Last Updated on Thursday, 28 September, 2023 at 9:20 am by Andre Camilleri
Last Monday, the Association of Catering Establishments (ACE), invited me for a panel discussion. Prior to the panel discussion, Dr Vincent Marmara delivered a presentation outlining the results of a survey carried out amongst the industry. According to the figures labour costs seem to be the biggest expense incurred by the industry. Conversely, rental costs are also quite pronounced in the survey.
Personally, I think that the catering establishments are facing undue pressures, mostly due to high inflation. Indeed, the prices of raw materials spiked in the past two years, primarily due to the problem of the war in Ukraine. Food prices are constantly increasingly due to multiple factors, inter alia, the energy shocks experienced in 2022, the restrictions in the supply of wheat, cereals, and other produce from Ukraine, as well as changing world economic patterns. As I have been stating for the past year, the war in Ukraine, left a scar in the way we do international trade. We are experiencing a supply side problem, which means that any demand side policies trying to curb inflation to pre-war levels, would need to literally slow economies to the point of almost negative growth. President Lagarde is trying to live to the ECB’s mandate to control inflation. However, resources are more focused on trying to deaccelerate climate change.
One of the questions that came out of the panel discussion on Monday, relates to the sustainability of the catering industry and the persistence of the EU to transit to cleaner and sustainable practices, in view that the figures barely show a profit for those within the industry. Clearly, the acceleration of the green transition is technically a geopolitical game. In my preceding opinion pieces, I said that sadly, the green transition is ill-timed because it coincided with a period of persistent high inflation. Given that what we are facing is a cost push inflation, shocks will persist until world trade economic patterns adjust. Clearly, the Green Deal was designed for a smooth transition with a ceteris paribus concept. Personally, I believe that more can be done on the EU’s side to re-adjust the Green Deal to the current realities. Surely, the majority of those within the catering sector won’t be captured within the perimeter of the CSRD and the European Sustainable Reporting Standards, which exerts additional costs in terms of reporting requirements on the industry when it comes to accountants and auditors, as well as the retrofitting of buildings. Unquestionably, any additional costs would mean higher inflation if not absorbed by the industry.
With such introduction of new reporting standards, in a free-market world, the least cost effective will be out of the market. That’s how liberalised markets work and what Adams Smith refers to as the invisible hand. When you look at the industry, it operates in a monopolistic competition market. Obviously, we cannot say that it is a perfectly competitive market because clearly there is no perfect competition. However, the opening up of additional restaurants and other catering establishments is obviously cultivating a culture of cutthroat competition within this industry. Obviously, competition is good when it is fair competition because it fosters quality for consumers. The survey showed that those owning the premises enjoy a competitive advantage unless they are not paying a loan. In my intervention, I said that those owning the premises are advantaged when considering the current high inflationary context, because locally, interest rates were left unchanged, in contrast to those paying an annual increase in rental costs to match inflation.
Nevertheless, loans on properties were not within the scope of this survey. However, an option to explore is to perhaps introduce an indexation pricing formula for the rental market to provide some stability during times of force majeure. Possibly, the government can look into the option of revising the rent regulation and attach an indexation formula for a temporary period of persistent high inflation. It might provide some stability and balances out competition relative to those who own the property. The idea is to slash the costs by roughly 3% over a period of 3 years. Obviously, we still need to chase and monitor costs. Indeed, when it comes to cutthroat competition, the secret to success is frankly how efficient a business is in controlling costs. Ideally, the government must look into controlling the spawning of restaurants run by TCNs.
In my intervention, I explained that sustainability practices, coupled by the introduction of the beverage containers recycling fee, contributed to an increase in expected inflation. However, to anchor inflation expectations Central Banks revert to monetary policy tightening. It is when President Lagarde announces additional increases in the interest rates, which are obviously demand side policies rather than supply side policies. Technically, this is why inflation is still persistently high because until the world economic patterns change and adjust, inflation is here to stay. Ironically, the authors of such an economic mess would be gone by the time inflation subsides and adjusts.
However, what surprised me most from the panel discussion was the reference to the BCRS reimbursement of beverage containers collection fees. Apparently, if a catering outlet uses the services of BCRS to collect the beverage containers, the reimbursement of the collection fees takes over 3 months. Similarly, it is creating a liquidity problem in times of high inflation. Furthermore, it would have been interesting to see how the industry would fare if government subsidies on energy bills were lifted. Surely, it would push utility prices and delivery costs exceptionally up, and several outlets would be driven out of the market. If the EU Commission persists on the narrative to remove the subsidies on energy bills, I would propose a change in VAT, as a proper justification.
Also, during the conference a reference to the economic note by Sagalytics and Dr. Joseph Muscat was made to outline that people are not ready to reduce consumption, yet. However, due to high inflation, consumers are either eating their savings to retain the same level of consumption, or else they are asking for wage increases. Clearly, the majority of respondents reported that if inflation were to persist, they would have to reduce expenditure. Afterwards, the discussion veered to the usual annoying narrative of why Malta is not attracting high quality tourists. I have been listening to this statement for as long as I’ve been around. Obviously, all tourists that visit the island are appreciated. We cannot say we want high quality tourists when the demographics of inbound tourists are similar across Europe.
Minister Clayton Bartolo, explained in detail the strategy to attract additional tourists, including religious tourism and other strategies to target other niches. Perhaps, something worth exploring is annual EXPOs in winter, such as auctions on fine arts, and other sought-after trades to tap into other niches of tourists. We also need cultural tourism in winter to attract high income tourists.
Lastly, we all long for quality. But bear in mind that once the quantity starts decreasing, even quality diminishes, because it would mean less competition and appetite to renew.