Inflation Impacts: Hospitality Industry's Survival Guide

Inflation has a significant impact on the hospitality industry, affecting everything from food and labour costs to energy prices and supplier expenses. With rising inflation rates, hospitality businesses face the challenge of managing increased overheads while trying to maintain profitability and long-term success. This has led to a range of strategies, including adjusting menu prices, diversifying suppliers, and focusing on employee retention. The Inflation Reduction Act, signed into law in 2022, also offers some incentives for hotels to improve their energy efficiency and reduce costs. As inflation continues to impact the industry, businesses must adapt and optimise their operations to navigate the challenges and sustain profitability.

Rising costs of food, beverages, and labour

Inflation has a direct impact on food, beverage, and labour costs for businesses in the hospitality industry. With higher food and beverage costs, businesses in the hospitality sector are forced to either absorb these costs into their operating budget or pass them on to their customers in the form of higher menu prices. According to data from online order management platform Ordermentum, supplier prices for hospitality businesses have increased by 20% since 2020, with spending on goods for venues increasing across the board.

The impact of rising food and beverage costs is particularly severe for small businesses in the hospitality industry, which are also dealing with rising labour costs. Labour costs can easily exceed 56% of expenses at full-service properties and 48% at limited-service properties. To compensate employees for rising inflation and to remain competitive in recruitment, businesses have had to increase pay. A recent survey by the Society of Human Resources Management (SHRM) found that 5% salary increases are now the norm.

While increasing pay can help with recruiting and retaining employees in the short term, it may hurt the organization in the long run. To effectively deal with inflation, hospitality businesses need to take proactive steps to manage costs and optimise operations. This includes conducting cost analyses, optimising operational efficiency, diversifying suppliers, negotiating contracts, and leveraging technology.

By diversifying their supplier base, businesses can compare prices and negotiate better deals, minimising the impact of inflation. Negotiating contracts with vendors and suppliers can also help to secure more favourable terms, such as negotiating longer-term contracts, bulk purchase discounts, or favourable payment terms. Additionally, businesses should focus on employee retention and training to optimise labour costs and improve operational efficiency.

Impact on overall profitability

Inflation has a direct impact on the profitability of businesses in the hospitality industry. With higher food costs, commodities, wage costs and labour shortages, restaurants and hotels have to make difficult decisions about their operating budgets. They must choose whether to absorb these costs or pass them on to their customers through higher menu prices and room rates.

The cumulative effect of inflation on multiple cost factors can significantly impact the overall profitability of hospitality businesses. Reduced profit margins can limit the ability of businesses to reinvest in growth initiatives or withstand economic fluctuations. For instance, data from online order management platform Ordermentum found that supplier prices for hospitality businesses increased by 20% since 2020, while trading has not returned to pre-pandemic levels. This means that businesses are spending more while earning less.

To effectively manage inflation, hospitality businesses need to take proactive steps to manage costs and optimise operations. This includes conducting a thorough cost analysis, optimising operational efficiency, diversifying suppliers, negotiating contracts, and leveraging technology. For instance, the Inflation Reduction Act provides incentives for US hotels to improve their energy efficiency. Hotels that install more energy-efficient HVAC systems can benefit from broadened 179D tax deductions, lowering their energy costs.

Additionally, businesses can focus on employee retention and training to optimise labour costs and improve operational efficiency. Providing competitive wages, benefits, and opportunities for advancement can help retain skilled employees. While this may increase labour costs in the short term, it can also improve employee retention and reduce recruitment costs.

Energy costs and efficiency

Energy costs have been a significant concern for the hospitality industry, with rising inflation affecting operational costs and profitability. Hotels and restaurants have been impacted by increasing utility prices, such as water, gas, and electricity, which has strained their budgets. The war in Ukraine and the Russian gas cut-off have exacerbated these rising energy costs.

To manage these challenges, businesses in the hospitality sector have adopted various strategies. Some have implemented cost-saving measures, such as investing in energy-efficient technologies, including energy-efficient lighting and low-flow toilets, to reduce their utility bills. Hotels are also outsourcing services like laundry and housekeeping to manage their budgets more effectively.

Additionally, hospitality businesses are exploring ways to diversify their revenue streams. They are opening up their spaces for events, weddings, and workshops, as well as collaborating with local businesses to offer unique experiences.

