Impact of Rising Costs on Leisure and Hospitality Sector

Apr 28, 2023

The issues of rising costs of raw materials, energy and wages are presenting great challenges to the businesses in Leisure & Hospitality (L&H) sector. Reports suggest sales in leading pubs, bars and clubs grew in November 2022 and again in February 2023, in comparison to its previous years, however such growth is being stumped by soaring inflation. The official statistics by the Insolvency Service reveals that the rate of insolvencies of the companies in England and Wales in January 2023 was 17% higher than the same month in 2022. The leisure and hospitality sector alone accounted for at least 15% of this total figure.

Adding to the current increased costs, a rise of 82% in energy costs have been expected in the hospitality sector in the first quarter of 2023 when the Government support is taken away. Clearly, someone needs to absorb these costs. Within the food and drink supply chain, independent research and surveys show that the businesses are passing on their increase in costs to their customers (namely, distributors, retailers and consumers) as over half of the businesses in this industry have reported an increase in the price of goods or services that they bought and sold onwards to other retailers and consumers. This could result in a knock-on effect on L&H businesses if they begin to lose customers as a result of increased costs.

If your business is in L&H and you are faced with price increases by your supplier or manufacturer, there are measures you can take to tackle the price hikes. The first step would be to check if the contract even allows a price increase, if not any price increase should be challenged. Your contract with your supplier might allow the supplier to unilaterally increase the costs in line with manufacturing costs, in which case you would need to check that you have a well written contract including a cap on such price increases to protect your business from having to absorb the excess costs and provide exit measures to parties to break the contract should the price exceeds a specified level. Again, it is important to check that any price increases that the supplier is trying to implement are in line with the rights under the contract.

In some cases, prices could be locked in for a minimum period, in advance for supply of agreed services or products at the time of signing the contract, which means the supplier could be construed to be in breach of contract if they unilaterally force the increased costs on your business, which could trigger your right to terminate the contract. In the absence of a right in the contract for the supplier to increase prices, you could challenge the supplier’s decision. Therefore, it is very important to check your contract for what rights and obligations you have under the contract.

If you decide to enter into a new contract, it is important to either exclude price increases or set some parameters in the contract with manufacturers or suppliers to mitigate the effect of increasing prices on your business. This could include putting in place a set price for a set term, cap on price increase or linking the periodic price review to an index, by which any periodic review of price would be undertaken based on that index with a cap on maximum price increase. You may also want to consider limiting the circumstances triggering a price increase and requiring evidence of increased costs of the supplier. As the market would naturally move up and down, you may think about agreeing a price reversion clause should the prices come down.

If you have checked the contract and your supplier has raised the prices in accordance with its terms, but the price increase is not one you are able to tolerate, an alternative option may be to look to terminate the contract and source an alternative supplier. Of course, termination may not even be required if your contract doesn’t have any minimum purchase or exclusivity provisions, in which case you may be able to cease placing order under that contract. If you are going to look to terminate the contract, then you need to be sure that you have the right to terminate and if you do, then the process of terminating a contract needs to be followed correctly for your notice to terminate to be valid, as otherwise there is a risk that you will be in breach if you terminate incorrectly.

If you are faced with price increases, consideration can be given to passing these on to customers. When contracting with business customers, you will need to check the contractual terms to ascertain what rights you have. Things can be slightly more complex with consumer clients. Whilst in many cases, there won’t be formal ongoing contracts, in some cases, such as weddings there may be. While looking at price increases with consumers, not only do you need to consider what the terms of the contract say, but also whether those terms are fair. In the context of business to consumer contracts, if the terms don’t meet the legal requirement of being fair in the eyes of the law, then they may not be enforceable.

We emphasise that any contract negotiations in this current climate should be given sufficient attention to so that you don’t enter into a contract that is unfavourable to your business and customers as a result of the fluctuating prices and increased living costs.

We can help your business to negotiate and sign contracts that are protective of your business and your customers. If you would like to discuss this further or would like more information, please email cesare.mcardle@herrington-carmichael.com or call us at 01276 686 222.

This reflects the law and market position at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought in relation to a specific matter.

Cesare McArdle

Cesare McArdle

Partner, Commercial and Construction Law

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