Challenges to the UK’s Hospitality and Leisure Industry

In recent years, the UK hospitality and leisure sector has experienced a significant shift in consumer habits. It appears that the hybrid working environment is here to stay, with many choosing to socialize in their local area on Friday evenings, shortening the weekend for city center venues. Additionally, the recent cost-of-living crisis has accelerated the shift in recent years towards people choosing a “night in.”

Venues are having to work harder than ever before to survive in this market and meet consumers’ ever-evolving demands. As widely reported, an increasing number of nightclubs and music venues are closing their doors as they struggle to survive the cost-of-living crisis amid falling levels of alcohol consumption.¹

Patrons are beginning to expect more from their drinking establishments, resulting in the rise of “competitive socializing” such as axe-throwing, mini golf and shuffleboard.

Earlier this year, a Portman Group and YouGov survey revealed that 39% of 18–24-year-olds surveyed do not drink alcohol at all and that 44% drink “no and lo” alternatives. As these younger consumers seek alternative ways to socialize, the hospitality industry must adapt.²

This has led to a rise in alcohol-free establishments over the past few years, from late-night dessert restaurants to specialist dry cocktail bars. The problem for these businesses is that alcohol has always been a high-margin product, and small batch “no and low” alternatives do not replicate such profitability, reflecting a higher cost with a simultaneous expectation to be sold at a lower price point.

While it is true that non-alcoholic products attract no excise duty, the alcohol extraction processes can be more costly than standard alcoholic drink production. Whichever way the alcohol is extracted, be it via evaporation or fine filtration, the capital expenditure of specialist machinery must be recovered in the price of the product. Alternatively, producers can outsource this process, attracting further additional costs.

Neither desserts nor alcohol-free drinks lend themselves to repeat purchase in the same way as alcohol. These consumers are unlikely to eat multiple cakes or drink multiple pints of alcohol-free beer in a single occasion like we might expect from a traditional alcohol consumer.

One way that the hospitality industry is capitalizing on the consumer desire for something new is to repackage their offerings into a one-off experience. For example, restaurants offering a cuisine-specific dining experience or a varietal-specific wine tasting. The problem with labelling in this manner is that the “one-off experience” becomes just that, a one-off, with businesses spending on advertising but failing to capture returning customers.

The same issue is affecting competitive socializing. Upon opening, there is a strong appetite to experience the latest escape room or batting cage, but once consumers have scratched that particular itch, few are likely to return. As a result, the price must be high per participant, which further deters multiple visits.

While the outlook for spending in 2024 is more optimistic than in 2023, consumers are looking to “trade down” their choices and opt for cheaper alternatives, which is at odds with some of the new alternative socializing trends and may bring their longevity into question. According to NatWest’s Retail and Leisure Outlook report, those who have renewed mortgage rates or rental agreements since July 2022 are likely to cut back on hospitality spend in favor of eating at home. The price sensitivity of this consumer group is putting further pressure on businesses to meet pricing expectations while also maintaining a profit.³

The coming year will bring further challenges; however, the sector has proven to be resilient, coping with multiple macroeconomic challenges. We expect that those agile enough to quickly adapt and provide the repeatable “experiences” that consumers crave will thrive, albeit this often requires a healthy cash balance to undertake the required capital expenditure.

Early engagement is important to ensure there is time to explore the wide variety of operational improvement options available to management. In some cases, however, a formal restructuring process may be necessary to reshape businesses, particularly multi-site operations. One such tool is the relatively new Restructuring Plan which is gaining traction in the hospitality and leisure sector because of the ability to differentiate between classes of creditor – for example performing sites vs underperforming sites. If structured properly this could be used to exit loss making locations. Kroll has significant experience in this sector and is well-positioned to support. Please get in touch if you think we can be of any help to your business.