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Restaurant insolvencies jump 64% in perfect storm

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The cost-of-living crisis may damage the UK’s beleaguered hospitality sector more than Covid, as new figures show a major jump in the number of restaurants going under.

11th Aug 2022
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It’s an “out of the frying pan into the fire” situation for the UK’s restaurant sector, which is suffering runaway inflation and plummeting footfall as the cost-of-living crisis drives customers away.

The number of restaurants entering insolvency jumped 64% in the past year amid staff shortages and soaring household bills, according to new data from UHY Hacker Young.  

Some 1,406 restaurants in the UK were shuttered in the 12 months to May 2022, up from 856 in the previous year, UHY found. 

The wider hospitality sector endured a 56% rise in insolvencies, putting restaurants well above the industry average for struggling businesses. 

Restaurants are also near the top of the list of most critically distressed businesses, according to new research by insolvency specialist Begbies Traynor. Hospitality continues to be affected by rising inflation in the “real economy”, which is far exceeding the official rate of more than 9%, Begbies said. 

“Pressure is rising on the restaurant sector every day. More and more of them are shutting their doors as a result,” said Peter Kubik, UHY Hacker Young partner. “Restaurants that only just managed to survive the pandemic thanks to government support are now facing fresh challenges in the form of rising inflation, a post-Brexit labour shortage and consumers who simply cannot afford to spend as much.”

Worse than Covid

AccountingWEB community members have also reported the critical situation of some popular local venues around the UK, citing worker shortages and low footfall. 

Many high-street stalwarts have gone under following the coronavirus pandemic, with Byron, Gourmet Burger Kitchen, Carluccio’s, Strada and Jamie Oliver’s restaurant empire all suffering heavy financial losses through multiple lockdown and social distancing rules. 

Manchester restaurateur Simon Wood is one of many high-profile industry figures calling for swift government intervention, proposing tax cuts and other measures to stave off further insolvencies.

“The economic crisis is crippling the hospitality sector,” Wood said. “Without an immediate VAT cut there are going to be many businesses that become untenable.”

Kate Nicholls, chief executive at trade body UKHospitality said the “ever-worsening situation” would also leave thousands of businesses unable to pay their own bills. “Urgent action is now required to help manage this – we are not going to get a grip of the cost of living until we tackle the cost of doing business,” she said.

Sacha Lord, Greater Manchester's night-time economic adviser, said the hospitality sector is now in an “extremely perilous position”, more so than during the Covid pandemic.

“Trading is now unviable for many and I believe we will see closures at an unprecedented level over the next 12 months leading to unemployment on an unimaginable scale,” he said, adding that he backs a temporary reduction in VAT on business energy bills from 20% to 5%.

Exceptionally difficult economic picture

UHY said that losses at the top 100 restaurant groups had broken £800m in the previous six months, despite major restructuring programmes during the pandemic. 

“Taken together with higher labour, material and energy prices, and combined with faltering consumer and business confidence, companies are facing an exceptionally difficult economic backdrop,” said Julie Palmer, partner at Begbies Traynor. 

Gas and electricity prices spiking has contributed to a slowdown in consumer spending, as it has forced up the price of everyday items and contributed to what Bank of England (BoE) governor Andrew Bailey called a “wage spiral”. The central bank has raised rates on multiple occasions in an attempt to fight inflation, with Bailey concerned the effects will increase the number of Britons in poverty and hit the group disproportionately. 

Analysts predict inflation could rise as high as 12% by October, putting households under further financial pressure and limiting their ability to eat out. 

Combination of factors

Accounting experts say an unprecedented combination of factors including cashflow shocks, inflation, Brexit and labour shortages have struck at once. 

“Individually they would be enough to cause significant problems, but combined they are a perfect storm, which is crippling the sector as a whole,” said Rick Smith, managing director of turnaround specialists Forbes Burton. “Not many industries could survive this kind of unrelenting pressure, so to see businesses continuing is admirable.”

The hospitality sector needs to look at what can be gleaned from this time too, Smith told AccountingWEB. “Plans need to be put into place to be able to cope with these and other scenarios. The rise of online ordering and apps is unlikely to replace physical hospitality in the long run as people will always need the social aspect. They are more likely to augment the hospitality sector,” he said.

