Rising labour costs, business rates and ongoing inflationary pressures are squeezing margins across the UK hospitality sector. As sales growth increasingly relies on price rather than volume, operators are focusing on productivity, efficiency and value to protect profitability and support future growth.
Hospitality operators are facing an increasingly challenging trading environment, as rising labour, food and operating costs continue to put pressure on margins. While sales are still growing, much of this growth is being driven by price increases rather than stronger underlying demand.
Higher sales are no longer enough
A survey1 of the UK’s 100 largest restaurant groups found that combined profits fell by 44% year-on-year, from £365m to £204m, despite revenues rising from £12.9bn to £13.3bn. This represents sales growth of 3.1%, below IGD’s forecast AFH inflation rate of around 4.7% in 2026, indicating that revenue growth is being driven more by price than by stronger underlying demand.
The squeeze is being felt across several cost lines. Higher employment costs and continued inflation across key commodities such as beef, coffee, chocolate and olive oil are absorbing much of the benefit from higher sales.
This pressure is not limited to major chains. Industry data2 shows that 23% of hospitality businesses are now operating at a loss, up from 15% three months earlier, underlining the fragility of the wider market.
While larger operators benefit from greater purchasing power, stronger balance sheets and the ability to spread fixed costs across extensive site portfolios, many independent businesses have far less room to absorb rising costs. If some of the UK's largest restaurant groups are generating profit margins of only around 1.5%, the financial challenge facing a single-site operator with one kitchen, one payroll and limited economies of scale is likely to be even greater. As a result, smaller independents are particularly vulnerable to further increases in labour, food and operating costs, raising concerns about the resilience of the wider hospitality landscape.
Employment costs continue to reshape hospitality
Rising employment costs are becoming one of the biggest challenges facing hospitality operators. Increases to employer National Insurance contributions and the National Living Wage are driving a reassessment of staffing models, opening hours and site portfolios. With a workforce heavily dependent on lower paid part-time and flexible labour, the sector is particularly vulnerable to these changes, making productivity improvements and operational simplification critical.
This is already having consequences for employment, with UKHospitality estimating that almost 9,000 hospitality jobs were lost in the month after the 2025 Autumn Budget, and total sector employment falling by 20,014 between September and December 2025.
These pressures are likely to accelerate structural changes across the sector, with operators increasingly turning to automation, AI-powered forecasting, self-service solutions and simplified operating models to reduce labour dependency and improve productivity.
Business rates remain under scrutiny
Alongside rising labour and input costs, business rates remain a significant fixed-cost burden for many hospitality businesses. While the government recently announced a 20% reduction in business rates for pubs, social clubs and live music venues in England, due to take effect from April 2027, wider concerns about the rating system remain.
In response, the government has launched an independent review into how pubs and hotels in England and Wales are valued for business rates, acknowledging industry concerns that current valuations do not always reflect the sector's trading realities. However, the review will not extend to cover restaurants, cafés or any other hospitality venues.
Unlike many retail premises, pubs are assessed using Fair Maintainable Trade, which estimates the turnover a property could achieve under reasonably efficient management. This means that when a pub’s expected turnover increases, its rates bill can also rise, adding further pressure at a time when sales growth may be driven predominantly by inflation rather than higher customer volumes.
The review, led by business rates specialist Jerry Schurder, is expected to report to the Treasury in March 2027 and inform the next business rates revaluation in 2029. While the prospect of reform is encouraging, it offers little immediate respite for operators and does not address the cost pressures facing large parts of the hospitality sector beyond pubs and hotels.
Growth will be hard won
These developments mirror the themes in IGD’s latest AFH forecast, which expects the UK AFH market to remain in a low-growth phase as weak disposable incomes, cautious consumer behaviour and elevated operating costs weigh on performance. Total AFH food and drink sales are forecast to reach £103.3bn in 2026 and £123.8bn by 2031, but much of this value growth is expected to be inflation-led rather than volume-led.
This means growth will be harder won. Operators will need to balance price increases with value perception, while using technology, menu engineering and supplier collaboration to protect margins without weakening demand further.
What this means for operators and their suppliers
While the outlook remains challenging, opportunities still exist for businesses that adapt to changing market dynamics.
For operators
Plan for sustained cost pressure using multi-year forecasts, inflation scenarios, energy management and waste-reduction targets.
Improve labour and operational efficiency by simplifying processes, standardising recipes and adopting forecasting, training and smart-kitchen technology.
Use data and menu flexibility to protect margins, adjusting prices, portions and ingredients while maintaining perceived value.
Strengthen supplier partnerships through longer-term agreements, labour-saving formats and contingency planning for shortages or price spikes.
For suppliers
Build trusted partnerships through menu support, profitability guidance and clear insight into changing consumer behaviour.
Provide actionable insight on category trends, cost forecasts and pricing opportunities to support operator decisions.
Plan together for volatility through longer-term agreements, ingredient substitution and early warnings of price shifts.
Develop flexible, cost-efficient solutions that reduce waste, preparation time, labour requirements and energy use.
IGD view
“The latest restaurant profit data provides another indication that the AFH market remains under significant strain. Sales growth alone is no longer sufficient; the industry’s ability to protect margins will be the key determinant of success. Our forecast shows, growth over the coming years is likely to be harder won, making productivity, value delivery and consumer relevance increasingly important for both operators and suppliers.”
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