While some hotels and restaurants choose to absorb the increased energy costs, others pass them on to their customers by increasing prices. This decision-making process is delicate, as raising prices too high may reduce customer demand.

The impact of inflation on energy costs has also influenced consumer behaviour. Rising energy prices affect travelling costs, causing travellers to rethink their vacation destinations and rental services. Similarly, rising costs of living impact consumer spending habits, with patrons becoming more cautious about their expenditures.

Inflation Reduction Act

Inflation has had a significant impact on the hospitality industry, affecting both businesses and consumers. Rising costs, including food, commodities, labour, and energy, have put pressure on the industry, with small businesses in the food, restaurant, and hospitality sectors particularly vulnerable. The hospitality industry has responded by adopting cost-saving measures, such as energy-efficient lighting, low-flow toilets, and outsourcing services. Additionally, labour shortages and changing consumer behaviour have further impacted the industry.

The Inflation Reduction Act (IRA), signed into law by President Biden in August 2022, aims to address some of these challenges by promoting clean energy and reducing costs for families and small businesses. The IRA provides $369-$370 billion in investments to lower energy costs, accelerate private investment in clean energy solutions, strengthen supply chains, and create jobs. The Act also offers tax incentives for businesses to improve their energy efficiency, with a focus on commercial buildings like hotels.

Hotels can take advantage of expanded 179D tax deductions if they improve their energy efficiency. For example, installing VRF and ductless technologies can lead to larger tax deductions of up to $1.25 million for 250,000 square feet. Additionally, the IRA modifies and extends the clean energy Investment Tax Credit, providing up to a 30% credit for qualifying investments in wind, solar, energy storage, and other renewable energy projects. These incentives are designed to encourage investment in low-income communities and communities historically dependent on the fossil fuel industry.

While the IRA primarily targets large corporations and wealthy individuals for tax increases, independent analyses suggest that ordinary Americans may not see a significant change in their tax burden. However, there may be indirect effects on taxpayers with more modest incomes. The IRA also provides incentives for paying prevailing wages and utilizing qualified apprentices in clean energy projects, supporting well-paying union jobs and pathways into the industry.

The hospitality industry can benefit from the IRA's focus on clean energy and cost reduction, especially with the right technology and solutions. Hotels can improve their energy efficiency, reduce their environmental impact, and manage their budgets more effectively. Additionally, the IRA's investment in supply chain strengthening can help address some of the challenges the industry faces due to labour shortages and disruptions.

Strategies for thriving amidst inflation

Inflation has a significant impact on the hospitality industry, affecting food, beverage, and labour costs. With rising inflation rates, businesses in the hospitality sector need to plan ahead and adapt their strategies to maintain profitability and long-term success. Here are some strategies for thriving amidst inflation:

Conduct a Cost Analysis and Optimise Operational Efficiency

The first step in dealing with inflation is to conduct a thorough cost analysis to understand the financial landscape and identify areas where costs can be managed and operations can be optimised. This includes reviewing expenses, supplier prices, and payment issues to identify opportunities for cost-saving measures.

Diversify Suppliers and Negotiate Contracts

Diversifying the supplier base gives businesses multiple options for sourcing food, ingredients, and resources. This diversification allows for price comparison and provides leverage to negotiate better deals, minimising the impact of inflation. Additionally, negotiating contracts with vendors and suppliers can help secure more favourable terms, such as negotiating longer-term contracts or bulk purchase discounts, ultimately helping to mitigate inflationary pressures.

Focus on Employee Retention and Training

Retaining skilled employees and investing in their training can help optimise labour costs. Providing competitive wages, benefits, and opportunities for advancement can help retain top talent. While increasing pay may be necessary to keep up with inflation, it can also help with recruitment and employee retention, improving overall operational efficiency.

Stay Informed and Plan Ahead

Businesses can prepare for rising prices by staying informed about current trends and planning ahead with effective budgeting strategies. This includes forecasting and anticipating potential economic headwinds, allowing businesses to adapt their strategies and ensure their continued success despite inflationary challenges.

Leverage Technology for Energy Efficiency

Fluctuating energy prices can significantly impact the operating expenses of hospitality businesses. To mitigate this, hoteliers can leverage energy-efficient technologies, such as VRF (Variable Refrigerant Flow) systems, which can dramatically lower energy costs associated with heating and cooling. Additionally, occupancy sensors can be incorporated to further reduce energy consumption when rooms are unoccupied.

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