Premium Opportunity in a Cost-of-Living Crisis

Opinion article by Mark Bentley, Business Development Director at HDI.

After navigating the challenges of the pandemic, the hospitality sector could be forgiven for hoping for some respite from the continual curve balls and challenges being thrown its way. However, we’ve gone from one period of turbulence and uncertainty straight into a cost-of-living crisis.

Even though we’re hearing that inflationary pressures are starting to ease, last month we were still seeing headline year-on-year inflation of 11.4% on food and 7.6% on drinks based on our tracking of more than 165,000 like-for-like site/item combinations in pubs & bars across the UK.

That’s an extra £1.16 added to the average cost of a main course and an extra 26p added to the average cost of a drink -a significant burden for consumers, who are already seeing their household bills rise and disposable incomes squeezed.

As always, there’s a need to look deeper and understand what’s really going on behind the headlines.

Since the pandemic there has been an acceleration in premiumisation trends, something which seems at odds with the fact that we’re now in the middle of a cost-of-living crisis.

In the world of drinks, consumers have been choosing to drink less but drink better, with categories such as World Lager & Craft Beers enjoying phenomenal growth at the expense of more traditional familiar favourites.

As disposable incomes have been squeezed, many people would have expected growth to soften, potentially driven by consumers trading down to lower-priced familiar favourites. However, the demand for premium is showing no sign of slowing, with the shifts in consumer preferences that we’ve seen over the last few years very much looking like they are here to stay.

There could be an element of the “lipstick effect” at play here, with consumers being more willing to buy less costly luxury goods at a time of economic crisis, but I believe that what we’re witnessing is a more fundamental, long-term shift in consumer behaviour – drinking less, but drinking better.

Given the acceleration in premiumisation trends, it would be easy to assume that its premium operators that are best positioned for success.

However, market share across major branded pub chains for the last six months versus the previous six months shows that, although the broad shape of the market between value, mainstream and premium operators remains relatively stable, we’re seeing a sliding scale of performance; with value operators growing their share overall, whilst mainstream and premium operators have seen weaker performance.

This could be seen in the context of the cost-of-living crisis, with consumers potentially looking to make compromises and trade down their choice of venues.

Looking deeper, there’s a real mix of operators that are winning and losing share across all sectors of the market.

In the premium space, many of the operators that are seeing their share come under pressure are located in city centres, often with a late night orientation. The challenges here have been well publicised recently with lower footfall in major cities since the pandemic and a marked shift in how people are socialising with occasions shifting earlier in the day.

This presents a challenge for some, but also opportunities for operators that can flex their offer and cater to different needs across the different dayparts, as mentioned by Clive Watson of City Pub Group in yesterday’s Morning Briefing.

Whether you’re a value-led community pub or a high-end restaurant, premiumisation is a real trend, with guests willing to pay more for quality and experiences.

Having more premium options offering consumers the ability to trade-up is key to providing a compelling offer, whilst also enabling you to increase average transaction values.

This could range from introducing more premium options to your range in a value-led venue (e.g., adding a World Lager to the draught beer range, enabling guests to trade up from familiar favourites), to really pushing the boundaries with experiential elements at the top-end and delivering a experiences which are worth paying more for.

So, what does this all mean?

Even though we’re in the middle of a cost-of-living crisis, consumer demand for premium is greater than ever. We’re undoubtedly having to run faster to stand still given the levels of inflation that we’re seeing. But with consumers’ appetite for premium, there’s opportunity for an operator to look at their food & drink offers and ensure that there’s the right balance of familiar favourites through to more premium options.

Getting your range and pricing right, backed up by great people delivering great service is what ultimately sets hospitality apart, giving consumers reasons to keep coming back.