Lettuce talk about inflation, labour, landlords and leverage
The new reality for the past few months has been rising inflation, with the hospitality sector hit particularly hard with rising costs, labour shortages and supply chain issues. In the face of this, what lies ahead for the hospitality industry, what should businesses in the industry be aware of and what contractual levers can they pull to manage contract risks effectively?
Lettuce look at inflation
Lettuce prices quickly became the face of rising inflation. We are all too familiar now with the cost of lettuce prices, with prices at one point ranging from $10 to $12, resulting in the treasured side salad becoming an optional, additional purchase.
So why the jump in food supply prices?
We spoke with Olvera Advisors, who said that rising prices were not unique to lettuce, but that according to the ABS, price rises were seen across all food and non-food grocery products in the June 2022 quarter. Olvera Advisors explained that the reasons for the jump in prices were largely due to the following:
global supply chain disruptions, mainly due to increased transportation costs;
the war in Ukraine, given that Russia and Ukraine are some of the largest producers of grain in the world; and
climate change, in particular natural disasters.
With respect to the hospitality sector, Olvera Advisors highlighted that this sector feels the pinch more than others because the cost of food is one of the most important operating costs for a restaurant, meaning that rising costs:
squeeze operating margins;
push businesses to adjust menu pricing; and
pass on costs to customers.
Unfortunately, increased food costs is not the only challenge facing the hospitality sector.
Labour
In response to the sharp rise in inflation and the strong labour market in Australia, this year the Fair Work Commission (FWC) decided to significantly increase the national minimum wage (NMW) by $40, amounting to an increase of 5.2%. To put this in perspective, the increase granted to the NMW in 2020-2021 was 2.5%. As of 1 July 2022:
the NMW increased to $812.60 per week or $21.83 per hour;
modern award minimum wages increased by 4.6%, subject to a minimum increase of $40 per week.
This includes increases to wages in the hospitality sector. As of 1 October 2022, these wage increases took effect in the Hospitality Industry (General) Award 2020, the Registered and Licenced Clubs Award 2020 and the Restaurant Industry Award 2020. Additionally, on 1 September 2022, changes were made to annualised salary provisions under both the Hospitality Industry (General) Award 2020 and Restaurant Industry Award 2020.
As the hospitality industry continues to be plagued by a severe labour shortage, rising labour costs have the potential to severely impact an industry already operating on thin margins.
Landlords
The Retail and Other Commercial Leases (COVID-19) Regulation 2022 (the Regulation), which provided certain protections under leases impacted by COVID-19, lapsed on 30 June 2022. As such, lessees need to be aware of the end of these protections and the resumption of ordinary legal rights and obligations.
Generally speaking, the lapsing of the Regulation means that lessors may take action against a lessee for breaches of a lease which have occurred outside of the “prescribed period” of the Regulation (13 July 2021 to 30 June 2022), subject to lessors complying with other legal requirements and the terms of the lease.
As such, consideration should be given to the following:
if any breaches of the lease have occurred after 30 June 2022, or if there are potential issues that may now give rise to a breach of the lease – such breaches are no longer protected by COVID-19 measures;
whether there is any outstanding rent which may now become due and payable, or if attempts should be made to renegotiate unpaid rent; and
that lessors may now seek to negotiate increases in rent.
Already there have been a number of businesses in the hospitality industry encountering issues with tenancies.
Leverage in commercial contracts
Commercial contracts also continue to remain on foot and operational during these rocky periods, and businesses need to be familiar with their rights and obligations under commercial contracts.
In the current environment, it is acutely important that businesses are aware of the contractual levers they can pull to manage contract risks effectively and ensure that contracts remain fit for purpose.
Such contractual levers include to:
review terms and conditions presented to your business by suppliers and consider whether you should seek to negotiate them based on the current landscape;
if your business is facing challenges in meeting obligations under current contracts, consider approaching the counterparty on a commercial basis to seek their agreement to vary or suspend performance of obligations under the contract;
identify (and diarise) any expiry or renewal dates which you could leverage to negotiate more favourable terms. If you have any costly, high risk or otherwise undesirable contracts, seek advice about whether your business has any rights to terminate; and
ensure you have appropriate contract management processes in place, so that complete (and fully signed) copies of your business’ material contracts are readily retrievable if and when you ever need to rely on or enforce them.
Key Takeaways
Given the unique challenges the hospitality industry faces, now is the time for businesses to:
review labour costs to manage any increases, including current wages, entitlements and classifications of employees;
planning and preparing for increased labour costs to assist with minimising any significant or adverse impacts on business;
assess whether they have any outstanding rent payable and if so, what plans should be put in place to manage rental repayments;
re-familiarise themselves with the terms of their leases to ensure compliance;
re-familiarise themselves and seek advice in relation to contractual levers which may be available.
If you have any queries or require any assistance get in touch with us today.
