A perfect storm for restaurants?

Brexit is pre-occupying the government at a time when ever higher minimum wage rates, soaring rents and an unfair business rate system are creating a perfect storm for the restaurant industry, say Bob Cotton and Miles Quest.

Twenty per cent of restaurants are facing closure, a recent survey claimed. It’s always news when a research study comes out with findings that catch the headlines, and when it’s published by an accountancy firm those headlines are taken seriously.

So it was when research by accountants, Moore Stephens, suggested that a total of 14,000 restaurants faced the prospect of closure as a result of rising labour and food costs, the latter caused by the weakened pound as a result of Brexit.  That 14,000 figure, however, represents barely 10 per cent of the total number of restaurants and pubs and well-managed operations remain quietly profitable. 

Nevertheless, this forecast may not be an exaggeration. Last month, Jamie’s Italian and Byron Restaurants went into Company Voluntary Administration, well known brands are shutting outlets and   restaurant insolvencies in 2017 jumped by 20 per cent.   

So, what’s new?  Restaurants are low margin businesses and represent the most volatile sector of the hospitality industry; they are forever opening and closing.  Many restaurants start- up every year (though often in existing premises) but well over half do not survive for long.  The restaurant industry is not – and never has been – for the unwary, the unknowing or the unrealistic. 

“Without productivity increases (or price rises) these extra costs are cutting profits, directly and alarmingly.”

The churn has been made more pronounced by the headlong – in some cases, foolhardy – growth of some restaurant brands many of which are owned by investment funds who, from present experience at least, have not proved to be natural restaurateurs.  This over-supply has created an even more competitive market place in which too many outlets are chasing each other’s customers at a time when operators face ever higher costs which are difficult to cover with higher prices. 

It’s creating an almost perfect storm for the restaurant industry.

Take wages.   Because the National Minimum Wage (NMW) affects as much as 60 per cent of the workforce, the annual hike in NMW is affecting the entire hospitality industry more than most others.  NMW workers are currently enjoying enforced annual pay rises.  In April this year NMW reaches £7.83 an hour, a rise of 33p.  That doesn’t sound much but it amounts to an extra £11.55 for a 35 hour week which will cost the industry in the region of £300m – no-one quite knows how much.  Future planned increases will have a similar impact.  

Further pressure is being exerted by those in better paid jobs as they seek to maintain the differential in their wages – something which employers are finding  hard to resist. Without productivity increases (or price rises) these extra costs are cutting profits, directly and alarmingly.   

Even more worrying, Brexit will result in a further unintended rise in wage costs.   Any shortage of migrant workers will mean that employers can only compete for fewer available staff by offering higher wages.

Just as serious, recent fearsome increases in business rates (and rents) have largely wiped out some restaurant profits.  Jamie’s Italian and Byron (among others), situated, as they are, in high streets where rate values and rents are highest, have had to renegotiate existing rent levels.  At the same time, business rate increases represent many thousands of pounds of additional cost.   Jamie’s Italian estate saw an overall 28 per cent hike in business rates (an astounding additional demand of £1.6m in 2017 according to Colliers) while Byron, Prezzo and others saw similar – or even greater – percentage increases.   

The government is partly to blame here.  A review of the whole system of business rates, and the basis of their calculation, is long overdue. 

“Rising wage bills, rising rates and rents, rising energy costs and rising food costs all impact on a restaurant’s four greatest cost centres.  A perfect storm is threatening to overwhelm all but the most efficient market-focused operator.”

Business rates for hotels are largely based on turnover; restaurant business rates are based on the property’s open market rateable value; rates for pubs are based on the annual level of trade that a pub is expected to achieve if operated in a reasonably efficient way.  

As rates are revised only at irregular intervals any increase – as happened in 2017 – is guaranteed to be hefty because the revision is compared to values five or more years previously.

But why is there a different way of calculating this major business expense for the three most significant sectors of the hospitality industry?  What is the difference, in today’s operating conditions, between a restaurant and a gastro pub?   Or even between a pub that serves food (as almost all do) and a restaurant that serves drinks (as almost all do)?   And why should a hotel be penalized by adding rooms and facilities (thereby increasing its revenues), which, as a result, causes it to be liable for higher rates?  In effect, this is a tax on investment.

Rising wage bills, rising rates and rents, rising energy costs and rising food costs all impact on a restaurant’s four greatest cost centres.   A perfect storm is threatening to overwhelm all but the most efficient market-focused operator (thankfully, there are many of them).

With its eye over-fixated on Brexit, the government is neglecting the day-to-day concerns of businesses.  A review of the business rate system is long overdue; some availability of migrant labour post-Brexit should be guaranteed for hospitality and the number allowed in should be agreed; the constant upward pressure on the NMW should be alleviated, perhaps with regional or sectoral  variations.  For most hospitality businesses, these concerns are far more immediate, and have the potential to be far more damaging, than Brexit is ever likely to be – something which UK Hospitality, formed by the recent merger of BHA and AMLR, should quickly recognise..  

Scrapping the BHA’s VAT reduction campaign – which has zero chance of success – would give the new association more time and resources to concentrate on these more pressing issues. 

Helping the industry ride the perfect storm which is gathering pace on the doorstep of every restaurant in the land must surely now be the priority.