A fine summer for most Minnesota hospitality and tourism businesses, but challenges remain

Minnesota’s hospitality and tourism sector had a decent summer: Nearly three-quarters of businesses reported positive financial health, according to a recent survey conducted by the Minneapolis Fed in partnership with Explore Minnesota Tourism and Hospitality Minnesota.

But the number of financially healthy businesses was less than the previous two summers and has been trending downward since a year ago (Figure 1).

Many businesses blame inflation, a tight labor market that has pushed wages upward, and declining customer demand.

“Customers have cut back on multiple stays at the campground to one to two stays per year versus three to four last year,” said a survey respondent from a southern Minnesota campground. Guests just have less disposable income because of higher costs of living, she said.

More than 270 respondents participated in the survey, which was conducted in late August at the tail end of the peak summer travel season.

Inflation affecting finances, customer demand

Demand for hospitality and tourism services was reported to be relatively healthy for most respondents. Overall, 62 percent said traffic was the same or better than a year ago and 66 percent said revenue was the same or better. Financially unhealthy businesses were less likely to report same or better traffic and revenue.

Outside of customer demand, inflation was noted as the most significant challenge for the industry, with nearly 60 percent of respondents identifying it among the top two challenges their businesses face.

Inflation has been higher than the 2-percent year-over-year level considered healthy by many economists since early 2021, peaking in 2022 at close to 9 percent. By summer 2023, inflation averaged just 4 percent. Businesses, however, are still playing catch-up with pricing.

Retail businesses are often reluctant to pass on to their customers the full price increases they receive from their vendors for fear of losing business. In summer 2023, 56 percent of respondents said their vendors had raised prices higher than 5 percent, but only 33 percent said they raised prices for customers by the same amount. That 23-percentage-point gap, while wide, was not as wide as the 34-percentage-point gap a year ago (Figure 2).

“We have raised prices and reached a peak,” a respondent from a Twin Cities restaurant said. “Unfortunately, we are unable to raise prices high enough to recover the wholesale price increases and the cost of labor increases. We have higher sales and a lower company [profit].”

At the same time, inflation may be dampening customer demand either by causing customers to spend less or not visit at all, as several respondents suggested.

Labor market still tight

Aside from inflation, the other top challenge identified by respondents is labor availability for open positions, with 36 percent naming it one of their two top challenges.

“Candidates do not reply when we reach back out to them. No-show rate is about 50 percent for in-person interviews. And candidates often string along offers and wind up taking another position,” said a respondent from a Twin Cities hotel.

Despite a decrease in job openings statewide, the labor shortage remains in force. As of June, there were roughly two job openings for every unemployed person in the state, according to the Bureau of Labor Statistics. Among survey respondents who were hiring, 45 percent considered the labor market to be very tight.

But that’s actually a significant change from a year ago, when there were 2.5 job openings per unemployed person and 70 percent of respondents said the labor market was very tight. Employers said they still need to work hard to attract workers, especially those with experience.

“I have built my staff by being overaccommodating and picking up the slack when workers don't show up to reduce any burden on the rest of my team,” said a respondent from a northeast Minnesota hotel.

The most popular way to attract and retain workers, respondents noted, is increasing wages, which 75 percent said they had implemented. But with most employers increasing wages, standing out becomes a challenge.

Higher wages have “helped in retaining some employees but since the entire market is increasing wages as well to compete for staff, I don't know if it's truly making an impact in attracting staff,” said another respondent at a northeast Minnesota hotel. “It makes us competitive and on an even playing field at least.”

Other popular labor-attraction strategies include making schedules more flexible (implemented by 49 percent), improving the hiring process (28 percent), lowering experience requirements (26 percent), and offering more on-site perks, such as free food (25 percent).

Into the fall

Looking ahead to fall, when activities tend to slow down for some hospitality and tourism businesses, 45 percent of respondents said they feel optimistic and another 31 percent feel neutral. Most expect customer traffic and revenue to be about the same as or better than a year ago.

But they continue to fret about inflation and hiring difficulties. Sixty-four percent said inflation seems like it’s getting worse, and 40 percent said the same of labor availability. Higher interest rates have made it difficult for some respondents to invest in their facilities.

“One property needs a roof and we cannot afford it,” said a respondent from a northeast Minnesota resort. “This will slowly ruin the building, but that is a measure of risk we have to take now.”

Many respondents, however, are looking past the challenges to the opportunities.

“Although there are economic challenges, we are fortunate enough to be in a location that continues to see sales growth/customer growth,” said a respondent from a northeast Minnesota grocery store. The respondent reported worsening inflation and wage pressure but also added that their “assumptions are that there are no immediate or major limitations to projected growth.”