Fewer customers, less revenue for Minnesota hospitality and tourism sector

Minnesota’s peak travel season has been slowing for a growing number of hospitality businesses, according to a recent survey of the industry conducted by the Minneapolis Fed in partnership with Hospitality Minnesota and Explore Minnesota Tourism.

Half of businesses from restaurants to resorts had worse customer traffic from June to August compared with a year ago, survey respondents said. This tracked closely with revenue trends.

They reported that reasons for worsening traffic and revenue ranged from customers having less money for travel because of the rising cost of living to rain and flooding keeping customers away.

The operator of a Twin Cities outdoors activities business said many customers have complained about the cost of travel to the area, including various fees and taxes. “Others have also mentioned that this is their first time visiting and will probably be their last because of the expense overall.”

Businesses in the Twin Cities and the state’s northeast region were especially hard hit, with a larger share of survey respondents reporting worsening traffic and revenue. Among business sectors, food and drink establishments were hardest hit.

The survey was conducted in late August and early September with participation from 266 hospitality and tourism businesses in Minnesota.

Fewer customers, less money

Compared with the past three summers, more and more hospitality and tourism businesses have reported decreasing demand for their services (Figure 1).

Survey respondents differed in their explanations for why this was happening. Inflation was a common theme, though there were other challenges.

In the Twin Cities, several restaurateurs said the fear of crime kept customers from coming downtown. In the state’s northeast region, the operator of a brewery said customers who might have come to the area to attend festivals didn’t because those events were rained out.

In the state’s southern region, the operator of a fishing outfitter said her business was hurt by weather also. “We run fishing guided trips. The flooding cancelled four weeks of trips with average loss of $400 per trip. [Equipment] sales were also way down as people were not fishing, so not in the area and needing gear.”

Challenged by growing expenses

Though official measures of inflation have slowed compared with a year ago, 60 percent of survey respondents identified the rising costs of goods and services used by their business as a top challenge outside of customer demand (Figure 2). This is similar to survey results from summer 2023.

Wage increases was a top challenge for 28 percent of survey respondents; this was the second most common response. Some survey respondents said they had to pay higher wages because the cost of living is higher for their employees. Labor availability was much less of a concern compared with a year ago.

Another significant change from a year ago is the share of respondents who said government policy was among their top challenges. Many said the state’s new earned sick and safe time (ESST) requirement increased their costs. Under the ESST law, which went into effect January 1, employers must provide an hour of paid leave for every 30 hours worked up to a maximum of 48 hours of paid leave.

The sector most affected by these challenges—inflation, wages, government regulations—was food and drink establishments. For example, 70 percent of respondents from this sector said inflation was a challenge compared with 57 percent of respondents from other sectors.

A Twin Cities restaurateur said her costs have increased significantly since 2020, with average hourly wages up 63 percent and food prices up 40 percent. Higher sales taxes and ESST requirements will increase costs as well, she said. “The outlook for our business has significantly softened over the last year and doesn’t look [like] change is coming anytime soon.”

For comparison, inflation has increased by 21 percent since summer 2020.

Many respondents said they were concerned about passing on the costs to customers for fear of pricing their services too high.

“Times are tight for most and especially those with families, which is the market base for a resort,” said a respondent from northeast Minnesota. “So while resort costs go up on our end we can only charge so much before we price ourselves out of the market. I feel we have reached that tipping point where the costs of business may be exceeding what the consumer is willing to pay!”

But while inflation and labor remain top challenges, the intensity of those challenges appears to have abated. The share of respondents reporting very high increases in wages and the prices of goods and services have decreased significantly from a year ago. For example, 35 percent of respondents in summer 2023 said they had increased wages by 5 percent or more. This past summer, 21 percent said the same.

Still, these challenges have had a cumulative effect. While a majority of respondents reported their financial health was stable but positive or growing, that majority has shrunk over time (Figure 3). Two summers ago, 81 percent reported positive financial health. This past summer, it was 64 percent.

Mixed outlook

As the hospitality and tourism industry enters the fall shoulder season, the outlook is mixed. A third of respondents were pessimistic about the next six months, a third were neutral, and a third were optimistic.

The reason for these sentiments varies. Many respondents cited their perception of the economy, the number of reservations in upcoming months, and even the weather. Respondents from the northeast, where fall colors often attract tourists, said they hoped for good weather.

Several expressed concern over customers’ willingness to spend given the cost of living.

The operator of a northwestern Minnesota resort said that while cabin rentals were down only slightly this past summer, they had observed customers cutting back significantly on buying items such as ice cream or T-shirts at the resort store. They said this pattern will likely continue into 2025. “We do not anticipate guests spending additional monies once they are here.”