When I wrote my last opinion piece back in early December, the hope was that we’d enjoy a bumper Christmas, with the positivity continuing into 2024. The much-anticipated strong Christmas period materialised as expected, with year-on-year growth ramping up over the three weeks leading into Christmas, and pubs, bars and restaurants enjoying improved growth over this period. However, we were soon in January, and the headlines seemed to be dominated by talk of quieter trade and generally sluggish performance.

HDI’s card spending data, which tracks the purchasing behaviour of 10.2 million people across the UK hospitality sector, shows that coffee and sandwich, delivery and fast food and takeaway were the biggest winners in January, gaining an additional £2.82 out of every £100 share of our hospitality spend over the four weeks ending 30 January when compared with the spend over the same 12 week ending period. Notable winners here included the delivery aggregators (Deliveroo, Just Eat and Uber Eats), independent cafés and the likes of Greggs, McDonald’s and Costa. In contrast, pubs, bars and restaurants saw their “share of wallet” squeezed; the very sectors which enjoyed such strong performance in the run up to Christmas.   

So, what does this all mean for the predictions I made back in December, that the broad shape of the hospitality sector is going to remain relatively stable and that businesses could now adopt a more strategic approach and plan for the future? Well, the good news is that I still believe that this is absolutely the case! January is typically a quieter month for hospitality, with many of us inclined to reign in our spending after the excesses of the Christmas period, with hospitality coming back to life in February with key occasions such as Valentine’s Day and half term, and the days becoming noticeably longer.

As always, there’s challenges on the horizon, not least with the rise in the National Living Wage in April, which brings further inflationary pressures to businesses which have seen unprecedented levels of inflation over the last two years. HDI’s tracking of headline price movements in managed pubs and bars shows that the average cost of a main course is up by 20.8% (+£2.01) and the average cost of a drink is up by 17.2% (+57p) over the last two years. With such significant price increases already passed through to consumers, it’s understandable that operators are cautious about pushing price even further. Investing in customer insight work to better understand your customers, competitors and local markets will really pay dividends here, helping inform where price can be pushed, or conversely, where a more cautious approach would be advisable. 

When considering how to navigate the inflationary challenges, there’s also another way beyond pushing price and/or looking to drive efficiencies. I recently delivered a workshop with Karen Turton from Purple Story, during which one of the attendees commented that “it can’t just be about saving costs, we have to focus on increasing our market share.” Growing your way out of a challenge rather than cutting your way out is surely preferable, but what does this mean in practice? I believe that there’s a significant opportunity here for marketing and operations teams to work even more closely together to identify opportunities to drive further growth.

One of the things that’s struck me on my travels in recent weeks is the contrast between businesses that are sweating their space, successfully catering to a whole host of different occasions across the week, and those who are seemingly missing opportunities. Loungers is a great example of a business that has mastered all-day hospitality, while Caffè Nero is also tapping into the opportunity to drive footfall and make the most of different occasions throughout the week, aptly demonstrated by a recent email inviting me to “make sure to pencil in a work from Nero session this week”.

In summary, it may feel like there’s big obstacles for the hospitality sector to overcome, but time and again the sector has shown that it’s adept at taking on even the most challenging of obstacle courses. Looking ahead, there’s plenty of cause for optimism. To quote Steve Holmes, chief executive of Azzurri Group, from his interview with Propel earlier this week, “2024 might be a year that as you progress through gets better…there is some light at the end of the inflation tunnel.” And of course, the fact that the quiet month of January is now well and truly behind us should provide even more cause for optimism.

In 1976, I started my first position in our wonderful industry as a chef in a London hotel. Deep in the basement were the food stores, with goods-in managers and burly porters. Here were quarters of beef at 50 kilos or more, whole halibuts of over 20 kilos and huge pallets of unpeeled potatoes filling every inch of storage before being sent to the larder (preparation kitchen), which groaned under the weight of work to meet that day’s service needs. These places don’t generally exist anymore, made redundant by more integrated supply chains and significant levels of pre-preparation by suppliers, where specialist skills can be more efficiently applied. 

But there is one anomaly, often found in fast-growing and entrepreneurial dining/quick service restaurant operators and sometimes contract caterers – the central production kitchen (CPU). These have mostly sprung up over the past ten to 15 years – operator owned manufacturing businesses nestling between the inbound supply chain and their restaurant kitchens. Commonly, they emerge from a relatively simple hypothesis, which goes something like, “we do this task in 35 separate kitchens, surely it will reduce cost and improve consistency by doing it in one place?” This is often followed by two assumptions – “we can use an existing asset” and “only we have the skills to hit the standards we require”. 

To begin with, these assumptions are often true. But site growth, menu/demand changes and new supply market capability often mean that in just a few years, things can look very different. A significant investment in cash and effort can suddenly change from being an obvious and smart idea into a monster that hungrily eats cash/resources and raises risk. 

