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Trends in the Hospitality Industry

Trends in the Hospitality Industry

In an environment of high rents, labour costs and competition, this is truly a difficult time for those in the hospitality industry. It almost feels commonplace to hear of another established restaurant closing, hospitality staff being underpaid or a disgruntled franchisee upset with the franchising system. Whether it be a fine dining eatery like Woodland House in Melbourne, a culinary institution like Longrain in Sydney or a long time family run business like Fresh N Wild Fish in Portside, it appears no type of hospitality business is immune to the overwhelming economic factors described above.

 

Health of the Hospitality Industry: By the Numbers

Australia Securities & Investments Commission (ASIC) figures indicates that:

  • during FY 2017-2018: 952 food and accommodation services businesses went into external administration – an increase from 803 businesses during 2016-2017; and• during FY 2017-2018: 952 food and accommodation services businesses went into external administration – an increase from 803 businesses during 2016-2017; and
  • during July 2018 and May 2019: 975 businesses in this sector have been placed into some form of external administration.

Australian Bureau of Statistics (ABS) figures indicate:

  • businesses in the hospitality industry now fail faster than in any other industry the ABS tracks;
  • all food service and accommodation businesses that were in existence in June 2014, only 54% were still in business in June 2018. To contrast against other industries, for mining, that figure is 64% and for healthcare, it’s 74%.

The current health of the hospitality industry demonstrates that now is a more critical time than ever for those in the industry to proactively identify trends and commit resources to strategies that provide a competitive advantage.

 

Use of Online Platforms

The pros and cons of using online platforms such as UberEats and Deliveroo has been at the forefront of public discourse for some time now. The benefits to businesses of using online platforms include:

  • providing employment opportunities e.g.: Deliveroo employs approximately 8,000 delivery riders
  • increased economic activity through increased sales;
  • enables businesses to reach a wider market; and
  • cost effective way for a business to have an online presence.

The negative impacts of using online platforms include:

  • high fees, with businesses being charged up to 35% commission on the order price;
  • figures released by Restaurant and Catering Industry Association indicate that since the introduction of online platforms the average profit margin of businesses has reduced from 10% to 2-4%;
  • creation of ‘dark restaurants’ (i.e.: people not eating out and instead ordering in), resulting in restaurants requiring less staff and floor space, which correlates to an undesirable neighbourhood and/or urban cultures; and
  • product quality being compromised by long delivery times.

Whether a business should use an online platform to provide their services/products will depend on the circumstances of each individual business. Some have found that offering a limited/reduced menu through the online platform, with products that only provide a high profit margin, has the advantage of being on the online platform whilst still ensuring costs are covered. Nevertheless, given the high commissions charged coupled with increased consumer demand for easily accessible platforms, the decision as to whether to use an online platform is unlikely to be an easy one.

 

 

Adjusting for Changing Customer Expectations

Technology has dramatically changed customer expectations and raised the bar in terms of the type of experience and engagement customers consider normal. This is a particular challenge in hospitality, where reputation and customer satisfaction is vital to the lifeblood of these businesses. Customers now demand a more tailored experience, whether this be through the use of guest focused technologies such as tablets in hotel rooms to control room features or customised apps/social media accounts to engage and respond to customer queries.

Social media has completely changed the relationship hospitality businesses share with their customers, with businesses now able to advertise their services in creative ways and customers able to share their experience with the entire world online. In addition to having a social media presence, it is just as important to allocate personnel to manage social media to actively provide feedback to happy/unhappy customers.

Furthermore, customers today are more health and environmentally conscious which means hospitality businesses now need to include activities and provide products in line with this sentiment such as well-equipped fitness centres in hotels or providing vegan options in restaurants. Eco-friendly practices could include waste reduction policies or updating systems so that air conditioners and lights automatically switch off when guests leave their hotel rooms.

As such, it is necessary for businesses to be aware of the changing expectations of customers and invest in strategies that will help them learn more about their customers and design services around them.

 

 

Flexibility of Growth Models – Franchising

The release of the final report in March 2019 from the senate inquiry into Fairness in Franchising, coupled with ongoing failures of franchises has resulted in a significant perception shift towards the franchising model.

The senate report highlighted that “far too many franchisors are abusing the power imbalance between themselves and their franchisees”.

Potential investors are now wary:

  • high franchise fees;
  • expensive exclusive supply agreements;
  • compulsory marketing and administration costs; and
  • lack of transparency about revenue and profit earnings.

As such, new entrants into the hospitality industry or those looking to expand their business need to be mindful that expectations have changed and the environment is now one of transparency and flexibility.

In summary, given the economic, societal and political forces at play, those based in or considering entering the hospitality industry should be highly vigilant and carry out proper enquiries, prepare budgets/forecasts and seek advice from astute professionals before making decisions.

If your clients need professional advice on their financial position contact our office for an obligation free discussion.

 

Article written by Shumit Banerjee, Director, SV Partners Sydney