Loungers is a broad church.
The AIM-listed cafe/bar/restaurant operator has over 200 sites spread across the UK through two complimentary brands- Lounge and Cosy Club.
With a 50/50 split between food and beverage sales (around 25% comprising alcohol) and an emphasis on all-day trading in neighbourhood locations, the group competes with the likes of Costa Coffee on one hand and Wetherspoons on the other.
So it was for this broad offering that I caught up with chief executive officer Nick Collins to get his perspective on how the energy crisis is affecting the hospitality industry, and what might be in store going forward.
Margins set to get worse
Luckily for Loungers, the company is somewhat hedged from out-of-control electricity and gas costs due to fixed agreements in existing sites until September 2024.
But hospitality is a low-margin sector and it’s not just utility costs that have governors ruffled.
“Everything that's happened in Ukraine alongside Brexit has put our sector under a lot of margin pressure,” said Collins, though Loungers is able to mitigate some inflationary pressures through economies of scale.
As for the wider industry, Collins is worried.
Profit margins are typically under 10% in the hospitality industry, with utility costs generally around 2% to 3% of sales… yet some venues are seeing four or even fivefold increases in bills.
That is simply unsustainable. Put simply: “If your utility costs are 12% of sales, you’re loss making.”
There is certainly no lack of evidence to support that.
From the recently announced closure of six BrewDog venues because of rising bills coupled with what BrewDog founder James Watt slammed as a “clueless government,” to the sevenfold increase in energy rates at one of celebrity chef Tom Kerridge’s pubs, almost every day brings another similar story.
To make matters worse, “coming out of COVID, most businesses don't have the cash reserves to sustain losses... the government's going to have to step in,” according to Collins.
Yet despite the pinch, he has yet to see any real change in consumer trends, particularly in the neighbourhood scene where Loungers thrives.
“The way the consumer is behaving has been pretty consistent over the past couple of years.
“We haven’t seen any shift in the way they are behaving and there is no evidence that they were tightening their belts.”
Inevitably, though, some of us are going to go out less as our disposable incomes continue to fall, yet Collins fully expects neighbourhood offerings to benefit from people trading down when they were previously heading to the city centres.
“People will stay more local, that’s something we saw in the last recession in 2008 and 2009.”
The simple reality
According to Collins: “I think clearly value is going to be really important in the coming months, but that doesn’t necessarily just mean pricing.
“If you look at the cocktail bars and the higher average spend operators, people are going to seek out quality and they’re going to seek out familiarity.”
But even though the value operators clearly stand to benefit from a possible trading down among customers, “equally you could argue that they're the ones potentially with the most risk because that target demographic is the one who's being squeezed the most”.
One of Loungers' latest ventures, The Cosy Club in Canterbury in August -- Credit: Loungers
All in all, more than demographic shifts or consumer trends, energy costs truly appear to be the biggest problem for the hospitality sector going forward, regardless of customer base.
Loungers may well have fixed contracts for the next couple of years, but “for any operators that aren’t hedged, these four or fivefold increases are the difference between profit and loss”.
With the UK leadership debate finally over, the next few days could show us whether keeping energy costs down is as central to Liz Truss’ policy vision as keeping corporation tax down is.
As for the price of a pint, despite Co2 production halting in the UK and inflation all but guaranteed to steam ahead, Collins thinks £20 for a jar is “unlikely”.
I’ll hold my cheers for now.
A word from an independent
Chris Dennis is a co-founder of Heads + Tails, a neighbourhood cocktail bar located in West Hampstead, London.
Dennis is sceptical of the possibility of government assistance in the current crisis. “In my 15 years experience of opening independent wet-led businesses in London, there has never been help from a governing body.
“Local councils have historically created problems, not solutions with regard to planning and operations.
“This helps you learn to adapt fast, however I fear that soon it won’t be fast enough.”
It’s not just the cost-of-living crisis that’s hitting independent businesses like Heads + Tails, but a lack of quality staff coming from Europe post Brexit and a return of international travel for the locals who would otherwise be propping the bar up all summer.
“Independent businesses are already in the eye of the storm, and many of us are still working out what the energy bills will truly cost our venues and perhaps more importantly, the UK’s independent businesses as a whole.
“There’s no need to evaluate the cost of turning a light on if you no longer can afford the venue and the team that brings it to life.”