Here are just a few of the circumstances we have encountered within operators with CPUs during the last decade:

· Site growth generating a need to open a new CPU causing major disruption and high/unexpected decommissioning costs.

· Declining volumes resulting in a “forced decision” to produce new stock keeping units (SKUs) within a CPU just to maintain capacity utilisation, requiring unexpected cash investment.

· Poor operational efficiency, leading to CPU staff costs nearly 20% higher than optimum.

· Insufficient scale, meaning that production runs of many SKUs were so small that the set-up/close-down processes made up over 50% of the product cost to the restaurant, making the cost per item ridiculously high.

· Seasonal fluctuations in volumes leading to capacity stress in high season, and inefficient capacity gaps in low season (you can replace the word “season” with “month/week/day” as well).

· New entrants to supply markets that can produce the same/better product at lower cost without operator investment.

· In-bound raw material costs circa 15% higher than the same materials sourced by a manufacturer.

· High availability risk with production of all key SKUs in one building (no disaster recovery).

There are many more too…

As businesses grow, what started out as a simple piece of “centralisation” can so easily become a hub of hidden complexity, costing the business huge amounts of effort and seriously damaging margins. 

I call it “hidden complexity”, because many operators treat the CPU as a central cost and do not evaluate it against other strategic options. It’s genuinely rare to see a clearly stated cost per kilo for each outbound SKU from a CPU, let alone a formal evaluation of CPU as a strategy – in terms of both its level of efficiency, and also its comparability with supplier sourced product. Indeed, we often see the opposite – operators defending a single inefficient CPU-made SKU, citing a further loss of efficiency if it were to be outsourced to external supply. 

Which leads me to my central point. It’s dangerous to think of your CPU as just another part of your operation. In my view, a CPU should be regarded as a separate food manufacturing business competing against external supply. It has resource and cash needs, often imposes unnecessary complexity on already stretched businesses, and unless closely measured and managed, can easily become uncompetitive. 

Of course, we see successful CPUs in our sector, and many circumstances where they are absolutely the best option. But I am genuinely surprised by how frequently we encounter gut-based investments with a lack of data driven focus on food production. The outcome is all too often expensive monsters with increasingly challenging exit strategies.

Despite the prevalence of challenging conditions in the wider economy, the market news for the foodservice industry as we begin 2024 is generally positive, with many chains reporting respectable sales growth figures. Personal experience seems to bear this out; when meeting friends in central London last weekend, we were unable to find a table for two without a reservation. 

 

A closer examination of the figures reveals a significant proportion of reported growth in sales can be attributed to food service price inflation, which is running at a higher rate than both the general rate of inflation and that of the food sector. Although the Office for National Statistics (ONS) reports a decline in general price inflation to 4% in December (and forecasts a further decline to 3% in 2024) the rate of price increases applicable to food and non-alcoholic beverages are twice as high than the rate of general price inflation, at 8% in the year to December.

 

Meaningful Vision’s analysis tracks price fluctuations across the menus offered by the UK’s leading 100 chains for fast food, fast casual, casual dining, coffee shops and so on. Studying the year-on-year price increases for individual products, we see that price rises for the fast food sector are outpacing the general food inflation rate (i.e. price growth in food and beverage retail sector as a whole), with price increases in food service reaching 12% in December. 

 

Food service price inflation is driven by a number of factors. As previously described, food inflation in the foodservice industry is running at a higher rate than that of general food inflation, but additionally, the rising costs of labour, energy, insurance and construction, which typically make up around 70% of the operational budget, are piling on the pressure and forcing retailers to increase prices to maintain profitability. While the 12% rate of price growth in food service recorded for December represents a marked improvement over the first quarter of 2023, when the rate was running at around 20%, it remains a cause for concern when compared with the nominal 4% general inflation rate as reported by the ONS.

Average weekly earnings in November grew by 5% according to ONS data, suggesting real incomes have started to grow. However, a majority of consumers inhabit the low-income bracket, and by necessity must allocate an ever-larger proportion of their overall income to cover the increasing costs of both food and energy.  Among this demographic, real inflation is higher than official ONS data and is running closer to the rate of food and beverage inflation. Ultimately, this means that purchasing power among those in the low to median income bracket has experienced a decline, and any wage growth they may have enjoyed has been negated by price increases.

 

Focusing solely on consumer traffic data, with numbers stripped of inflationary effects, gives us the most accurate picture of performance, revealing the true level of resilience and loyalty displayed by the customer base towards a particular brand or product, and indicating either antipathy to, or acceptance of, increasing prices. Consumer traffic among the top 100 chains, including fast food outlets, coffee shops, casual dining restaurants and pubs, shows a slowdown from 2% growth in the first quarter to a 3% decline in the fourth. This indicates the cost-of-living crisis experienced by many consumers cannot be ignored and is impacting on confidence. However, some areas of the market are performing better than others in this respect.

