The Estimation of Costs of Doing Business in the Hospitality Sector: 2022 and 2023 report, researched and authored by Dublin City University Associate Professor Emeritus and Economist Anthony Foley, shows that spiralling food and energy costs have taken their toll on the sector, with businesses facing a serious and sustained rise in costs.
Soaring energy prices biggest concern
Further to general inflation of 9.1%, indicative price changes from the Consumer Price Index show serious increases across the board in food prices. Over the period July 2021 to July 2022, food costs increased by 8.1% – beef was up 11.4%, poultry rose by 13.4% and the price of fresh milk jumped by 21.2%.
However, it’s soaring energy prices that pose the biggest concern to the hospitality sector. The price of electricity increased by 40% in July 2022 compared to July 2021, which followed a substantial increase of 11.3% in July 2021. Gas increased by 60.2% in July 2022 compared with a year earlier, while heating oil increased by 91.9% in July 2022, this followed an additional large increase of 39.6% in July 2021. These rises in energy costs do not allow for further significant increases announced by electricity and gas providers over recent weeks.
The report found that energy price increases for businesses have exceeded household increases in many cases. Non-household electricity prices in Ireland were found to be 60% higher than the EU average in the second half of 2021. The differential was even more stark with gas prices, with business gas users experiencing rises of more than double those of households.
Along with most other sectors of the economy the hospitality sector faces challenges in recruiting staff. This has already put pressure on payroll costs. Hospitality hourly earnings were €15.45 in the first quarter of 2022, a 16% increase on the same period in 2019.
Anthony Foley’s analysis found that the hospitality sector is particularly vulnerable to labour and food cost increases. The labour cost relative to turnover is between 28.9% and 33.3%. Food and beverages inputs account for between 30% and 36.9%.
Thus profit margin projections for hospitality businesses have dropped significantly with Restaurant profit projections down from 7.3% to 3.5%.
According to the report, the cost situation for hospitality will deteriorate further in the remainder of 2022 and into 2023, with additional costs rises expected in interest rates, water charges and employment taxes.
“The economic turbulence in the hospitality sector is clear,” commented Anthony Foley, “Severe inflationary pressures on core costs mean we’re looking at a crisis situation across much of the sector. Survival over the next six to 12 months will be the goal for many in the sector, with ever-tightening margins a reality for most.
“The sector is going through a phase of real upheaval. In deciding which policy levers to pull, government would make the biggest impact by focussing on high consumption taxes like excise which would have a positive effect on the commercial sustainability of businesses within the sector.”
DIGI Chair Kathryn D’Arcy added, “The findings of the Estimation of Costs of Doing Business in the Hospitality Sector: 2022 and 2023 report are distressing. It demonstrates again the need for policies and actions that reduce the costs facing thousands of businesses and employers throughout the country.
“When you combine this analysis with recent findings showing a decline in the number of pubs of almost 2,000 since 2005, it points to the need for meaningful policy measures to weather the immediate period.
“The majority of hospitality enterprises are sole traders and small businesses who create employment and operate on the thinnest of margins. For the long-term sustainability of the hospitality sector, we need to ensure there is a hospitable environment for business to thrive.
“One measure that the Government can enact overnight is a reduction in excise by 7.5%. Small businesses would be able to utilise the cost reduction to offset the rising costs elsewhere in their businesses, namely food, energy and labour costs. Therefore, we call on the Government to enact this change in Budget 2023.