Businesses that stand out with unique offerings may be best placed to ride out the volatility, Smith said.

“Customers want experiences, and venues and businesses can possibly do better if they carve out their own niche, such as a certain type of cuisine or offering a unique and exclusive experience for diners or bar patrons,” he said. “Recovery will take place, but it will be once we have a grip on the extraordinary pressures on the country.”

Replies (8)

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By Justin Bryant
11th Aug 2022 11:16

Without wanting to sound callous, if these businesses are in terminal decline then it's not really for the taxpayer to bail them out, in case anyone's suggesting that. (If there were large bankers' bonuses at stake things would be very different of course.)

Also, see here re VAT recovery on energy bills, so a VAT cut there won't really help for VAT registered businesses.

https://www.accountingweb.co.uk/any-answers/reclaim-vat-on-business-elec...

Perhaps what they mean instead is a VAT cut from 20% to 5% on the food etc. to attract more punters?

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LL
By RickyRoark
11th Aug 2022 13:54

Whenever we're discussing the "cost of living" crisis/inflation it is crucial to remember that the only thing capable of causing inflation is the Bank of England printing money and politicians/government spending it.

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Replying to RickyRoark:
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By Hugo Fair
11th Aug 2022 16:46

You alleging that Putin is a politician?

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Replying to Hugo Fair:
LL
By RickyRoark
12th Aug 2022 13:14

I'm assuming you're being sarcastic, however for readers who may think Putin has something to do with increasing costs:

- Putin orders Russia to invade Ukraine
- Our politicians impose sanctions on Russian officials/heads of state
- Our politicians place trade bans on Russian oil/energy
- Demand for non-Russian oil/energy increases, supply remains constant
- Price for non-Russian oil/energy therefore increases
- Cost of our oil/energy increases
- Countries without a stake in Russia/Ukraine (i.e. Saudi Arabia) buy Russian Oil at the regular price and resell it back to us at a higher price
- We pay higher prices and Russia remains unaffected

It is also worth noting that our politicians introduced the Energy Price Cap a few years ago. Anyone who has read the introductory chapters to any Economics textbook will understand that price controls do not work. We had around 70 energy companies in 2017, since then around 60 have gone out of business.

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VAT
By Jason Croke
11th Aug 2022 20:46

The media is so focused on the electric price cap, that we forget hospitality is seeing the same price rises.

How much longer can Gregg's and Costa keep their prices whilst the cost for the ovens and coffee machines and Aircon are tripling every month?

VAT as a cost isn't an issue for businesses as they can reclaim it, there is perhaps an argument now that those cafes keeping below the threshold may now find it beneficial to register for VAT, as although that outs up their consumer prices, the potential input tax recovery in electric and gas may see the cafe afford to reduce prices and maintain margins.

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By alejandra
12th Aug 2022 11:03

Check your pub/restaurant customers' till receipts! A pub that my company visited for a staff meal charged us £108 VAT on a £378 bill, i.e. nearly 29%, presumably due to someone setting up the tills wrong. The manager insisted it was correct. So they are either overcharging customers or giving away profit to HMRC, which is a real shame the way things are.

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By [email protected]
12th Aug 2022 13:17

From someone who owns a small restaurant, is an accountant and has worked in the commercial utilities sector I can totally understand this.
We haven't seen the impact of these energy prices really yet. At Christmas we were looking at rates of 24p for electrify and thinking this was unsustainable, now we are seeing clients signing Gas contracts this rate! Electricity rates at 80p plus.
Business coming off 2-3 year contracts are paying around 14p
You will see profit margins wiped out in a lot of small independent eateries or huge prices rises, which will in turn keep people away.
Agree re the VAT on energy bills, it would aid cash flow but nothing else.
The 5% on sales would be welcomed back and would make a difference

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boxfile
By spilly
12th Aug 2022 13:53

Locally, we’ve seen landlords increasing the rents by about 20-25%. And what I find really galling is that VAT is charged on the green energy levy. Surely the levy should be vat-exempt as it’s a ‘special’ tax?

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