Pubs - Has the economic hangover cleared for the sector?

Undeniably, the pub market has experienced a turbulent past few years. Following the Covid-19 pandemic and more recently the war in Ukraine, pub operators have encountered intense inflationary pressures, the cost of living crisis, increasing energy bills, labour shortages, rising interest rates, industrial action affecting travel, and supply chain disruptions. The culmination of all these challenges has helped result in the closure of 153 pubs within England and Wales in the first three months (Q1) of 2023 after approximately 386 pubs within England and Wales shut their doors for good in 2022. However, what does the future hold for the pub market? Despite the current economic climate, there are signs of potential optimism within the sector.

According to HSBC market analysts, pub operators outperformed expectations over Q1 and Q2 of this year with improving consumer demand within the sector.

UK inflation rate is dropping, will it continue to fall?

The most recent fall in the UK inflation rate will relieve some of the financial pressure on UK consumers and increase consumer confidence within the pub sector notwithstanding that higher input costs and elevated staff wages have forced UK pub operators to increase their food and drinks prices to retain profit margins. According to the Office for National Statistics (ONS), the price of lager in UK pubs had risen by 11% in the 12 months leading to June 2023 due to inflated operating costs.

However, the Bank of England has predicted the inflation rate will drop to 5% by the end of 2023 which provides some optimism to British pub operators concerning the sector’s cost outlook – and the reduced inflation rate should lead to lower interest rates in the medium to long term and hopefully encourage buyers within the pub market.

Reductions in pub rateable values (RVs)

Following the 2023 business rates revaluation in April, the rateable values set within the UK hospitality sector generally reduced the rates liability for UK pubs. There has been an average decrease of 17% in rateable values across the UK pub sector following the 2023 revaluation, which will reduce these costs to UK pub operators until the next revaluation in 2026.

UK pubs adapting to changing consumer preferences

According to UK pub industry reports, younger consumers tend to drink less than their older counterparts and the importance of soft drinks has never been higher within the sector. Also, more contemporary pub customers are conscious about health and wellbeing and their impact on the environment.

There is an increasing demand for ontrend, creative flavours provided by sustainable brands that use high quality, low calorie ingredients. While soft drinks are not the most profitable beverages in a British pub, simple non-alcoholic cocktails (‘mocktails’) possess a much higher profit margin.

Although sales volumes are down in comparison to pre-pandemic levels, sales growth has been driven by higher prices and seizing these consumer market opportunities to challenge rising costs. However, UK pubs need to continue adapting and diversifying their offerings to meet changing customer expectations and remain appealing to the wide variety of UK consumers.