive the winter. Some pubco tenants are already leaving having failed to get rent or beer tie relaxations. As tenants leave will the pubcos be able to get new ones in the current climate?
The impact of surging energy bills is being compounded by a fall in sales as households seek to save money. After the 2008 financial crisis, there was a lot of new money sloshing about. Low interest rates to steady the world economies meant low savers’ rates as well. Britain got used to spending and house prices boomed. Now with interest rates rising on top of stonking gas and electricity bills, something has to give and it is easier to forego a trip to the pub than terminating a Netflix account, not upgrading your mobile phone or visiting the manicurist and tattoo parlour! According to CAMRA some 52% of people think the average price of a pint is already unaffordable.
The Morning Advertiser survey found more than 65% of operators said they had seen utility costs increase by more than 100% while 30% reported a jump of 200% and 8 reported leaps of more than 500% and four-fifths of operators said that they could not afford any increase in energy costs. One correspondent said a fixed contract at 14 pence each unit has now been quoted 83 pence to renew it. The energy companies perhaps see hospitality as a high risk sector while the Government seems to think it is a robust industry and can cope. It can’t.
How can pubs save energy? Training staff to switch off equipment and not turn on the oven on as soon as they arrive first thing in the morning is a start and maybe we shall see more air fryers and other more energy efficient equipment in the kitchens. Raising bar fridge temperatures from 5 to 7oC and abandoning extra cold products are easy wins. Restaurant portion sizes will also reduce to save waste and menus will be paired down to contain only good sellers.
Running a pub makes it difficult to cut down on energy bills. If you are offering hospitality, you need a nice warm building where people feel comfortable so you cannot really advise people to come in a woolly sweater! It is just possible that consumers might migrate to the pubs to keep warm of an evening as their own fuel bills increase. Rather like the apocryphal pensioners travelling around on buses all day to keep warm. If each person radiates 750w of heat, 30 people in the bar would mean you would not need any heating at all!
The Metro Bank has advised pubs to explain the difficulties that they are suffering to help drinkers understand why they have been forced to raise prices and avoid upsetting clients who are also feeling squeezed themselves. Hopefully maintaining customer loyalty rather than risking customer alienation.
Will the World Cup be enough? During the last World Cup, beer sales in the UK were up 4.4% but with this year’s tournament taking place in November and December it may not be so easy. People continue to say they enjoy watching sporting events in the bar. During the delayed men’s Euros the pubs screening the final saw daily sales jump by 64% and those not showing it suffered a sales dip of 5%. So start planning your World. Cup now and hope it does not detract from the traditional festive season at the end of the year.
Spare a thought for the Aussies where beer excise duty went up by another 4%. Duty is adjusted twice a year in line with inflation and commentators predict a A$15 pint. (£8.84). Australia is the largest exporter of LNG, now ahead of Qatar but still burns a lot of coal, is short of oil and poo poos electric vehicles.
Will the government be taking taxpayer money to give money to taxpayers in a circular attempt to be seen to be doing something? This is just a sticking plaster; the fundamental cause of this inflation is that the supply of goods and services under prevailing conditions cannot keep up with demand. Hence they cost more. This is caused by a shortage of fuel, a shortage of goods and a shortage of labour. Unfortunately pumping more taxpayer money into the economy to subsidise demand does not address any of these problems.
Pubs are stuck between the proverbial rock and a hard place as inflation and energy costs continue to increase while consumer spending and confidence plummets. With customers tightening their belts running a pub looks like being completely unsustainable. There is a bumpy road ahead.
Is there any light at the end of the tunnel? Well frankly – no. Industrial action will be fruitless in the long run but the vulnerable will need support. The rest of us will have to take our belts in a notch or two. We expect that Germany (which got 55% of its gas from Russia last year) will put pressure on heroic Ukraine to cede territory and end the war but can you stop a belligerent petrostate continuing to weaponise energy supplies? We must use less and maximise what we have got of our own. When there is a surplus again, the price will come back down – but that is not going to be soon.
Note that this blog was penned before the result of the Tory leadership contest was announced so we do not yet know what support measures will be put in place.