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Struggling hospitality sector continues to feel the heat

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Following a perfect storm of economic blows to the sector, a battered hospitality industry grapples with an uncertain future.

2nd Nov 2022
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After the turbulence of the pandemic forced swathes of hospitality businesses to shut their doors, those that remain have been left with a host of challenges to contend with and even more questions for their accountants.

For member moboffsol, fears for their hospitality clients have left them in a difficult position as they struggle with the reinstatement of the 20% VAT rate, and so came to the Any Answers forum for advice. “Am I missing something that I should be advising them on or do I just sit back and watch while they go under?” moboffsol wrote, adding that, at the rate things were going, many of their hospitality clients were on their way out. 

VAT on the side

Responses to moboffsol were mixed, with many believing that the VAT increase was the least of the hospitality industry’s worries.

“The hospitality sector has gone through a perfect storm of negative events that have left many struggling,” friend of AccountingWEB Glenn Martin wrote, arguing that a combination of rent arrears, energy prices, staff shortages and a hangover from Covid is affecting businesses and customers alike. “The cost of going out now is huge, and with many worrying about paying bills, leisure money takes a hit. The city centre will likely survive but village pubs and rural venues will likely disappear at a rate of knots.”

Jason Croke also believed that VAT was not to blame, reminding the poster that VAT should never factor into profitability. “The first mistake is to blame VAT, as many businesses do. I agree that customers vote with their feet and what I post here may be controversial, but if the pub isn’t making money, it needs to increase its prices and look elsewhere to grow or diversify the business.”

Ben Steele, owner of Bristol-based firm Steele Financial, was also cautious to blame VAT as a chief issue for the sector, instead pointing out that the businesses that are now struggling with VAT payments are likely to have had issues before the reduction. “I said to my clients, ‘Pre-Covid, you dealt with this VAT percentage; it’s not new. It was existing right up until Covid and all we’ve done is go back to it. So if you’re struggling, there was an issue before the VAT reduction, so we need to actually look at why there was an issue as opposed to blaming the increase.’

“The problem is some businesses became complacent with more profit than they had ever had. But that was just because of a temporary reduction; it wasn’t theirs.”

Recipe for disaster

Kalil Kierans, senior manager at Bristol bar/kitchen the North Street Standard, echoed the points noted by the Any Answers community, saying that while the move back to a 20% VAT rate has been difficult, other areas have been causing bigger headaches.

“VAT is always a killer, but we were prepared for the change. We were also able to get a fixed rate on our energy bills before the rise, which has really helped. For us as a bar/kitchen, the real worry is the upcoming rise in alcohol tax and the issues that can cause further down the line,” Kierans said, adding that the employment crisis affecting the industry has also caused problems for his establishment.
“The owner stood by and supported me and the team during Covid, which has alleviated hiring pressure, but filling positions is still difficult. With things up in the air still, we just have to wait and see before we can react.”

Sympathising with Kierans’ struggles, Steele has seen what he describes as the “business version of long Covid” affecting his hospitality clients’ employment prospects. “The biggest issue that I think hospitality has been facing is not just finding it near-impossible to recruit – and even then, recruiting good, solid, decent, loyal staff – it’s also managing the higher costs of employment,” Steele said.

And it is the increasing cost, alongside a diminishing pool of workers to fill positions post-Covid that Steele believes is compounding wider economic issues. “Partnered with the obvious like utility increases and general costs, as well as Brexit massively pushing up the cost of raw materials, everything has increased and nothing has come down.  That’s all bad as it is, but because some of those cost issues actually affect the general public, the two together are a perfect storm.”

Getting creative

Although the industry has taken a beating over the past two and a half years, Steele believes that the hospitality sector is beginning to adapt to the changing demands of the market. “There are creative ways for people to now start and test the market with their food and drink ideas, such as this newish phenomenon of dark kitchens,” Steele said.

Dark kitchens, or ghost kitchens, are delivery-only restaurants, completely cutting out the dine-in experience as the take-out market continues to grow. At a recent hospitality expo, Steele spoke to some of the big players in food delivery who are now investing in these kitchen set-ups, potentially offering struggling restaurants an alternative.

“Deliveroo has created a dark-kitchen premises in Bristol and is now offering takeaway businesses a spot there. It’s these new ideas that are keeping the industry going and encouraging people to enter the market,” Steele said.

Some in the Any Answers community, while not explicitly mentioning the dark-kitchen option, noted the success of some hospitality businesses renting out their kitchen spaces to other culinary enterprises.

“If the numbers work, consider getting an operator in to run the food side. They pay you a rent and staff it, you get the crossover trade re the drinks sold and so on,” user DJKL said, while moboffsol considered franchising to help alleviate their clients’ pressures.

Tackling the issue

While the outlook for the hospitality industry remains relatively bleak as the country heads into a harsh winter, Steele remains optimistic that the sector can pull through with as few economic casualties as possible. 

However, he was adamant that clients needed to consider reaching out to their financial adviser more frequently and become more invested in the financial success of their business. “It may be completely misguided optimism, but that’s based on how the past three months have gone, compared to what we expected them to be like,” he said.

“I can only say to clients to keep going, but it’s not going to be okay on its own. They have got to make things okay for their business – nobody’s going to do it for them. We’ve taken on many hospitality clients recently and their numbers were shocking because they didn’t know how they were doing. They were running businesses blind because their accountant did year-end accounts only and so they were finding out how they did 12 months later, which is useless.

“That’s why it is so vital to tackle it head-on,” advises Steele. “Get a good accountant to monitor your business several times a month at least and if you do that, you’ll have that good support to guide you.”

 

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