Restaurant and leisure groups warn Ukraine war will push costs higher

Companies across the UK’s leisure, retail and food sectors have warned that the war in Ukraine will worsen already surging inflation as energy and food costs continue to rise, tightening the squeeze on their businesses.

Fever-Tree, the soft-drinks maker, lowered its profit guidance for 2022 on Wednesday blaming commodity prices that “have increased dramatically” since Russia invaded Ukraine.

Tim Warrillow, chief executive, said there was “significant uncertainty in relation to our input costs in the short term” as the war in Ukraine pushed already elevated commodity prices higher.

The cost of commodities from oil to wheat had been pushed up by surging demand as countries emerged from the pandemic. But they have soared higher since the outbreak of war and while companies may not source directly from Ukraine or Russia, the knock-on effect on prices is being felt across the global supply chain.

Fever-Tree downgraded its forecasted earnings for this year from £69mn-£72mn to £63mn-£66mn on the back of rising costs.

The Restaurant Group, which owns the Wagamama and Frankie & Benny’s chains, said that cost inflation would be higher than 5 per cent before any impacts from the war were priced in. Andy Hornby, chief executive, warned that further costs could hit the company.

“Costs bases are coming under inflationary pressure” across suppliers, he said, adding: “One to two steps down the supply chain, you never know what the knock-on impact is going to be.”

The group said, however, that while it was “mindful” of the impact of Ukraine on inflation, it would keep guidance for the year unchanged.

The company also flagged that energy costs would be £6mn to £7mn higher than in 2021 but said it had hedged most of its electricity and gas costs for the year ahead, as well as 75 per cent of its utility costs for 2023 and 2024. This was further in advance than usual owing to the uncertainty surrounding energy prices.

“Investors do not want the risk of extreme volatility in companies like ours,” said Hornby. “It may be we could have got a better deal on 2024 in a year’s time but we’ve taken the risk of real extreme downside volatility out of the equation.”

The Gym Group has low staffing and input costs but nonetheless warned on the hit from inflation. It said it expected its operating cost base to rise 4-6 per cent over the year ahead, driven by a £2mn increase in utility costs in the second half of 2022, which meant it would raise prices.

Richard Darwin, chief executive, said rising power bills had affected the low-cost gym operator but any increases as a result of the war would be accounted for through hedging of energy costs.

The low-cost operator said revenue would return to pre-Covid levels by the end of the year.

The Restaurant Group is also bouncing back, as revenue rose to £636.6mn last year, up from £459.8mn in 2020, but well below the £1bn reported in 2019. On a like-for-like basis, Wagamama sales during the weeks it was open last year were 15 per cent higher than in the same period in 2019.

Hornby said the “biggest challenge in the [hospitality] sector” remained the recruitment and retention of staff.

Anna Barnfather, an analyst at Liberum, said companies faced further struggles with increases in value added tax, business rates and the national living wage this month.

Though planned for, “with energy on top as well, it will be hard to manage” these extra costs, she said, adding: “That will tip some operators over the edge. Perhaps not the quoted ones, but lots of independents and private ones.”