Insolvency risk for 20% of restaurant businesses

20% of restaurant businesses in the UK currently exhibit warning signs that they are at risk of going insolvent according to new research by Moore Stephens. The research shows that 14,800 restaurants are faced with the threat of going under as Brexit and rising labour costs put a strain on the industry.

Since the Brexit vote, the pound has decreased in value by over 13% against the Euro and 12% against the US dollar. With over half of all food in the UK imported, 75% of which is from the EU, restaurants have been faced with either raising their prices or reducing their profit margins.

Staff costs have also been rising, with the National Living Wage being increased to £7.50 in April, up from £6.70 in 2015. The Government plans to increase the National Living Wage even further in the near future, aiming to reach at least £9 by 2020. Coupled with the rising cost of produce, this has put additional strain on restaurants already struggling to turn a profit. The recent recalculation of business rates has added to the industry’s difficulties. Restaurants in London, where there is the highest number and concentration of restaurants in the UK, are facing the maximum 42% increase in business rates in the first year, according to the Mayor of London’s office.

Even large restaurant groups have been hit by rising costs, with Byron, Prezzo and Jamie’s Italian all closing outlets in the past year owing to tough trading conditions. Handmade Burger Co went into administration earlier in the year, further highlighting the problems facing the sector.
Insolvency Service data shows that the number of restaurants entering insolvency has increased by 13% in 2016/17 to 1,544 from 1,363 in 2015/16.

Figures released by the ONS in October show real household disposable income has fallen 1.1% in the past year. This is a further sign of worry for restaurateurs, who now have to navigate the prospect of falling demand for eating out. Jeremy Willmont, Restructuring & Insolvency Partner, says: ‘The restaurant sector is one of the most competitive for a business to survive in at the best of times and current market conditions make it even tougher. Restaurants have been particularly impacted by rising costs linked to the weak pound, and will continue to face difficult decisions over how much of their increased costs they try to pass on to consumers.”

“The increase in the number of insolvencies in the last year is indicative of how difficult the market conditions are now. Finances can be uncertain in the restaurant sector, but this is beyond the norm. ’In such a competitive market, restaurants need to be wary of building up losses and debt now in the hope of future profits, as the industry looks to be facing a prolonged period of tough trading conditions.”

“A restaurant’s fortune can change remarkably quickly as consumers look for the next new and exciting opening. A restaurant not completely on top of market trends is going to struggle in this environment.”