FTSE 350 Review: Captive audiences key to hospitality's success

In a year-end trading update issued in early January, Greggs (GRG) said it was expecting to implement at least one more price increase on its products (having already hiked prices multiple times to offset inflation). According to analysts at Panmure Gordon, the to-go food market is split roughly 50/50 between independent shops and chains – and the former are struggling the most with rising costs. 

Gregg’s fourth-quarter sales were up an impressive 18.2 per cent on the same period last year, which Panmure said is not just reflective of price hikes, but also evidence it’s gaining market share from embattled independents at the same time, too. Pub chain JD Wetherspoon (JDW) is another major brand the broker thinks is primed to gain market share from its smaller rivals. But it’s important to note that higher sales won’t necessarily translate into greater profits at a time when outgoings are getting out of hand.

In the first quarter of its 2023 financial year, Wetherspoons managed to eke out like-for-like sales growth of 0.4 per cent on 2019 levels. However, Peel Hunt analysts flagged in November that the company’s labour spend was £120mn higher than it was before the pandemic  – which puts a damper on things. The situation is much the same at rival pub group Mitchells and Butlers (MAB), where management predicts its costs will increase by £180mn in the 2023 financial year. 

Inflationary costs were initially concentrated in the areas of energy, wages and food prices, “but progressively became evident throughout most of the supply chain”, MAB management wrote in the company’s 2022 full-year results. Economists have recently coined the term “polycrisis” to describe the current convergence of geopolitical and economic crises. Though few sectors have emerged unscathed, hospitality is undoubtedly fighting fires on numerous fronts.

It is a different story for contract caterers such as Compass (CPG), which provides food to schools, hospitals, gyms and large event venues. Inflation and growing operational complexities have led to an increased interest in outsourced food service. In the last financial year, the company said 45 per cent of its new business wins came from clients seeking outsourced catering for the first time. 

Compass can also boast a client retention rate of more than 96 per cent for the 2022 financial year. Its revenues are not as exposed to falling consumer spending. This provides something of a defensive edge in an otherwise difficult climate for hospitality. 

In theory, this logic should also apply to SSP (SSP), one of the UK’s other major contract food service companies. However, it operates branded catering units exclusively at airports and railway stations, meaning its success is bound up with travel and tourism. Units located in airports represent more than 70 per cent of total sales – so the UK’s rail strikes won’t have an outsized impact – but global flights are still around 15 per cent below 2019 levels. 

For the moment, lingering concerns about passenger numbers may be weighing the shares down. But the sector’s present-day woes must be balanced against future growth plans. In SSP’s case, Peel Hunt expects expansion to add 20 per cent – or £550mn – to sales between 2019 and 2025. The company also thinks that the travel market will remain resilient, even as the cost of living crisis bites.

“We anticipate that the profile of these leisure travellers will leave them less impacted [by] these pressures than the wider population,” SSP’s chief executive, Patrick Coveney, said on an earnings call in December.