Economic Uncertainty in the 2026 Hospitality Sector
By Ben Johnston, COO of Kapitus, a small business lender and marketplace
The current economic environment is uncertain for the hospitality sector. On the one hand, unemployment remains low, consumer spending remains steady, and low taxes and technology advancements are helping some businesses grow profitably. On the other hand, a volatile tariff strategy, elevated oil and gas prices, supply chain disruptions, and a rapidly changing technology landscape combine to create tremendous uncertainty for small business owners.
The biggest risks to the economy come from rising inflation which could lead the Federal Reserve to raise interest rates. At the moment, inflation appears under control, and many economists anticipate a cut in interest rates before the end of the year. But if rising energy costs and supply chain disruptions lead to higher inflation, higher interest rates could follow, depressing growth and corporate earnings.
Oil Prices:
Rising oil prices are yet another shock to operating margins that small businesses in the hospitality sector need to contend with. Almost a year ago, small businesses were contemplating the impact of “Liberation Day” tariffs imposed on nearly all of our trading partners. Over the course of the year, small businesses learned how to navigate these tariffs, altering supply chains and onshoring as much production as possible in an effort to avoid the tariff’s most painful effects. At the same time, businesses grappled with improving, yet stubbornly high, inflation and interest rates which combined to further reduce small business margins. Today, with oil climbing above $100 per barrel, small businesses are once again grappling with the impact of an unforeseen expense and agonizing over whether to pass these increased costs on to an already stretched customer base. We expect that small hospitality businesses will likely delay raising prices as long as possible – similarly to when tariffs were first introduced – but that businesses will ultimately need to pass these expenses on to customers should prices remain elevated for several months.
The uncertainty caused by a sudden spike in oil prices and the lack of clarity as to the severity and duration of the spike will likely cause many small hospitality businesses to retrench, holding off on starting new projects, taking on new hires, and investing in the growth of the business, until the picture becomes clearer. Given the importance of small businesses to the U.S. economy, this could have a significantly negative impact on the unemployment rate and overall GDP growth.
On the positive side, the U.S. has a robust oil and gas industry which employs many small businesses involved in both upstream and downstream production. These businesses will benefit from higher prices which, if sustained for a long enough period of time, make additional oil and gas projects economically viable. It is also important to note that as the largest oil and gas producer in the world, the United States is less exposed to economic disruption than many other developed economies, especially those in Europe and Asia. As a result, it is likely that fuel costs will rise higher and faster in parts of the world where we are currently levying tariffs with the goal of driving production back to the United States. If U.S. oil prices become a relative advantage to U.S. businesses, it may serve to speed the repatriation of manufacturing back to the U.S. during this period of instability.
The restaurant industry will experience higher fuel oil and cooking gas costs as well as higher food costs resulting from higher transportation costs and higher food production costs:
- One of the industries with the highest dependency on oil and gas prices is the transportation industry which includes long-haul trucking as well as short-haul and local delivery services. Fuel oil is one of the transportation industry’s primary operating expenses, and operators will feel the impact of this disruption immediately.
- The agriculture industry is also highly exposed given the diesel-powered heavy machinery used in production, the distribution costs required for products to reach consumers, and the fertilizer required to maintain crop yields.
Supply Chains:
Supply chains have been unstable ever since Covid when demand changes, production challenges, and labor shortages sowed chaos throughout the world. Since then, global conflicts in Ukraine, the Red Sea, and the Strait of Hormuz, in addition, drought in the Panama Canal region and a stuck tanker in the Suez Canal have combined to wreak havoc international shipping. With Iran’s recent success in closing the Strait of Hormuz, the fear is that more militant actors will emerge with the goal of disrupting global trade in search of profit.
