Demand falls and prices rise: the example of gastronomy

It is estimated that in 2023, the turnover value of the catering market increased by approximately 10%. nominally – well below the inflation rate. It should be assumed that companies also benefited from the tax solutions of the infamous Polish Order.

High profitability of large entities in the industry and rapid increase in catering prices

It is worth supplementing the above diagnoses with additional information. Firstly, it turns out, paradoxically, that the profitability of large companies in the catering sector (and hotel industry, considered together) in the last two years has been above average (chart). After a dramatic collapse in 2020, the profitability of this sector quickly returned to very high values.

Of course, it should be remembered that the Central Statistical Office data on profitability concern approximately 300 enterprises in the catering industry (including the hotel industry) employing over 50 employees. Meanwhile, there are probably over 80,000 smaller companies of this type. Opinions about the difficult situation and even worse prospects concern the “mass” of small entrepreneurs in this industry. They do not apply to large companies that are apparently doing well.

The second piece of information worth noting is the behavior of the retail price index for catering services (including the hotel industry). It turns out that the price index systematically exceeds the general inflation index (CPI). Importantly, the difference between both indicators has increased significantly during 2023 (chart).

In December 2023, the CPI was 6.2%, and the retail price index for gastronomy (including hotels) was as much as 9.9%. In December 2023, price increases for the catering and hotel industry accounted for approximately 0.5 percentage points of the overall inflation rate.

Two market segments

Several conclusions can be drawn from all of the above information.

Firstly, with the ongoing increase in costs, the ongoing reduction in the scale of demand eliminates many “smaller” (and financially weaker) companies from the market. What is remarkable is that these companies seem unable to pass on rising costs to rising prices. The customers (less wealthy, but more numerous) of most of these companies cannot afford the more expensive “eating out”. So we are dealing here with an active “demand barrier”.

Secondly, larger (and especially large) companies are doing very well. Their profitability is high and constantly growing – despite the increase in costs, which cannot be sustained by all small enterprises and small plants. Their (less numerous but more affluent) group of customers can afford services that are more expensive than average. In relation to this market segment, demand does not seem to limit price increases.

Thirdly, probably, the shrinking segment of small businesses makes life even easier for those enterprises that are able to survive (especially the large ones). They can raise their prices more freely, fearing less competition from small enterprises “sideways”.

Demand is falling and prices are rising?

It is commonly believed that rising prices reflect growing demand, through an impersonal “market”. In fact, the prices of most consumer goods and services are changed not by the “market” but by their specific producers and sellers. Very often it has nothing to do with changes in demand for them. We experienced an incredible increase in the prices of energy, water, municipal services, etc. This was not caused by an increase in demand for energy, water, etc.! Also not due to a sudden spontaneous reduction in their potential supply. It is even conceivable that this decline in demand will prompt sellers to raise prices (to compensate for losses due to reduced physical sales volumes). The “paradoxical” effect of recession (i.e. decline in demand) has already been described by Michał Kalecki. According to him, the decline in sales volume increases the burden of fixed costs, thereby reducing the profit margins of producers. It is therefore appropriate to raise prices to protect margins.

“No” to “cooling” the economy

What is the conclusion? First of all, we need to appeal for a less simplified understanding of the ongoing inflation process. Quite high inflation is not necessarily the result of excessive demand. “Cooling” the economy with monetary and/or fiscal policy measures does not necessarily accelerate disinflation, but only reduces demand. But by eliminating many producers and suppliers from the market, it can also reduce the supply. As a result, the alleged excess of demand over supply may persist – with a reduced scale of economic activity. Moreover, by eliminating some producers from the market, “cooling” may make life easier for companies that survive this “cooling”, and thus their market position is strengthened. They are able to generate above-average profits – including: dictating prices higher than “normal” prices (which would apply in conditions of more effective competition).

The author expresses his own opinions, not the official position of the National Bank of Poland.