Matthew Wyatt FCA explains the big issue facing the sector and why operators shouldn't fear Brexit.
Brexit has arrived with the UK hospitality industry having previously enjoyed a decade of growth. This was in part fueled by cheap money, via money printing (quantitative easing) and a low interest rate environment. It led to a remarkable upsurge in the construction of new hotels and other hospitality establishments. At the same time, the industry benefited from an abundant supply of labour in the form of EU migrants.
These workers, happy to go about their jobs on the national minimum wage, kept payrolls and wage ratios firmly in check. The Brexit vote and subsequent decline in the pound has also encouraged more overseas visitors to the UK than ever before. However, these new trading conditions have come with the drawback that the cost of doing business is rising significantly.
The sector sits on the precipice of significant change. Cheap money and cheap labour have encouraged too many businesses to give too little thought to a future in which there will be fewer – and far more expensive – workers. Clearly the time to plan is now, but how? The solution for operators lies in improving the quality of your existing hospitality staff.
A spiralling cost base
Undeniably, wages are already on the increase as the National Living Wage (NLW) rises to £9 an hour by 2020; that's in addition to the increasing administrative and cost burden operators have already had to contend with in the form of real time information reporting and auto enrolment. The weaker currency also means energy, rates and food costs are all rising.
Given these developments it should come as no surprise that domestic consumer spending is being forecast to decline. For quite some time post the financial crisis, wage rates either just kept pace with or failed to keep up with inflation. That changed in late 2014 but since Brexit there has been a distinct upward movement in the cost of living. On top of these developments will come a reduction in the availability of migrant labour once Brexit comes into effect in 2020.
The issue being the hospitality trade is very dependent on these workers and any reduction in that supply will be serious and far reaching.
Work permits - a staffing solution?
Government thinking is said to be focussing on the introduction of work permits. The British Hospitality Association (BHA) claims that the industry will need 100,000 work permits a year post-Brexit – a not unrealistic figure. But even a vague admission by present government ministers that work permits might be a way forward has yet to be tested and key decisions have still to be taken about the skill levels of workers allowed in.
There is little evidence to suggest that the government would agree to the large number that hospitality is claiming when they are competing with potentially bigger claims from the care industry and NHS, retail and agriculture in particular.
The impact of this will be financial. Post Brexit, expect fewer migrant workers to be available meaning average wage rates are likely to rise well beyond the present government’s proposed increase in the NLW. As so many hospitality workers (is it 20%, 30% or more?) are at, or, even below the current NLW wage level, the industry will find payroll costs under severe pressure.
Preparing for rising payroll costs
The ready availability of migrant labour and low rates of pay has discouraged many employers from concentrating on their employees and staff practices. Only if productivity can be raised - if fewer people do more work, at better rates of pay – can service standards be protected and wage costs contained. The reality is low productivity remains the industry’s significant Achilles’ Heel.
Brexit may appear to pose a great danger, it actually also offers significant opportunities. Providing sterling stays at realistic levels and prices remain competitive, Britain will continue as one of the world’s most attractive tourism destinations. Brexit won’t change that. Britain’s standards of food and hospitality are now high and rising; that shouldn't change.
The keys to a bright future
Without the suffocation of EU oversight and legislation, longer term the UK government will be able to implement desired changes in labour and food regulations, competitive tendering and other key issues that increase business costs. Comparison with EU VAT rates will continue to rankle though they remain unlikely to change.
Post-Brexit, businesses need to find smarter, innovative ways to organize a more expensive workforce. The key to this will be in taking full advantage of technology and automation which can admittedly, be difficult to envisage in a service industry.
As mentioned before in this blog, placing far greater emphasis on training and upskilling staff – apprentices, in particular – is a necessity. The same can be said for selling a career in the hospitality trade as both desirable and realistic. Operators will find this is vital moving forward to attract the British-born youngsters needed to fill the gaps left by a short term over reliance on immigrants.
When looking at total working conditions – not just pay; unforgivably, this is a challenge the industry has failed to meet for the last 50 years.
The content of this post is up to date and relevant as at 19/05/2017.
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