Creative ways to tackle cost pressures

Any conversations I’ve had with hospitality and retail business leaders in recent months have invariably worked their way around to the issue of labour costs. There cannot be a single management team across these sectors that is not worried about rising costs and is carefully crunching the numbers to see how to maximise the value from its employees.

UKHospitality has calculated that employing a full-time restaurant staff member will jump by at least £2,500 from increases in the national minimum wage (NMW) and national insurance contributions (NICs). On top of this, a high number of part-time workers will also be caught up in the lowered thresholds. UKHospitality says nearly 800,000 hospitality staff will be involved, costing the industry around £1bn.

With bigger employee bases and high numbers of entry-level jobs, retail and hospitality invariably take the bigger hits from any NICs and NMW changes. This was starkly illustrated by a recent conversation I had with Paul Hargreaves, founder of Cotswold Fayre, whose wholesale business involving selling artisan food into retail stores and farm shops has revenues of £25m per year and employs 40 people, whereas his two Flourish Foodhall & Kitchen outlets, which have a roughly equal split between retail and food and beverage, have sales of £5m and employ 110 people (including part-timers).

He says he found the difference in the cost of labour needed for food and beverage due to the much higher number of people required a “real eye-opener”. If the restaurants weren’t such a powerful driver of footfall to the retail part of the business, then I doubt he’d entertain being involved in the customer-facing Flourish business. From large corporates to small operators, the message is the same.

Is it any surprise that Sainsbury’s recently announced it will cut more than 3,000 jobs as it shutters its remaining 61 in-store cafés, which comes almost three years after it closed 200 such cafés and removed the labour-intensive food counters from its stores. 

Scottish chef Dean Banks, who runs six restaurants in Scotland, including the flashy Pompadour in Edinburgh, says he will be reducing employee numbers by 15%-20% and has just scrapped plans to open a 200-seat restaurant in Dundee due to the forthcoming tax rises.

This is drastic action. To avoid such a fate, many businesses are making the strategic decision to focus greater attention on add-on business areas that require fewer people. For some, this involves the push into more hybrid models such as incorporating retail. Copying operators in the US and moving into selling merchandise undoubtedly represents a modest opportunity. 

Supplying branded food goods into retail is also proving lucrative for a growing number of restaurant brands. Itsu has made this a key growth area, with 30% of its sales generated this way in 2023, and much more expected in the future. Julian Metcalfe, founder of Itsu, believes it will very soon be larger than the restaurants business, and the rationale for the shift in focus is obvious. “The high streets, especially staff costs, are so expensive,” he said.

For many pubs, the answer has been to reduce opening hours, and maybe consider things like outsourcing the kitchen, with third parties manning the stoves. The real strategic winner though for a growing number of pub operators is adding rooms. The labour costs required for accommodation versus the pub, with its food and beverage, is substantially lower, and staying guests invariably prove to be serious spenders on food and drink in the bar/restaurant – often on quieter nights of the week.  

The other strategic route to managing the rising costs of employees is automation. There are not many quick service restaurant (QSR) businesses that do not have kiosks within their outlets. If a QSR brand does not have them, then they are clearly doing it to stand out as the only business not on board with this route to optimising customer flow. There are many other examples of automation being tested and introduced into restaurants, predominantly in the back end, to boost efficiency and strip-out labour costs. 

One of the most progressive participants is the London healthy bowls restaurant Common Room, which is run by technology and restaurant start-up Kaikaku. The restaurant has a dining room on the ground floor, while behind the scenes in the basement, it has code writers and hardware designers with 3D printers, constantly innovating the model. Interestingly, its backer, Auctor Group, has just bought the 20% stake in Tortilla that was held by Quilvest Capital Partners. The plan is to bring the cutting-edge tech of Common Room and Kaikaku to bear on a much bigger stage at Tortilla and its more than 120 sites globally.

The heated conversations and exchanges around NICs and NMW increases will undoubtedly continue, but the hospitality industry is never one to stand still and lose heart, so concurrently, we have many constructive organisations looking at ways they can creatively and innovatively adapt to the serious challenges they continue to face.

Glynn Davis, editor of Retail Insider 

This piece was originally published on Propel Info where Glynn Davis writes a regular Friday opinion piece. Retail Insider would like to thank Propel for allowing the reproduction of this column.