Tariffs:
As a result of the Supreme Court ruling that the Federal Government had illegally collected tariffs from importers in the United States, U.S. Customs and Boarder Protection (CBP) launched a portal called CAPE (Consolidated Administration and Processing of Entries) to handle the processing of refund applications from those parties that paid the tariffs originally. This means that the Importer of Record (IOR), and only the IOR, can apply through CAPE for a refund.
While many small hospitality businesses and consumers paid higher prices as a result of these tariffs, only the importer of record is eligible for a refund. So, if the importer paid a tariff at the port of entry and then raised prices on its imported goods when selling them in order to cover the tariff, that importer will receive an additional benefit through the refund process, which it may or may not choose to pass along to customers in the form of lower prices in the future.
Small businesses in the hospitality sector should be aware of the windfall that some of their suppliers are likely to receive from these tariff reimbursements. To the extent that the costs of tariffs were passed on to small business purchasers of their products, it is reasonable to for these businesses to ask for price concessions on future purchases as compensation for their loyalty and sacrifice. The same argument could also be made by consumers who in turn purchased goods at elevated prices from the small businesses who purchased them from importers.
Given President Trump’s commitment to maintain the use of tariffs as a point of leverage in his negotiations with foreign countries, and his willingness to reach for novel interpretations of existing trade law, it seems unlikely that he will abandon tariffs as an economic strategy. Section 122 of the Trade Act of 1974 allows for tariffs of up to 15% to be imposed for up to 150 days to correct “fundamental international payment problems.” This gives the President the ability to continue using tariffs and provides leverage in future trade negotiations. Section 301 of the Act would likely take longer to implement as it requires trade investigations which take time, but these tariffs would not be restricted to a 150-day time limit, making them more durable and sustaining. We believe that the President remains as committed to his tariff strategy today as he was when he entered office, and that small businesses are unlikely to see a significant drop in tariff rates during the Trump Administration without an act of Congress that defies the President’s wishes.
We do not expect those receiving refunds to reduce prices materially once refunds arrive for several reasons. First, the refunds will likely be paid in a lump sum and will not be attributable to any specific transaction or relationship. Refund recipients are likely to treat the money as a one-time windfall which can be used to either reinvest in the business, or dividend out of the company for personal use. Second, tariffs on most imported products continue under other trade policies, and with consumers now used to paying higher prices for imported goods, we expect these new tariffs to be passed on to borrowers just as the now overturned tariffs were.
Consumer Spending:
Consumers feel less certain about the future than they did in years past. Home and education prices are at historic highs and labor participation is low by historical standards. Today there is a wider wealth gap than at any time since World War II, and workers are increasingly concerned about the future of their employment given technology advances in automation and AI. As a result, small hospitality businesses should tailor products for the consumer segment they are trying to reach. Wealthy consumers are spending heavily on luxury items, while less fortunate consumers are spending on lower-cost items with high utility and value. It is important for small business owners to know the difference and design products accordingly.
What Small Hospitality Businesses Can Do:
Small business owners are taking a cautious approach to expansion given today’s economic environment. They are testing new markets on a small scale and confirming demand before investing heavily in new strategies.
They are also looking for automation and AI solutions to reduce headcount and their dependance on volatile labor markets. There are many new businesses emerging to take advantage of the AI wave. There are new businesses using AI to perform all kinds of services from marketing, to technology development, to design. We expect to see many new businesses formed in the coming years as large corporations downsize and a new generation of entrepreneurs embrace technology to create a new economy.
Successful businesses today maintain options in their supply chain, their headcount, and in their access to capital. Many businesses today are investing in automation as a way to control more of their supply chain and reduce dependency on human capital. With recent advances in AI, many businesses are now adopting AI tools that help them connect with and manage customers, handle accounting and business analytics, and even develop software. Successful businesses also maintain multiple financial relationships capable of providing working capital to fund growth. Many also finance equipment purchases and maintain revolving lines of credit to manage the volatility of cashflows month to month. It is important for small hospitality businesses to maintain both bank and non-bank relationships to ensure access to a full suite of financial products.
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