As the Hospitality Industry hits $13bn in revenue for the year across Aotearoa, it seems a good time to reflect on the year that was in this super resilient sector.
Not quite the annus horribilis that 2020 was, 2022 certainly threw up some fresh challenges for the already stretched hospitality sector. This is not another ‘woe is me’ article. No, Sir. I think we’ve had enough of those. Instead let’s reflect pragmatically and then … well, let’s move on!
I am immensely proud of hospo operators throughout Aotearoa. It’s been hard yakka but, wow, have people dug in. We didn’t quite have a storm of locusts, but pretty much everything else flew our way including mad dictators wandering across the fence line into next door’s garden and causing havoc in the Geraniums. We’ve had the knock-on effect (partly due to the afore mentioned mad person) of massive price hikes in just about most things we consume. We’ve had politicians severely restricting our normal flow of workers that (let’s face it) keep the country moving. We’ve had banks too scared to lend money on hospitality businesses despite that well-proven resilience. Then we’ve had the Reserve Bank deliberately engineering a recession. Happy times!
Owners are shattered. It’s been such a slog without that transient workforce to help them through. The Restaurant Association quotes that we are 30,000 employees shy of where we need to be, and most owners absolutely feel that. It’s slowly easing but we come into the crazy season, so the effect won’t be felt until well in to 2023. No-one at the Ministry of Business, Innovation & Employment will be receiving a Christmas card from me this year.
And yet, good folk of New Zealand, we are still here, and we still fight on. Spend has been well ahead of where most people expected the hospitality sector to be this year. That’s such good news and so, so heartening to see cafes, restaurants and bars absolutely humming. If we had had the staff needed then spend would have hit $14bn, I’m sure!
Food prices have hit hard. Coffee prices….. wow they have jumped too (although they are now starting to ease, I understand). For the main part, operators, have been good this year at increasing menu prices. They have always been far too slow to react to price and wage rises but, because everyone is doing it, there is comfort in a herd, so we have seen good price hikes. I really mean GOOD. You must, must, must increase your prices. Years ago, I banged on about the $5 Flat white. How about the $8 Flat White, people?! It’s time.
MARKET PERSPECTIVE
It’s been a wild ride from a business sales point of view. Here are some of my observations and experiences over the past 2-and-a-bit years of Covid ‘stuff’.
2020 was just awful. I worked so incredibly hard (just as everyone did) JUST to stand still. 2021 was remarkably good to me. People, basically, got bored with Covid, said a bunch of swear words and, well … just got on with life. Businesses sold and all those people that hesitated in 2020 came out of the Geraniums to see that there was still sunlight out here.
2022 has been odd and frustrating. Then it was really frustrating. Then it was irritating. Then, I just accepted it! Those aforementioned things (squashed Geraniums, recession talk, immigration, bank lending or lack thereof, price hikes, inflation blah, blah, blah) … they all conspired to affect the market. For me, personally, it was actually a reasonable year but hard going. The nerves of 2020 came back but they were different nerves.
So was there a mass influx of doomed businesses to the market? Well, no. For the last 2-and-a-bit years people think that I should be busy trying to offload hospo businesses that are going to the wall. That’s just not the case. EVERY year 2,000 hospitality businesses go out of business. Come rain or shine, that’s the case.
I have listed pretty much the same number of businesses every year for the last 10+ years. A lot … but that’s because it is a very dynamic sector and, historically, people only hold on to a hospo business for 2 ½ to 3 years before they trade up, down or out.
I have listed everything from a $125,000 café to a $4.1m monster of a hospitality business. None that I have listed are because they are distressed. Far from it.
MARKET PRICES
It was easier to analyse businesses, this year, because we had a good 6 to 8 months of ‘normal’ trade. So, no more ‘guesstimating’ and working around Covid subsidies and lock down periods. So that was good! Because of employment struggles it became very difficult for hospitality businesses to retain that golden 30% wage to sales ratio. It had been slipping, anyway, but the lack of employees meant that all the power was in the hands of the workers and wage rates were pushed ever higher. Enjoy it while you can, people! Hospitality owners will take back control soon enough, mark my words! Wage percentages slipped to 40%, even higher for some.
Food prices stretched the COGS percentages. Whilst good operators were once 30% and below, that also became harder. Menu increases HAS helped some stay within a bull’s roar of that golden target, but many places have seen the percentage slip.
This has meant that, although sales are nicely up over those of 2020 & 2021, costs have risen for many. This, of course, influences the values of hospitality businesses.
For the first time in my career, I have had to admit that business prices dipped in 2022. There is no easy answer to this one and no one knows exactly what the impact has been. This is because there have been many extenuating circumstances for owners accepting prices. As mentioned above, it’s not because the businesses have been distressed. It’s more to do with the long 2 years of Vendors worrying about selling and, perhaps, holding on until the clouds cleared a little and this year has just been ’time’. They have been more philosophical about prices.
Buyers have wanted to pay less for various reasons too. Some, I admit, smelled blood in the water and have just been out for bargains. Some of them have actually found them. Others have struggled to get bank finance, and this has been a real factor this year. Some have succumbed to all the Geranium and employment stuff mentioned before.
All of these factors add up to affect the ‘general’ market.
HERE’S THE GOOD NEWS
I said in an article a few months into the worst of Covid that, as long as there are humans on this planet, there WILL be a Hospitality sector. Man, is that truer than ever. Covid happened (yes, I know it’s still happening) but the world did not end. We’ve got the measure of it. We are no longer frightened sheep, and those beautifully cooked restaurant meals are not going to eat themselves. So, we are back at it. Big time.
That’s the first point. The second point is that one of my favourite anecdotes when I talk to people is that the LAST things to go in a recession are chocolate, lipstick, and coffee. It’s true! It doesn’t matter what financial state we are in, we ALL need a break from ‘it’. OK perhaps pull back on the holidays and stop buying so many cars but … nope … you are not taking away my Eggs Benny and coffee.
Here’s the third point. Hospitality businesses make DAMN fine investments. Articles by so called experts tout average profit margins around the 5% / 6% mark for hospitality businesses. I have been doing this for 13 years and I am telling you – that is NOT true. I do realise that there are personal finance costs and taxation that I do not take into account when I am selling (because each person’s situation is unique), but $1.15m EBITDA off $4.2m sales equals 27% when I went to school. $125,000 off $565,000 sales equals 22%. Just 2 current examples off the top of my head.
Here’s point 4. I mentioned earlier that Owners will take back control of wages. Yes, it has been an employee’s market, but already overseas workers are coming back in. The Government (if they want to survive) have no choice but to correct this almighty stuff up. It will be slow, but it IS happening.
HAPPY CHRISTMAS
I could probably go on for many more points, but I really should end and I want to end with this; Hospitality has such a good feeling about it right now. It has had everything thrown at it but still – here it is! It’s a vast and vibrant and fun sector to be involved in. It’s the BEST sector to be involved in. There – I’ve said it. There will always be challenges but 2023 is going to be an absolute cracker and I, for one, can’t wait.
Have the most splendid Summer break. Make that profit you ‘Hospo Wonders’ and, for the rest of you, you need to do 2 things. Go forth to your local cafes, bars and restaurants and enjoy yourselves like never before. Then reflect over the Christmas break about how wonderful it would be to ditch that suit and boring job and own your own hospitality business.
Nick Giles – Head of Hospitality, LINK Business Brokers
