#6 - Dealing With Rising Costs & Declining Revenues
David Carruthers
I Help Founders & Leaders Get Success, Balance & Make A Difference Using My BEE? Framework To Create A Thriving Future of Hospitality
It's more than likely that you're now dealing with rising costs & declining revenues. Even if you haven't yet seen revenues declining it's highly unlikely if you're operating a hospitality business on planet Earth at the moment that you won't have seen the impact of rising ingredient costs, rising energy & other costs.
When we launched Future of Hospitality at the end of April, and we started warning hospitality business leaders that the industry was about to be hit by multiple events in the ‘external environment’, few had actually begun to feel the impact on their business performance and profitability.?
Most were still feeling good that they were 'allowed to ope' and trade and were enjoying the journey they thought they were on, trading back towards 'normal'. That journey and the potential for enjoying it hasn't lasted very far into 2022, before the 'next major crises' are taking their toll on an industry that hasn't yet picked itself up and dusted itself down from the last crisis.
The quarter between April and June 2022 has seen a significant shift across the world, with the largest rise in inflation (rising prices) and the lowest level of consumer confidence (and for us, operating out of consumer discretionary spend, that has a big impact) in modern history.
We launched Future of Hospitality? in April with David's vision to help hospitality business leaders (our tribe) firstly, be aware and better prepared for the challenges that are coming around the corner and secondly to begin having conversations about what the industry of the future might look like, rather than have others (government, vested interests) shape our industry to suit their needs, not ours.
Through the monthly Industry Insights & Key Challenges briefing which we began in May, we are presenting the big issues so leaders can prepare and respond accordingly and strategically rather than leaving it too late and reacting.
On 15 August we will be holding our 4th monthly briefing (register here, it's free) and the big challenges that we believed were on their way towards us, just around the corner, are now very present for many business leaders in our industry.
On 22 August we're running a (free to Future of Hospitality? tribe) masterclass focusing on sharing 25 strategies that may help you mitigate the impact of rising prices & declining revenues. Register for the masterclass here.
The real issue isn't any single event, but the convergence of rising costs due to (almost uncontrollable increases in) inflation AND diminishing consumer confidence in the economy recovering which is leading to the lowest consumer confidence levels we have seen in modern history, lower than at the beginning of the pandemic and on par and heading lower than at the time of the GFC.
Rising Costs
Few business leaders are going even a few days without yet another ingredient rising in price. In the US inflation is now over 9%, the UK over 8% and Australia over 6% heading to 7%+
Talking to business owners, general managers and head/exec chefs, the story is the same. CoGs are out of control. So, some are ‘holding on’ increasing prices because this can’t last, right? We say inflation is unlikely to stop rising in the foreseeable future. We've previously talked around tis graph from McKinsey which predicts food prices, in this year alone, rising between 20% and 45% depending on the level of escalation of the Ukraine-Russia conflict.
Some say that it’s just a case of passing these increased costs onto customers, and in the very short term, that might work, and we’ll talk about why it might not work beyond the short term, in the masterclass.
Falling Customer Revenues
The US has just reported a negative GDP quarter, with this quarter also likely to be in decline, meaning the US is likely to be in ‘technical recession’ very soon, even though consumer behaviour has suggested it’s in recession for some time.?
Australia appears to have positive GDP growth at the moment, but, that’s the average including resources. The reality on the High Street suggests recession has already reached the part of the economy that most ordinary Australians and our industry lives in.
In Australia, house prices rose by 27% over the last 2 years and has, eventually, now peaked and started to decline. The media of course is calling the decline a crash, and maybe it is, but we guarantee it will certainly be perceived as a 'crash' by consumers (who will reduce spending further) if the media continue to shout doom & gloom and create greater fear.
Energy costs in the UK have risen by 225-250% over the last year. In Australia, consumers are starting to realise energy costs are rising quickly. Some hospitality businesses will begin to pay more for energy than they are for rent.?
We know that discretionary spend is falling which means consumers, our customers, have less money available to spend on going out to hospitality venues and also buying take-away food too.
When consumer confidence falls, consumers reduce their spending. When consumers have less discretionary spend left in their bank accounts every month, they have no choice but to reduce spending.
