Hospitality braces for weaker consumer demand

By James McAllister

- Last updated on GMT

Hospitality braces for weaker consumer demand inflation

Related tags: Inflation, Consumer confidence

Falling consumer confidence and slowing demand growth has started to weigh on output across the hospitality and tourism sector, according to the first Lloyds Bank UK Sector Tracker.

The sector – which includes pubs, hotels, restaurants, and leisure facilities – posted its third consecutive month of output growth, with firms recording the second fastest rate of growth (65.0) of all 14 UK sectors monitored by the Tracker in April.

However, there were early indications that inflation has started to erode purchasing power and dampen consumer demand, threatening the outlook for the sector.

The UK Sector Tracker is an 'evolution' of the Lloyds Bank UK Recovery Tracker. It uses PMI data from S&P Global to shed light on current trends in the UK economy. A reading above 50 on the Tracker indicates expansion, while a reading below 50 indicates contraction.

According to the data, the sector’s pace of output growth slowed month-on-month as firms reported a moderation in new business activity for the second month in a row (56.6 in April vs. 63.6 in March and 64.5 in February).

Record price rises amid surging cost inflation

Tourism and leisure firms reported an unprecedented rise in input costs in April, driven by higher transportation, material, energy and salary expenditure. The sector registered 91.4 on the Tracker’s Input Price Index – the sharpest rate of cost inflation in 24 years of the Tracker’s underlying data.

Against this backdrop, nearly two-thirds (63%) of firms raised prices charged to customers, leading the sector to post a record 72.9 on the Tracker’s Prices Charged Index.

The gap between the Tracker’s Input Price and Prices Charged indices narrowed to 18.5 points (vs. 18.8 in March), suggesting that margin pressures eased slightly. However, the difference remained more than twice the pre-pandemic average, underlining a continued squeeze on profitability.   

“UK firms have continued to benefit from consumers, at home and overseas, looking to travel and embrace leisure activities again after so many months living under Covid-19 restrictions,” says Annabel Finlay, managing director and head of food, drink and leisure at Lloyds Bank Commercial Banking.

“However, there are early indications that consumer confidence is waning – a factor that could lead to more conservative spending, and future falls in demand. If inflationary pressures remain, many businesses face a dilemma.

“As this month’s data show, the sector is battling elevated cost inflation, with firms, understandably, adjusting the prices charged to customers to help rebuild margins. How much they can do so without further negatively impacting demand will be a key consideration going forward.

“Ultimately, future demand will depend on the degree to which consumers consider travel and leisure spending as core or discretionary. It’s possible that we will witness divergences in demand trends across the economy, as those who have accrued ‘excess’ savings continue to spend, while those with lower incomes exercise greater caution.

“Firms may need to be agile in response to potential changes in the spending behaviours of their customer bases.”

Bank holiday hopes

While the Lloyds Tracker indicates dampening consumer demand as inflation rises, there are still hopes that the forthcoming Platinum Jubilee Bank Holiday weekend will see a surge in trade.

According to the British Beer & Pub Association (BBPA), pubs and brewers are preparing for a bumper event, with an estimated 90 million pints expected to be sold resulting in a £105m boost for businesses.

With opening hours extended until 1am across the Jubilee weekend​ and an extra day off on top of the regular end of May bank holiday, pubs are hoping for record bank holiday sales, which will see a £29m pay back into the economy in duty and VAT.

In addition to extended opening hours, several other initiatives are expected to boost sales with many brewers creating special celebratory beers to mark the occasion and many getting involved in hosting jubilee lunches and community street parties.

“The Platinum Jubilee weekend is set to be a joyous occasion for the whole country, and pubs are looking forward to leading celebrations in their communities across the country,” says Emma McClarkin, chief executive at the BBPA.

“Pubs have always been a place for people to come together and it’s at special times like this that really shines through.

“Whether it’s toasting a special brew for Her Majesty the Queen or joining a Jubilee BBQ at your local, we hope people will celebrate at the pub and show their support for two great British institutions.”

The BBPA has joined with other leading trade organisations, and the Together Coalition to call for the extended bank holiday to be made permanent and turned into a ‘Thank Holiday’, to recognise the Queen's service year on year.

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