Is The Cost Of Living Crisis Killing Australia’s Hospitality Scene?

The cost-of-living crisis and the impact of rising inflation have dominated headlines for well over a year, and rightly so. From everyday Aussies to local shops, bars and restaurants, everyone is feeling the pinch, and there doesn’t seem to be any respite on the horizon. 

While there’s no denying that the majority of Australians have been impacted in some way by the current economic climate, you’d be hard-pressed to find an industry that’s had it tougher than hospitality.

Hospitality businesses have been battling the cost of living crisis on two fronts. Firstly, their customers are feeling the pinch and are spending less. Secondly, operating expenses have dramatically increased, denting already tight margins. 

According to data from our recent Hospitality Industry Report, the cost-of-living crisis and rising inflation have impacted 99% of hospitality venues. 

With a string of well-known venues announcing they’re shutting up shop due to financial pressures, Australian towns and cities face the possibility of a severely diminished hospitality scene. 

With this in mind, we’ll explore how the cost-of-living crisis is impacting hospitality businesses, how venues are coping, and why it’s essential to appreciate the current hardship facing venues before the burden takes a permanent toll on the industry.

Let’s dive in.

• A struggling industry
• Rising costs and considered customer spending
• Lack of consumer appreciation for rising costs
• How are venues coping with inflation?
• What’s the answer?

A struggling industry

Let’s cut to the chase. The Australian hospitality industry is struggling.

It was recently reported that one in every 13 hospitality businesses is at risk of going bust. For those of us in the industry or those who love hospitality and are regular patrons, this probably isn’t much of a surprise. 

Recent headlines have been awash with venue closures. Sydney’s Broadsheet reported that 16 popular venues had closed their doors in recent months, including Lucky Kwong, fronted by renowned chef Kylie Kwong and Sammy Jnr, sister venue to world-famous cocktail bar Maybe Sammy.

Credit reporting bureau CreditorWatch highlighted the plight of the Australian hospitality industry, which ranks first among industries in terms of the rate of external administrations. The bureau also noted how hospitality businesses have struggled with cost pressures, such as energy prices and the cost of ingredients, as well as labour shortages.

CreditorWatch CEO Patrick Coghla commented:

It’s hard for hospitality businesses to pass on price rises compared to those in most other sectors. Consumers can easily ‘trade down’ to a cheaper venue or just eat at home.”

Rising costs and considered customer spending 

To reiterate our earlier point, hospitality venues are battling the cost of living crisis on two fronts. 

On the one hand, discretionary spending is down and, unfortunately, dinner out or ordering takeaway is often the first cut people make to save money. If people do opt to go out, they are more considered about their purchasing power–usually looking for deals or foregoing a starter or dessert to cut down the bill.

On the other hand, hospitality venues are facing similar issues to the rest of us–increased energy bills, soaring rent, interest rate hikes and exorbitant ingredient costs. 

This double-whammy hit means many hospitality businesses just can’t afford to operate.

Renowned food journalist Dani Valent perfectly spotlights the dire situation for many venues.

“It’s always been challenging to run a food business. But none of the previous hospitality crises compares with the dire sentiment in the restaurant world today,” writes Dani. 

“Profit margins have traditionally sat at around 10 per cent. In 2021, only 19 per cent of businesses hit that mark, according to the Restaurant and Catering Industry Association. Now, for many restaurants, breaking even is cause for celebration… One thing is certain: it has become far harder to run mid-range restaurants, and not all will survive.”

Alex Prichard, culinary director of renowned two-hatted Bondi restaurant Icebergs Dining Room & Bar, echoes Dani’s sentiment.

“Everyone is facing similar pressures. We are lucky that we have 21 years of reputation and a client base to keep us going, but the more you talk to people in the industry, the more you hear it,” he says.

We’re at a pivotal point where the solo groundbreakers just can’t survive any more, and it could ruin what everyone loves about hospitality.”

Pricing pressures vs. customer expectations 

“The price of meat doubled, but we’re only charging an extra 50%.”

During Lightspeed’s Table Talks event, which brought together leading figures in hospitality and tech to discuss the current state of the industry, Chris Terlikar from One Trick Pony & Bluebonnet BBQ shared some of the business’s recent challenges with costs.

“The price of meat doubled in the last ten years since we’ve been open. And trying to communicate that to our customers through price increases on the menu isn’t received well,” comments Chris. 

“We used to charge $10 for 100g, and now we’re charging $15 for 100g. So, while the price of meat has doubled, we’re only charging an extra 50%.” 

And it’s not just the cost of meat that’s increased; they’re seeing substantial price rises across the board, such as firewood used to cook their meats. 

“We used to pay $350 for a ton of firewood. Now, that’s almost $1000.” 

