Report: Operating costs up as payroll expenses undermine industry growth

The Report benchmarks operating costs, market trends and sector performance. The tenth edition shows the average costs associated with running a pub at a seven-year high, with payroll costs accounting for almost 30% of turnover.

Food sales up

The report also underlines the continued evolution of the licensed hospitality sector with food sales now accounting for 32% of revenue, with wet sales making up just 61% - the lowest in the history of the report.

ALMR chief executive Kate Nicholls said: “In terms of revenue, we are seeing results that back-up the ALMR’s recent Future Shock Report showing that customers are increasingly moving towards food options and away from drinks.

“These are encouraging results for the sector, but evidence of rising costs coupled with uncertainty following the EU referendum, threaten to undermine the good work businesses are carrying out and could potentially derail investment in venues and staff.”

Operating costs

Operating costs now stand at 49.3% of turnover up from 47.7% in last year’s survey. Payroll costs now stand at 27.8% of turnover - a substantial amount with payroll costs set to rise over the short and medium term.”

“With the Government looking to introduce an Apprenticeship Levy and increases to the rates of National Living and Minimum Wages, clearly some pubs and bars are going to absorb these additional payroll costs,” Nicholls continued.

“Businesses need confidence and certainty in order to plan and invest, but uncertainty over the UK’s exit of the European Union could undermine confidence in the sector and threaten investment.”

Gross profit margins on food sales were down from last year’s record levels to 61.5%, as operators were unable to fully pass on cost inflation to customers.

The ALMR’s employment survey showed tight profit margins of around 8-12%; a 1.5% increase in costs could reduce them by 11%.

“This casts doubt over their ability to pass on increasing labour and legislative costs, which could threaten future profitability,” Nicholls said.

Article 50

“Sector recession in 2008 had a two-year drag on growth and investment and turbulence following the triggering of Article 50 could have a similarly negative effect.

“The Government will need to take this onboard as it considers placing additional financial burdens on businesses which could undermine investment in venues and staff members.”

The 2016 ALMR Christie& Co Benchmarking Report has been the largest, most comprehensive edition to date.

Adapt

Neil Morgan, managing director – Pubs & Restaurants at Christie & Co, said: “In all sectors, operators who can adapt will be the winners going forward.

“High Street venues are evolving, and their unique presence in the centre of the UK’s towns and cities allows savvy operators to promote daytime trade, whilst simultaneously positioning themselves to benefit from the vibrant evening economies on the circuits in which they are located.

“However, as these segments become increasingly competitive, we may see operators having to fight harder to maintain their market share, which in turn could reduce margins and profitability.

Rising costs

“In the short term, costs are expected to rise due to currency fluctuations and more expensive imports, and changes in consumer confidence could also impact on levels of discretionary spend.

“Christie & Co is delighted to not only sponsor the ALMR Benchmarking report but also add our insight and observations making this one of the most informative industry reports of the year.

“As a company we value, appraise or transact on over 9,000 licensed businesses a year, therefore the ALMR and its members can be assured our insight is based on the reality of the market and our direct involvement with the industry.”