financial business stock market graph chart candle stick screen monitor

Less businesses or higher prices?

We are in a very challenging economy right now. This article explores why this is so.

In the past I have written that the growth in this industry has been to a large degree led by property developers, who seemed to want to put some kind of hospitality facility into every new building development. In the recent past, a disturbing new factor has surfaced which is pushing the establishment of new hospitality businesses way beyond that which property developers have previously done. I’m referring to the meteoric rise in popularity of television shows such as Masterchef, which on one hand — and quite positively — have created a new-found interest in the art of modern cooking, but on the other hand has created an ‘underclass’ of dissatisfied professionals who seemed to be all seeking their own restaurant or café — with the mistaken belief that ‘it’s all about the food’.

Migration drives the industry from the bottom

Another factor which is driving the industry beyond its capacity is the surge of migration into Australia that we have seen in the past five years. A relatively high percentage of new migrants seem to gravitate towards the establishment of hospitality businesses, particularly small restaurants and cafes, because they can be run as family businesses and require skills that are mostly already present within the family. Most of the businesses established by new migrants are positioned at the cheaper end of the market and provide a benchmark for the public perception of value for money. Their upmarket cousins have to compete with this.

Legal or illegal, migrants often start hospitality businesses

The world is a dangerous place

There also seems to be a simmering uncertainty within our general community about where the world is heading at the moment. The US is experiencing tough times, as is half of Europe. We have had a series of natural disasters both in our own country and in numerous places overseas. The retail industry is reporting substantially decreased revenue and a property market appears to be a bubble. There have been numerous references in the press alluding to the fact that the public seem to be nervously reducing debt rather than spending on acquisitions, purchases and recreation.

As a result of these factors, we now find ourselves with far too many restaurant and cafe seats than there are customers to occupy them, and new ones keep on coming.

Those of you who have been reading my essays for some time will recognise that I’ve been advising of a slowdown in industry for several years. I thought the crunch would come sooner than it has but the inevitable has been delayed by the public perception created by the media that food and beverage is an art form which provides both a high profit and a high public profile.

Masterchef
Television has driven more people into hospitality businesses

Declining profit drives a new professionalism

One thing is clear to me as a result of my privileged position in being able to look at the inner workings of many hospitality businesses at any one time, and that is that independent hospitality businesses running the traditional way with haphazard sales and marketing systems, high production costs, rigid menu structures, eye-wateringly expensive internal fit outs and unsustainable rents are likely to fail — sooner rather than later.

To be fair and not all my clients are doing it hard. But interestingly, all of my clients who are producing a reasonable profit are very experienced operators who have done their apprenticeship through the ownership of a number of hospitality 

businesses, and to approach their business from purely pragmatic view, rather than a romantic or emotional viewpoint. They take the attitude that commercial viability comes way before any artistic considerations.

Something has to give or we won't be able to pay our staff

Longer term, my worry is that the poor margins achievable by most hospitality businesses will exacerbate the situation where the industry falls way below community norms for pay and working conditions. Most of you would be aware that we are currently experiencing quite a crisis in the supply of skilled staff across the industry. I have written about this a number of times. Looking into the future, it will be difficult to provide attractive working conditions and pay levels within the industry until a reasonable level of average profitability has been regained.

I don’t pretend to have all the answers, but I do recognise that the broad solution to the industry’s woes requires a major rebalance of a number of factors. Either we have to have a broad community acceptance of substantial price rises within the industry — which I think is unlikely — or there needs to be a sharp reduction in the number of hospitality businesses. There is a further possibility, which requires the value of the Aussie dollar to take a substantial dive which in turn brings a flood of well-heeled tourism into the country. Again, given the strength of our economy and the weakness of the number of overseas economies, this is also unlikely.

Share this post

Share on facebook
Share on google
Share on twitter
Share on linkedin
Share on pinterest
Share on print
Share on email

Library categories

Site navigation