Economic conditions have been tightening for more than six months, and pubs have been absorbing most of those additional costs, as consumers begin to tighten up their discretionary spending. So when is it time to start passing that cost on to patrons?
In December 2022, inflation in Australia reached 7.8 per cent – its highest rate in 32 years. Combined with consecutive cash rate hikes by the Reserve Bank of Australia (RBA) since May 2022, Australian consumers and businesses have seen interest rates increase from 0.1% to 3.6% in less than a year, in a bid to halt rampant inflation. Earlier this month, the RBA announced its first pause in the cash rate since May 2022 – although it did warn that more hikes were likely.
After much increased pressure on business and consumers, the fiscally conservative measures have finally shown some slight effect, with the consumer price index (CPI) for the first quarter of 2023 showing a slight slowdown at 7.0 per cent.
However, the real concern for most Australians – and for hospitality venues – is food inflation, where prices were still increasing by eight per cent in the first quarter of 2023.
“One of the biggest drivers of inflation is currently food, Australians can see that every time they eat out or go to the supermarket. Food inflation is tough for anyone to avoid right now. In the UK, the inflation rate for food is an incredible 19.2 percent currently. The high prices will stick around,” suggested Brett Reynolds, Chief Investment Officer at Tiger Brokers Australia.
“As the RBA has lifted rates quickly in past months, I expect them to hold rates at the current level in May and June, before another rise in July. Rates remain below historic averages, I still believe the RBA is set to lift interest rates to 4 percent this year. The announced changes to the RBA structure will not impact this.”
Making pricing decisions
Many on-premise operators have not meaningfully lifted meal prices in close to a decade, but the current strain of food inflation is making the increased costs harder to absorb. Many pub kitchens have begun making strategic choices about what to offer, in an effort to avoid increasing costs. So at what stage do operators start to consider price hikes?
“With inflation rising at unprecedented rates over the last 12 months, many Aussie restaurants, bars and cafes have either increased prices to combat higher operating costs or absorbed the cost themselves so as not to deter customers. A recent pause to inflation gave the industry cause for cautious optimism, but the Reserve Bank of Australia warned in its April meeting that increases in immigration and wages would make ‘reducing inflation more difficult’, suggested Paul Hadida, general manger APAC of SevenRooms.
“That poses further questions for a hospitality industry that has faced, and answered, so many in recent years. As costs like produce, rent, wages and utilities increase, more and more venues will face the dilemma: absorb costs or pass them on? There is no straightforward answer, but while ongoing economic pressures are concerning, there’s reason to be optimistic too.
“SevenRooms research shows that 79 per cent of Australians believe local restaurants, bars and cafes need their support more than ever, and that they can still be persuaded to maintain their usual habits with personalised experiences.”
If consumers have less money to spend, when they do decide to spend it, they expect an experience worthy of their patronage. Thus Hadida argues that a more personalised experience is now essential, making data retention and proper usage more important than ever.
“To overcome inflationary pressures, direct relationships are fundamental. First, when consumers can book or order directly, they forgo third party platform fees. And for venues, direct relationships allow you to collect approved guest data that enables you to understand their habits and preferences, then use that information to provide the personalised and meaningful experiences guests want and are still willing to pay for.
“These experiences incentivise loyalty, and for venues customer retention is infinitely cheaper than customer acquisition. Through approved data, you can provide personalised marketing that recognises their habits and preferences, incentivises their patronage, communicates openly and candidly – including about any menu changes, and why – and builds the deeper relationships that help businesses better endure any challenge,” stated Hadida.
“So whatever your decision, direct relationships, marketing, communication and personalisation are crucial. If your venue absorbs the costs, it can drive retention through exceptional experiences. And if the costs are passed on, Australians continue to demonstrate an incredible willingness to support local venues who build relationships and provide personalised experiences.”
Both economic conditions and data usage and the customer experience will be discussed as part of the Pub Leaders Summit program, with the likes of Paul Walton, interim MD of ALH Hotels, and Marianne Mewett, CXO of AVC, discussing these pressing issues.
To view the program and secure your tickets, visit the Pub Leaders Summit website. The Pub Leaders Summit will be held on Monday 24 July at Eatons Hill Hotel in Brisbane.