How will businesses deal with increased costs in 2025?

Since chancellor Rachel Reeves’ Autumn Budget those in the hospitality industry have been bracing for a year of increased costs. The question on everyone’s lips as we enter 2025 is what effect these changes will actually have on the industry and how the industry will go about combatting them. How will hospitality be affected by increased costs on the horizon this year? This question is the main consideration for most hospitality businesses entering 2025. Most business leaders believe that an increase in staff costs will be the main way in which these costs will be felt. However, Jon Calabrese, operations director at Clays Bar, believes that this could narrow the gap in wages between London-based businesses and the rest of the country, potentially leading to a redistribution of talent. “The narrowing pay gap between London and regional cities, coupled with the more affordable cost of living outside the capital, may encourage workers to relocate. This could result in talent increasingly shifting to regional areas, leaving smaller operators in London struggling to compete with rising wage demands. “Greater challenges for smaller operators, independent businesses, may find it increasingly difficult to sustain operations due to the higher payroll costs. Many smaller businesses may, unfortunately, be forced to close under this financial pressure. We could also be hit with another bump of inflation, with a risk of wage-price spiral again, higher pay, greater spending resulting in higher purchasing prices and demand on pay rate increases to counterbalance this again,” Calabrese says. Many in the industry also expect that these increased costs will cause a squeeze on profit margins causing independent businesses to struggle more and potentially causing them to close. “This will squeeze already tight profit margins, forcing many sites to reassess their operations. Smaller independent venues may struggle the most, maybe leading to closures or shifts in service offerings. The increased cost of living could also impact customer spending habits, as diners become more selective about how often and where they eat out. The challenge for us continues,” says Greg Lambert, food director, SIX Rooftop at The Baltic, Newcastle. Dan McGeorge, chef-owner Vetch, Hope Street, Liverpool, echoes this idea saying: “It’s going to be tough, I can see some businesses closing and potentially job cuts in different areas depending on if there is a knock-on effect to any measures put in place to counteract the cost increases. Overall, it seems that many expect the increased costs will end up being passed on to the consumer, something that Jane Pendlebury, HOSPA CEO, sees as inevitable. “The reality is that many businesses will have no choice but to pass some of these costs onto consumers. However, with household budgets also under strain, there’s an obvious risk that price increases will affect customer demand – with raised prices then not filling the shortfall in custom. “The balancing act between maintaining profitability and retaining customer loyalty will be tougher than ever, and, unfortunately, this may lead to some operators reducing opening hours, scaling back their offering or even, in the worst cases, closing altogether,” she explains. What will businesses do to counteract this? How the sector adapts will go a long way to deciding what kind of year it could be for the industry and could shape the industry for the future. Calabrese sees it as an opportunity for businesses to streamline efforts and innovate. “Larger hospitality businesses are likely to focus on improving productivity and efficiency. This could lead to greater investment in staff training and development, as well as innovation in services to reduce reliance on labour. For instance, we are likely to see an increase in order-at-table technology and self-service kiosks in places we may not have seen before, for example. “Rising staff costs may prompt businesses to scale back on recruitment, instead looking for ways to streamline operations and reduce headcount. Therefore, casual and agency staffing services may benefit, as operators seek a more flexible workforce to adapt to seasonal demand without taking on the burden of a full-time payroll,” he states. He also foresees an increase in acquisitions by larger firms as smaller and independent businesses struggle to make ends meet. Pendlebury reiterates that chances of knock-on effects to the consumer but warns that businesses will have to be careful not to harm the overall customer experience too much or risk dire consequences. “To remain viable, businesses will have to make difficult decisions. Increasing menu prices, cutting back on staff or opening hours and simplifying menus are likely strategies. Some may also explore operational efficiencies through technology, using AI and automation to enhance service delivery without adding costs. “However, there’s a real concern such measures could compromise the customer experience. For instance, shorter menus and reduced opening hours might limit choices, while smaller teams could impact service levels. Tragically, as we’ve already witnessed far too much in the last few years, some businesses may decide to close their doors for good,” she states. In the world of restaurants, Lambert, like Calabrese, foresees businesses having to streamline and increase efficiency but expects that this could be seen on the menus. “To counteract these pressures, I can see businesses needing to become more efficient and innovative. You could expect to see tighter menu designs that focus on cost-effective yet high-quality ingredients to reduce waste. Restaurants may introduce more dynamic pricing, offering deals during quieter times to maximise revenue. Energy efficiency will also be a priority, with investments in greener equipment and practices. On the staffing side, cross- training teams to handle multiple roles could help reduce labour costs without compromising service quality I would hope,” he says McGeorge expects similar, saying: “Firstly, I wouldn’t be surprised if you see an increase of anything up to 10% on a menu, especially with the rise in minimum wage, national insurance, business rates etc. These costs have to be covered somewhere many people don’t know that we absorb any perceived short-term increases as a lot of produce can vary in price throughout the year. Not many businesses do this. “Some businesses will reduce staffing or in some cases reduce quality in order to try and keep any hope of turning a profit. The truth is they are businesses with overheads that are ever-increasing, and restaurants are not not-for-profit organisations. Unfortunately, and I hate to say this, but I believe you’ll see more centralised kitchens and produce being brought in pre-made in a lot of restaurants in an effort to reduce costs.”