The battle for UK businesses to hold down customer price rises

The cost of eating smoked salmon at London’s Wolseley restaurant has risen by over a fifth. Meanwhile, supplies of baked beans by Kraft Heinz to Tesco, the UK’s biggest supermarket chain, were temporarily imperilled. Persistent and rising double-digit inflation, higher than in all other G7 countries, is hitting UK businesses — and their customers — in myriad ways.

With Andrew Bailey, the governor of the Bank of England, urging restraint on companies that may be too ready to pass rising day-to-day costs on to consumers, how businesses cope with stubborn inflation and higher interest rates is coming increasingly under scrutiny.

Hospitality

“It’s hard to conceive of a sector that’s taken more of a hit,” said Jonathan Neame, chief executive of Shepherd Neame, a Kent-based brewer and pub operator, of hospitality. “It is energy intensive, food intensive and people intensive.”

The data bears him out: according to the Office for National Statistics, prices in restaurants and hotels rose by an annual rate of 12.1 per cent in February; the highest rate since data began in 1991.

Shepherd Neame has increased prices by more than 20 per cent since 2019 to offset rising costs and protect profit margins, but opted to do so in incremental rises rather than one annual rise.

At the Dalata Hotel Group, the wage bill has jumped 24 per cent compared with 2019, but it is wary of passing costs on to the customer.

“The consumer ultimately will vote with their feet,” said the chief executive, Dermot Crowley. Dalata has instead cut down menu sizes in its restaurants and introduced cordless vacuums to speed up room cleaning, so the hotels need fewer housekeepers.

Baton Berisha, managing director of the Wolseley Group, which runs the eponymous Mayfair restaurant among others, agrees: “If you just transfer that price to consumers then they may not return.”

Reluctantly Berisha had to increase smoked salmon menu prices by 20 per cent last year and plans to do so again this May.

Retailers

Supermarkets have been raising shop-floor salaries to soften the sting of surging inflation. This is squeezing their profit margins, albeit some of this is being passed on to consumers.

ONS data showed that the price of food and non-alcoholic beverages rose by 18.2 per cent, the steepest increase in 45 years.

“Most people would be surprised by how much of their food bill is labour in stores and the supply chain — around 25 per cent,” said Justin King, the former Sainsbury’s boss and a non-executive director at Marks and Spencer.

The largest supermarkets claim that they are not putting up prices by as much as the ONS’s headline food inflation figure. Ocado, the online grocer, said prices were up by about 9 per cent, with shoppers becoming more selective.

Meanwhile, tense negotiations between retailers and suppliers over price hikes are expected to continue. Supermarkets have been accused of being slow to pay suppliers more, despite smaller businesses warning they could go bust as they grappled with soaring bills. Last summer, Kraft Heinz temporarily halted supplies of some products to Tesco in a row over pricing that has since been resolved.

Consumer goods

Makers of everyday products have passed on as much of the financial pain to retailers and consumers as they can. “It’s the consumer who always pays,” said Martin Deboo, analyst at Jefferies.

In pushing up prices, companies risk alienating cash-strapped shoppers who could seek out cheaper alternatives or simply buy less. Supermarkets’ own-brand sales were up 15.8 per cent over the year to March, according to Kantar.

Scottish drinks maker AG Barr said volumes of its flagship product Irn-Bru fell 4 per cent in the year despite an 18 per cent rise in group revenues. The company’s cost of sales in the 12 months to the end of January were more than a quarter higher than the previous year.

There are some signs the worst of the cost pressures may have passed, however.

“Come the end of this year I think we’ll start to see the cost pressure really reduce,” said Tim Warrillow, co-founder of Fever-Tree Drinks, the producer of mixers for spirits. He pointed to a recent moderation in both sea-freight rates and the costs of energy used to make glass for its bottles.

Housebuilders 

UK housebuilders have been squeezed by rising wage bills as well as the costs of raw materials such as timber, where supply was limited by the war in Ukraine. Some materials, including brick or plasterboard, take significant energy to produce and have been hit by rising prices for power. Smaller firms that lack economies of scale were particularly hit by high build costs.

Housebuilder Vistry said build costs now appeared to have peaked, citing no major cost increases from its suppliers in the first quarter, falling prices for some raw goods and lower labour costs as construction and demand slow. Andy Murphy, analyst at Edison, said that “it seems possible that overall build cost inflation could turn negative this year”.

Banks

Stubbornly high inflation is pushing up borrowing rates. UK banks reaped bumper profits from those rising interest rates in 2022, after years in which ultra-low base rates hampered their net interest margins — a measure of the difference between the interest received on loans and the rate paid for deposits.

In their annual results, the major high street lenders — Lloyds, NatWest, Barclays and HSBC — guided that the boost from net interest margins might have peaked in 2022, but the rise in interest rates could change that.

“There’s pressure . . . on all banks to disclose how much they’re making on [deposits] for their customers,” said one chief executive.

MPs on the Treasury Select committee have accused big banks of being too slow to pass on the benefit from rate rises to savers, particularly for instant access accounts.

Reporting by Oliver Barnes, Laura Onita, Alistair Gray, Joshua Oliver and Siddharth Venkataramakrishnan in London