Reported in The Guardian, The Independent and CityAM - 05.12.2016
Higher costs and stagnating incomes putting strain on restaurant businesses
A total of 5,570* restaurant companies have at least a 30% chance of going insolvent within the next three years as Brexit raises costs and disposable incomes stagnate. In addition, the sharp decline in the value of the Sterling since the Brexit vote has added to the pressure on the sector by increasing the cost of imports for restaurants. The UK imports 48%** of its food and many restaurants rely heavily on imported food and wine.
The restaurant market has become increasingly competitive as a regular supply of new entrants launch innovate food concepts in order to differentiate themselves. This churn in the popularity of different cuisines and food styles has led to some restaurants facing insolvency as new entrants and innovations leave the offerings of existing incumbents looking ‘dated’.
The influx of new participants – 200 restaurants opened in London last year alone – also provides consumers with a lot of choice and results in restaurants cutting prices or offering ‘special offers’ to remain competitive.
As well as higher raw material costs, restaurant companies have also seen the cost of labour increase. The government raised the National Minimum Wage to £7.20 from £6.70 earlier this year which has put added strain on restaurants already struggling to remain profitable. The government has announced that it intends to raise the National Minimum Wage to £7.50 in April next year.
Stagnating disposable incomes has impacted the appetite for consumers to eat out. The UK average gross disposable household income increased just 0.5%, from £17,872 to £17,965***, over the last year.
Even some of the largest restaurant companies have struggled with weak trading. For example, The Restaurant Group has decided to close 33 restaurants across the UK, including 14 Frankie & Benny’s branches and 11 Chiquito restaurants, after a ‘challenging trading period’. The company also has plans to close its flagship Garfunkels branch on the Strand in a further demonstration of the challenges some restaurant formats are facing.
Mike Finch, Restructuring Partner at Moore Stephens, comments: “It’s been a tough year for many restaurants in the face of rising costs and fierce competition.
“It is unrealistic to expect UK restaurant groups to avoid the impact of the fall in the pound by substituting for UK produce – they are going to face a big hit. Restaurants have to make tough decisions as to how much they try to pass on to consumers; too much and they risk losing business, too little and they lose margin.
“Fluctuations in the foreign exchange markets have hit small and medium sized restaurant businesses particularly hard as they have tighter financial constraints and are less likely to negotiate long term supply contracts. All this comes at a time when many consumers are likely to be very price conscious.
“The high number of potential insolvencies over the next year shows just how fragile finances can be in this sector and demonstrates the importance of careful financial management.
“There may be further challenges to come as the UK’s trading agreements with Europe remain uncertain. Many in the restaurant industry would consider the idea of additional import tariffs on foodstuffs with horror.”
If any of the issues raised affect your business and you would like to discuss further, or to receive further information please contact Michael Finch
*Analysis from Moore Stephens’ ‘Moore Data’ service of licensed restaurant registered as limited companies as per Companies House – year end 24 November 2016
**Food Statistics 2016, Defra, latest figures available
***Analysis of GDHI data, ONS, latest figures available