 

Benefiting from workers returning to office environments after a near three-year absence, the central areas of Britain’s large cities, and coffee shops and bakery chains in general, are bucking the trend seen elsewhere in the country and gaining customers with a growth in footfall, albeit modest. But competition between players gains intensity as footfall declines nationwide since companies, unable to tap into new growth, find themselves competing head-to-head for a share of the market. The ultimate winners in this contest will be those companies with bold and innovative sales strategies, informed by a thorough knowledge of the competition and facilitated by the flexibility to mount rapid responses to changes in the marketplace. 

 

In this challenging and competitive environment, market information is more important than ever when crafting strategies and taking decisions which could make or break a particular product, or even the fortunes of an entire organisation. The emergent power of big data to track the competition heralds a new era for foodservice retailers. Relying solely upon common sense or experience to inform decisions is no longer enough to satisfy the demands of a volatile and fast-moving market. The time has arrived for companies to unlock the power of data driven decision making. The potential rewards of such an approach offer protection from the vagaries of market trends and will result in increased loyalty from customers, and a model of sustainable growth for the years ahead.

 

The family local when I was growing up and entering drinking age was the Northcote on the hotly contested border between Leyton and Leytonstone in east London. It was an all-wet Charrington’s house run for most of that time by an Irish couple, who really were called Joseph and Mary, and its customer base reflected the multicultural neighbourhood, although in a peculiar way.

 

The public bar was the domain of West Indians, who played dominoes continuously and very noisily, whooping and slamming the tiles down on the table with a bang. Caribbean dominoes is almost a contact sport and sounded much more exciting than the genteel form of the game we used to play.

 

It formed a background noise that flowed unimpeded across the island bar to the saloon, which was mostly white apart from a group of Sikhs who occupied the large table in the window behind the door, a little distant from the rest of the bar. Was this a kind of informal racial segregation? There didn’t appear to be any rules, and I can’t remember witnessing any overt racism. I was white, mind. 

 

Perhaps it’s worth mentioning that this was the kind of pub where most of the regulars had their own territory. My own grandmother sat at a table that was right up against the bar. This was so she didn’t have to move when she needed another Guinness. Or sherry. If some stranger had already taken the spot she got very grumpy. But there’s no doubt that race was a factor that cut across these habits.

 

All this came to mind as I read a new article written by Manchester and London-based academics, Amit Singh, Sivamohan Valluvan and James Kneale, and published in the European Journal of Cultural Studies. Titled “A pub for England: Race and class in the time of the nation”, it introduces an ambitious project to reassess what’s special about the English pub and detach it from nationalist and racial assumptions.

 

Their inspiration is David Jesudason’s much-admired book Desi Pubs, which last year drew attention to a neglected genre within the hospitality industry and told some fascinating stories about how British-Indian operators struggled against racism to create places to eat and drink where all faces would be welcome. These desi pubs welcomed everyone, and if you visit one (Jesudason’s book acts as a handy guide) that’s exactly what you’ll see today. A whole community mixing together.

 

Singh, Valluvan and Kneale argue that this challenges the idea that Englishness and the pub are essentially bound together, a view that dates at least to Hilaire Belloc’s 1912 essay “On Inns”, in which he writes the words that have been inscribed on so many pub walls: “When you have lost your inns drown your empty selves, for you will have lost the last of England.”

 

While this seems to resonate at a time when pubs are under threat, the recourse to patriotism to bolster their defence is fraught with danger. The temptation to align the challenges facing the trade with some spurious, and racist, notion of the dilution of Englishness (or Britishness) as a result of immigration has already drawn unpleasant elements on the far right of politics to the cause of pubs.

Of course, we can acknowledge that significant non-drinking populations, for instance, in certain parts of the country can be a factor in that neighbourhood not being able to sustain so many pubs, but that’s far from being the only cause. I’m sure I need not go into all the others.  

 

At other moments, migrant communities have invigorated the industry. I’m thinking of Joseph and Mary at the Northcote followed by West Indians, Australians, South Africans and Poles, and yes, we should add the Punjabi and Gujrati licensees championed in Jesudason’s book.

 

We live on a multicultural island and we enjoy a multicultural pub trade. We must resist attempts to enlist pubs in the cause of nationalism, and Singh, Valluvan and Kneale’s work could help us do that.

 

By studying desi pubs more deeply, they aim to better understand what really goes on in pubs to make them convivial working-class social spaces that overcome division rather than seeing them as bastions of Britishness. As anyone who knows pubs well can tell you, that’s going to be a complex and interesting job.