Author: Dominic Roe
Hotel and restaurant businesses have always had to rely on the timely delivery of supplies to meet the needs of their customers. However, the way goods move across borders and through the supply chain has changed due to COVID-19, Brexit and the conflict in Ukraine. Fuel prices remain at an unprecedented high, the cost of shipping is still at an elevated level, and these costs are inevitably being passed up the supply chain.
Increased fuel and freight costs
The price-per-mile cost for UK haulage and courier vehicles has risen by 16% over the last three years,1 according to data from the TEG Road Transport Price Index—from 100.9 points in April 2019 to 117.8 points in August 2022.2 One of the factors to blame for this is high fuel prices which have been putting a heavy strain on the road freight industry.
The price of oil jumped above $100 a barrel on 24 February 2022 when Russia invaded Ukraine, with prices continuing to increase into early March, when the price in sterling reached new record highs.3 Prices have remained elevated and volatile amidst concerns of major disruptions to Russian supply.
In a survey by Logistics UK, 71% of logistics companies reported an escalation in the costs of transporting goods during Q1 2022 compared to the same period a year previously, with 40% of respondents saying that costs had climbed by 25% or more.4 This is a combination of increased freight rates and higher fuel costs.
Freight businesses are particularly reliant on diesel, the cost of which is likely to remain elevated even as the cost of other fuels begins to subside. Bulk diesel prices, which constitute about 30% of the cost to operate a vehicle, have risen by 35.7% to average 129.03 pence per litre in Q1 2022 when compared with Q1 2021 (price excludes VAT). All 241 respondents to the survey reported a rise in fuel costs.
The shortage of drivers has had a significant knock-on effect on the food and drinks industry, rippling through supply chains and creating a mismatch of supply and demand.
This remains an issue, although the number of HGV drivers in employment is not falling as significantly as in recent quarters, according to data from the latest Office for National Statistics (ONS) Labour Force Survey.5 This suggests that recruitment initiatives introduced by government and industry in the latter part of 2021 and into 2022 are showing some results. The Driver and Vehicle Standards Agency (DVSA) is also working through its testing backlog following closures of test centres during the pandemic.
How long the newly-trained HGV drivers will stay in the industry remains to be seen. If some change their minds about their new career direction, this could bring driver shortages into the spotlight again, but for now, things are looking more promising.
Increased shipping costs
Global shipping costs surged during the pandemic, and could remain above their pre-pandemic levels in the longer term.6 There are several reasons for this, including a commodities boom and the increased reliance on e-commerce and the shipment of products purchased in this way.
Further global events have also impacted supply chains and shipping costs. The Suez Canal event in March 2021 caused costs to increase after the severe disruption to global trade caused by the Ever Given container ship getting stuck in the waterway for a week. Then, in February 2022 when Russia invaded Ukraine, it marked what would be the beginning of prolonged disruption to the export of goods, including wheat and cooking oil which are vital to the hospitality sector.
As the war continues, global shipping costs—and their inflationary effects—are likely to remain higher for some time to come.
How can the sector respond?
For a sector that relies on the transport industry, these increased costs are yet another challenge to face alongside high energy costs, staff shortages and pandemic recovery. Some hospitality businesses will face the difficult decision of whether to raise their prices and risk a loss of custom, or maintain their prices and face the possibility of a reduction in profit.
In any financial downturn, it is important to take a proactive approach to cash management across the business and reduce risk to the balance sheet. Smaller businesses may seek to control their transportation/shipping budgets by diversifying their fulfilment options.
In addition, it can be beneficial to re-examine your insurance and risk management programme, in case there are any concerns which could lead to a significant uninsured loss or a material impact to your balance sheet. If you would like us to help you with this, or if you need any other risk management advice, please get in touch with our specialist Hospitality and Leisure team.