Six Restaurants A Day Declared Insolvent – But Why?

3 August 20234 August 2023 Business Business Matters
“Insolvencies of restaurant businesses are now happening at a far faster rate than during Covid,” Rebecca Dacre, a partner at Mazars, said. “It is a very toxic mix of rising input costs, sharply rising finance costs and weak demand. Most restaurateurs have not seen this combination of negative factors before.” Industry lobby groups including UK Hospitality and the British Beer and Pub Association said last month that more than a third of hospitality businesses could go bust by early 2023. While the industry experienced a rebound in business this summer after a string of forced closures during Covid lockdown periods, restaurants are now struggling with surging inflation, which has not only increased the cost of energy, food and drinks, but meant their customers have less money to spend on going out. Barclaycard recently reported that more than half of Britons were planning to cut down on essential spending, raising concerns about revenues from the Christmas period, when many businesses make the bulk of their profits. Some firms are also struggling to recruit enough employees as post-Brexit rules on migration block EU citizens from working in the UK. This has contributed to higher wage inflation. Mazars said the combined pressures were likely to spell a tough few months for the industry, despite the usually lucrative holiday period. “The Christmas trading period is usually a bumper period for hospitality businesses. However, restaurants will be bracing themselves for a very tough winter and many face a real battle to keep afloat,” Dacre said. “There’s a certainty of further insolvencies if they don’t receive much more support from the government, but the chances of the government fully turning on the taps is low.”

Restaurants and cafes across the UK are going insolvent at a pace not seen for more than a decade, new research shows.

A total of 3,347 eateries have been unable to pay their debts in the past two years to March 2023, according to data from the Insolvency Service.

During the first three months of 2023, an average of six restaurants were affected every day.

Businesses declare insolvency when they are unable to afford the repayments for their debts. Of those restaurants declared insolvent, 98% of cases have ended with the business being shut down.

However, it is not simply because of consistently high interest rates, it’s also because the cost of taking on debt has become more expensive since the start of the year. Interest rates on business loans in particular have jumped to more than 6%.

The reasons why restaurants are struggling are myriad, but the likes of UK Hospitality have also pointed out that energy prices are slowly choking the industry too. With energy prices up at about 80% on average, is it any wonder the industry is struggling?

Data collected by CGA Insight on behalf of the British Institute of Innkeeping, UKHospitality, the British Beer and Pub Association and Hospitality Ulster showed businesses that were forced into long-term fixed rate contracts between July and September 2022, as energy prices continued to rise, felt the least optimistic about their prospects over the next 12 months.

Of those businesses that locked into a contract at the peak of the energy crisis between July and September almost half (46%) felt their business was at risk of failure in the next 12 months, with 92% citing energy prices as a significant contributor to that risk. These businesses were also less likely to have cash reserves and almost half (46%) of all respondents had less than three months’ worth.

Hospitality seems to always be the sector that suffers quite profoundly when the cost of living starts to bite. One of the most commonly-eschewed luxuries when belts need to be tightened, it’s an industry that suffers from literal feast and famine almost immediately.

Calls have been made by many that hospitality should be treated better overall. For example, in 2022, it brought in around £54 billion to the UK Treasury in receipts, so calls for Government support have been made to try and maintain this.

Overall, it seems restaurants have a need to not only diversify and create attractive businesses for customers to flock to, but to offer something cost-effective too. Truly a double edged sword it will be worth watching to see how this progresses over time and whether we will see a new wave of more agile and innovative businesses emerge.

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