The real issue is the convergence of rising costs & falling customer revenues
We all know that the hospitality industry operates on low net margins, often between 5 -15% depending on the type of venue.
We also know that 50% of businesses fail in their first 12 months and 80% fail within 5 years (data pre-covid), with lack of cashflow being the primary reason for business failure (2 other major reasons are lack of strategic planning and serious illness, which is lack of health, which often comes from stress and burnout)?
So, whilst average inflation may be 6-7%, we know that we’re seeing ingredients rising by 10-30% and we know energy costs are rising at an exponential rate. What’s going to happen to the net profit of those businesses operating at 5% (many at less than that or losing money)??
Once profitable businesses will begin to 'lose money' very quickly if they don't take action now. This will be accelerated as customers stop spending and reducing discretionary spend with hospitality businesses, especially the ones they regularly visit and experience them putting their prices up every week. Can you see the dilemma?
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Other challenges also impacting businesses
We've talked previously about the systemic staff shortages, supply chain issues, the Ukraine-Russia war, major weather events, spiralling energy & fuel costs that we're all faced with too. We'll spend more time on these issues in future newsletters.
But everything will be ok because our governments are ‘on it’ and they’re going to put policies in place to fix this…eventually…possibly.
If you’re waiting for your favourite political brand to solve the systemic staffing shortage, we can almost guarantee the business you own or manage will not exist by the time the government puts policies in place that attract a massive number of people into the hospitality industry, if indeed what they eventually do, has any positive impact.
Our expectation is that the sheer number of businesses that will go bust, possibly 20% or more in Australia, in the next 3-12 months, once closed, will see their staff moving to fill the vacancies within the industry. (Staffing shortfall) problem solved, right?
Don’t Stand On The Beach As The Tsunami Approaches
Most deaths in tsunami’s result from the number of people standing on the beach, looking at the coming wave, wondering how big it’s going to be, as it becomes clear and they don’t have time to take appropriate action to survive the moment, so they can thrive again later.
The above slides show you how negative consumer sentiment is in Europe. I don’t have the research directly from Australia but you can make some assumptions that there’s also a negative sentiment about the economy recovering in the short term and the impact that rising prices is having on consumer discretionary spend.?
What Can You Do?
Your specific situation is unique and therefore your starting point, your current situation, is also completely unique.
David is going to share 25 strategies that can help you survive & thrive, in a 90-minute masterclass on Monday 22 August. You’re welcome to attend and for those in the Future of Hospitality? tribe it’s completely free.
Treat this like a menu of strategies which you can choose one or more from the menu to consider implementing in your own business.
The chances are you are on a scale between feeling overwhelmed by what's happening or you're business is 'doing better than before' and you're wondering what all the fuss is about.
The external events shaping how well your business performs are changing at an unprecedented rate and the level of uncertainty and volatility is far beyond anything we've experienced in our lifetimes.
We are seeing the so-called experts getting it so wrong they'd be sacked if they were held accountable for their predictions. Look at the forecasts that were being made about inflation as recently as December 2021 compared with the actual levels of inflation by June 2022, in the slide below. For each country, the bar is what inflation actually was at the end of June 22, and the circle on the bar represents what the experts predicted only a few months earlier.
Masterclass Focus
In the masterclass we're going to look at these themes and David will present ways you can look at moving forward. Take one or more of the strategies and mould them for your specific business case and then implement them and monitor the impact on your business.
The 25 strategies will fall under these 5 themes:-
Whether you’re a hospitality entrepreneur building a brand or group, an independent business owner running a single venue, a manager responsible for the performance of a business, or a department in a?business (head chef, operations manager, event manager) or a multi-site group leader being faced with the prospect of ‘keeping multiple plates spinning’ in this uncertain and volatile environment, there’s potentially something for each and all of you in this masterclass.
Register for the masterclass here (you’ll also get a recording of the masterclass so you can review the 25 strategies in more detail at your own convenience)
If the external environment and the challenges it's presenting are the music and you are the dancer, now is the time to learn to dance to the beat of the music.
There will be casualties and many businesses in this industry will not exist in 12 months time, but you don't have to be one of those casualties.
You can not only take action to improve your chances of surviving, but that action can be responsible for you thriving.
Look after yourselves and those you care about.