Considered customer spending

“We’re seeing beer get hit pretty hard at the moment.”

At the same Table Talks event, Adrian Osman from me&u sheds light on the performance of certain menu items based on overall revenue data from me&u.

“We’re seeing beer get hit pretty hard at the moment,” shared Adrian.

Why?

“You’ve seen all the media about $15, $16, $17 pints. So it makes sense that on a Wednesday, people are going around to their friend’s house now and buying a six-pack for what they view as a five times cheaper experience.”  

Weekday closures  

“More and more closed on Monday and Tuesday now.”

While me&u data reflects strong sales growth year-on-year for weekends, it’s a different story for weeknights, particularly Tuesday and Wednesday evenings.

“In the tougher months that have fewer weekends and as weather kicks in, and the weather being a huge factor on performance, there’s a lot of fear around what you do with the weekdays,” explains Adrian.

“We’re seeing that manifest in venues closing on certain days. So there are more and more closed on Monday and Tuesday now. Trying to concentrate their labour model and the opening model to work on the weekend.”

Lack of consumer appreciation for rising costs

Raising menu prices is often a contentious issue among customers, particularly in today’s economic climate, where consumers feel like all costs, in every aspect of their lives, are spiralling out of control. 

The sentiment around raising menu prices is heard loud and clear by hospitality operators, and many are wary of rising prices, even though it could be detrimental to their business.

It’s a climate of fear to raise prices,” comments Dani Valent.

“These are really significant numbers and significant changes that people are making, and there is this really gnarly problem of raising prices and finding the courage to do it.” 

Finding a solution

The consensus among hospitality operators is that customers don’t appreciate the challenges associated with rising food prices and operational costs. 

However, the situation is nuanced. It’s not that customers don’t necessarily care; there’s generally just a lack of understanding of how much it actually costs to keep a restaurant operating. 

Understandably, those who don’t work in the industry don’t know how much it costs a restaurant to get the dish onto a plate. From ingredients to staff wages, licences, rent, utilities, business tax, insurance… the list goes on. 

Kirbie Tate, owner of JAMES restaurant, commented on this situation at our recent Hospo Cicle event in Melbourne.

“Even with what’s out in the media and [customers] are reading these challenges, I think people are still concerned with what it’s costing them and their experience,” 

I don’t really think that they connect with the challenges of the industry. And I don’t think it’s naive to think they will.”

However, Kirbie isn’t necessarily blaming customers for their apathy. 

“We’re a business, and we need to solve those problems. It’s not about people understanding the costs. It’s about us being clever with the costs.” 

$36 for broccolini

“A good example is today I went out and had lunch, and we were charged $36 for broccolini,” explains Kirbie. 

“My guest, who’s not in hospo, was like, oh my God, that’s outrageous. And I was like, well, that’s actually what this broccolini should cost, you know?” 

“The fact that it was just listed as broccolini for $36 was the issue. They could have been clever about what that dish was.” 

“I think it’s for us to create the solution rather than to expect the customer to just accept it.” 

How are venues coping with rising inflation?

Venues are having to take action to help balance the costs of rising inflation, from switching up menus to reducing staff numbers. 

In our recent hospitality report, we asked hospitality operators what adjustments they have had to make to cope with inflation. Here’s what they said.

While close to one-third of hospitality venues have raised their prices to cope with inflation, businesses are clearly exploring other avenues to avoid passing costs on to customers.

As we discussed earlier, Bluebonnet Barbecue’s ingredient prices have increased by 50%, yet they’re still reluctant to pass all the additional costs onto the customer. Only half of their own costs for purchasing the raw ingredients are covered by price increases. And that’s before you factor in the losses they’re taking on for their firewood.

What’s the answer?

Unfortunately, there’s no clear-cut solution to the ongoing cost-of-living crisis that’s impacting the majority of Australians. And, in all likelihood, prices will continue to rise in the foreseeable future.

While there isn’t much we can do to influence the economic climate around us, we can, as consumers and loyal customers of our favourite venues, reframe our perspective to one of understanding rather than outrage. 

While every sector is grappling with rising costs, restaurants and bars are in an exceptionally precarious position, striving to balance quality and service with customer expectations despite razor-thin margins.

As consumers, it’s important to empathise with the plight of hospitality operators or risk our favourite venues disappearing. Hospitality businesses are not merely raising prices to bolster profits but are struggling to cover the soaring costs of ingredients, energy, and labour. 

We hope the article has highlighted some of the unique challenges faced by the Australian hospitality industry amidst the ongoing cost-of-living crisis. 

While everyone is feeling the pinch, taking the time to understand why venues are raising prices can make a significant difference to struggling businesses in this essential industry and ensure that our favourite dining spots can weather the storm and continue to offer the experiences we value.