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Pubs and restaurants enjoy sales recovery but can it last?
I left it ridiculously late to book a restaurant for a Mother’s Day meal. Everywhere I tried couldn’t fit me in – decent weather meant one of the industry’s biggest money-making dates in the calendar should have been a good one for pubs and restaurants this year.
Despite the well-documented pressures beginning to exert themselves on consumer spending people were out in their droves. Looking at the latest credit card spend data it’s clear that weekend wasn’t an anomaly.
People now seem to have found the confidence to get out and socialise up a storm, making up for the time lost during the various Covid lockdowns.
There may have been more than a few postponed Christmas parties to bolster the numbers but the end of Covid restrictions has signalled a sea change and one the beleaguered hospitality sector will do its best to cling onto.
But it’s got a whole load of headwinds to battle against, not least of which is the cost-of-living crisis which has driven the share price of nearly all bar and restaurant operators significantly lower since the start of the year.
Investors are nervous, considering how inflationary pressures will impact the earnings of an industry trying to get back on its feet. Prices are already rising with pub chain Marston’s (MARS) reported to have tacked 45p onto every pint and just a quick glance at any menu you pick up tells the same story.
Shackled with extra costs linked to wages, energy, raw materials and more, businesses are making necessary adjustments and hoping the hikes don’t put people off.
So far consumers are prepared to pay the extra to socialise
Currently consumers seem to be prepared to pay a premium to ‘live’ again. The opportunity to break bread with friends, family and co-workers at a place that isn’t the kitchen table is a little intoxicating even without adding alcohol. While those drinks cost substantially more than they would if they’d been bought at the supermarket the added extras seem to be worth the extra pennies.
The latest retail sales figures produced by the Office for National Statistics showed a drop in in-store food and drink sales in February with speciality stores hardest hit as consumers made difficult choices about where to spend their cash.
But February can only hint at what’s to come. With inflation now standing at 6.2% and warnings that this year will deliver the fastest drop in living standards households have experienced since the mid-1950s, discretionary spend is going to become a whole lot less discretionary.
April is expected to be a tipping point as the big jump in energy prices finally filters through to the retail market. That jump is a legacy issue, but it comes as the war in Ukraine is adding to cost pressures, and measures announced by the Chancellor to help households cope aren’t expected to make much of an impact.
The hospitality sector is worried, particularly as the cut in tax at the pump precedes an increase in VAT at the bar.
Tim Martin, the irascible chairman of JD Wetherspoon (JDW), might know how to work a good soundbite but his warning that the return of 20% VAT on hospitality spend is a form of discrimination has struck a chord with many in the industry. Consumers might have been able to pay more to go out in February, but will that be true by the end of April?
Will cost-of-living crisis act like a ‘second pandemic’?
While the retail sector has been able to cope effectively with lockdowns by shifting sales online, bars and restaurants weren’t able to pivot so successfully, and losses have piled up.
The industry has now started the process of digging itself out of the hole. Restaurant Group (RTN)-owned Wagamama saw a 21% increase in like-for-like sales for the eight weeks to the end of February, outperforming the market by 13%. However, there are already warnings from industry insiders the cost-of-living crisis could turn out to be a ‘second pandemic’ for the sector.
There are a couple of things for investors to consider before writing off the sector altogether for the time being.
First, people have been starved of much of the joy life has to offer over the past two years and socialising will remain high on people’s list of priorities for some time to come.
Second, a meal out might become an ‘affordable treat’ especially if people shelve holiday plans or put off buying big ticket items.
And third, if the weather plays ball, especially over that lovely long Jubilee bank holiday weekend in June, there will be a significant boost for venues with outdoor spaces, and Covid certainly made the sector think hard about outdoor facilities.
People are likely to cut back, they’re likely to go for one drink rather than two, a meal every other week rather than every week so the much hoped-for post-Covid boom is expected to be curtailed but not totally eroded.