‘Shifting sands’ mean a cautious outlook for H&L sector

Looking back at 2022

Fuelled by post Covid-19 pent-up consumer demand, 2022 got off to a flying start, with many restaurant operators reporting upwards of 100% growth compared to 2019 and entertainment venues and hotels recording similar figures in a significant Q1 bounce-back. Our 2022 review of consumer spend showed consumer card spending increased 10.6% year-on-year in 2022, as the lifting of all Covid-19 restrictions encouraged Brits to shop more in-store, eat and drink out and book holidays abroad.

We saw the welcome return of festivals and other outdoor events after a three-year absence, while the sector benefited from premium sporting events like F1racing. International tournament action for England’s football teams – both men and women – also boosted trading.

However, a reduced labour supply (and rising wage bills); supply chain problems caused by Russia’s invasion of Ukraine, the mounting cost-of-living, unprecedented political times and resulting brittle consumer confidence, the sector was faced with challenges. By June, much of the hospitality and leisure sector slipped to just single-digit growth versus 2019.

For many H&L businesses it’s been a perfect storm. In an industry with traditionally low margins, energy costs and wage bills rose whilst revenue declined. That brought mixed fortunes across the sector and some of the M&A activity we saw in 2022 was driven by smaller operators deciding this was one challenge too far and selling up to bigger players.

Rising energy prices

The cost of energy has been a real challenge for Hospitality and Leisure firms and the latest Government energy support package will see the Price Cap removed at the end of March for businesses in England, Scotland and Wales, replaced by a new discount mechanism based on wholesale prices. Cash and profits could be impacted, and some businesses may look to increase prices or reduce costs and energy consumption to try and maintain margins.

Whilst investment in longer term solutions may hit corporates as an extra cost in the short term, it might also be imperative for businesses to look at how they can future-proof their running costs by developing a more sustainable approach to their energy consumption. With sustainability high on the agenda for many hospitality and leisure providers, it is important that the cost of doing business does not overshadow this important transition, and I expect to see businesses putting ever-greater weight behind promoting their Environmental, Social and Governance (ESG) credentials to existing and prospective customers.

For projects with long-term sustainability at the core, sustainable financing may be a suitable option to support any immediate shortfall in cashflow.

Changing consumer behaviour

There will of course still be opportunities for H&L businesses in 2023 but I think their challenge will be trying to second-guess a shifting consumer landscape. Fragile consumer confidence is likely to lead to more spur-of-the moment booking patterns, with customers making spending judgements almost week by week or day by day.

With regional variation thrown into the mix too, businesses will need to adapt and be ready to market their offering for different uses at different times. Those that best identify what their customers want will have the advantage. Businesses should take advantage of insights in our monthly UK Consumer Spending Report to help analyse current trends, customer demographics and insight into how consumers are spending their money.

The decline of cash is another ongoing behaviour trend and businesses will need to continue to invest in digital technology to respond to customers’ expectations for flexible payment options, including platforms such as ApplePay and GooglePay. Cashless payment systems are a key area of expertise for Barclays, and we can advise on initiatives such as tying in payments with loyalty schemes to help to attract and retain customers.

To keep up with consumer patterns, businesses should consider investing in systems like CRM to gather essential data on their own customers’ spending behaviour. It seems clear to me that, together, digital payment and effective data analytics are weapons for success – and this can really level the playing field between SMEs and larger operators.

Tackling staffing shortages

Staffing shortages have been a real challenge for some time and although there’s no overnight fix, I see this easing a little in 2023 with continued and expanded Government initiatives, apprenticeship schemes, recruitment drives and better promotion of the career paths available in H&L starting to have impact.

Many H&L businesses have been giving their existing employees more opportunities to try new roles to foster homegrown career progression and employers have had to introduce new benefits, rewards and more flexible hours to make the workplace more attractive and recognise employee loyalty.

Areas for growth

A trend I expect to grow in 2023 is the popularity of competitive socialising in pubs and bars, featuring everything from pool and shuffleboard to darts and curling, so businesses may want to consider how to capitalise on this trend.

Travel bookings overseas held up well in 2022 and that should continue, with some operators reporting record bookings for 2023 and others already issuing timetables for 2024.

Inbound tourism has picked up too, thanks to the weaker pound, and there are growth opportunities here if airports can increase passenger capacity. Replacing staff lost during the pandemic will be the key to unlocking this potential.

Working in partnership with your bank

The pressure on profit margins I’ve mentioned will mean challenges for some businesses, but this is not a time to bury heads in the sand. If you’re likely to suffer an adjustment to your business plan, I urge you to work in partnership with your bank to get through it.

In summary, there are still many reasons for the H&L sector to be optimistic in 2023, especially while leisure spend in pubs, cinemas and restaurants holds up – but with a shifting sands environment because of fragile consumer confidence, there’s still a good deal of uncertainty about exactly what to expect.

Read related insights