Rising labour costs drive up Away From Home inflation in 2025

• Projected Inflation Rate: 5.2% for 2025, up from our June 2024 Projection of 4.0%

• Sector-Specific Inflation: Healthcare and education sectors at 3.1%, full-service restaurants at 5.8%

• Impact on Pub Sector: £650m net impact estimated by BBPA

IGD’s latest economic forecast reveals that annual inflation for the Away From Home (AFH) market is expected to surpass prior estimates for 2025, with an anticipated average of 5.2% for the year, compared to the 4.0% forecasted in June 2024. This significant increase is primarily driven by rising labour costs, which are expected to disproportionately impact service-driven businesses employing a younger, lower-paid workforce, such as those within the AFH market.

According to the latest IGD Economic Viewpoint Report, “How to respond to rising labour costs in 2025”, released on April 29th, retail food prices could climb by 3.4% on average this year, while Away From Home prices may jump 5.2%, as businesses face these rising labour costs. The impact of these costs varies across different sectors of the AFH market, alongside an operator’s ability to pass on costs to the end consumer. Cost-driven sectors such as healthcare and education are expected to experience a more moderate inflation rate of 3.1%. In contrast, full-service restaurants, which are more reliant on labour, are forecasted to face inflation rates as high as 5.8%.

Operators across the AFH market will be grappling with a combination of these escalating labour costs amid reduction of business rate relief, which will drop from 75% to 40% from April onward (capped at £110k and therefore likely to affect smaller businesses more). Additionally, they will need to absorb the rising labour costs and increasing expenses for fuel and raw materials related to the manufacture of their purchased menu ingredients. For businesses with large commercial kitchens, rising energy costs will also have a significant impact.

The British Beer and Pub Association (BBPA) has estimated a net impact to the pub sector of £650m due to these increased costs, while Greggs, the high street bakery chain, is expecting a £50m incremental cost impact for their business alone*.

Nichola Gallagher, Senior Analyst at IGD says, “Operators in the Away From Home market are facing unprecedented challenges due to rising labour costs and other operational expenses. It is crucial for businesses to adopt a mix of pricing strategies, cost-cutting measures, and operational shifts to stay competitive and maintain profitability in this evolving landscape.”

The price elasticity of the operator’s business model will influence how much they are able to pass on to their customers. A lower value proposition will be able to carry a higher percentage price increase and still be affordable to most consumers. Likewise, the premium end of the market will be most protected as more affluent consumers are likely to continue their eating out habits despite price increases. Mid-market operators will face the most significant challenges, needing to adopt more strategic approaches to manage these rising expenses without alienating their customer base.

IGD anticipates that operators will implement gradual price hikes throughout 2025, in an effort to manage customer price sensitivities and avoid a steep drop in footfall. To minimise the impact on the customer experience, many operators will also look for cost-saving measures, such as reducing head office staff (rather than guest-facing roles), reformulating menu items to enhance margins on dishes, and integrating automation where possible.

Considering these pressures, several operators are reevaluating their growth strategies. Some, like Wells & Co, a Bedford-based brewer and pub company, have already cancelled planned acquisitions in response to the October budget announcements, instead shifting their acquisition focus to other European countries**. Additionally, some pubs are adjusting their operating models by reducing opening hours or outsourcing their kitchen operations. For larger hospitality businesses, diversifying into retail offers a potential pathway for growth. Itsu, the well-known UK-based food-to-go chain, has capitalised on this strategy, now generating around 30% of its sales from its branded food range in retail outlets. This trend is likely to be emulated by other players looking for alternative revenue streams amid rising operational costs. 

Want to know more? 

• Visit IGD to download our latest IGD Economic Viewpoint Report, “https://www.igd.com/Social-Impact/Economics/Reports/Viewpoint-How-to-respond-to-rising-labour-costs-in-2025/56628”

• Coming soon – new market forecast: IGD’s Away From Home five-year market forecast for 2025-2030 will be released on 1st July. Sign up to our Away From Home & Food-to-Go newsletter to ensure you don’t miss out. (https://www.igd.com/about-us/newsletters)

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Notes to editors:

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