One in ten restaurants face imminent risk of closure

More than one in ten (12%) restaurants are at imminent risk of closure as their financial position has worsened over the last 12 months, according to an analysis of financial data by Price Bailey.

The research analysed the credit risk scores and balance sheet information of all 50,900 British restaurants. It found that 10,388 (20% of the total population) have negative net assets on their balance sheets. A business with negative net balance sheet assets is deemed to be technically insolvent. These businesses are vulnerable to going bust (cash flow insolvent), which occurs when businesses are unable to make payments to suppliers or lenders.

Of the 10,388 restaurants which are technically insolvent, 6,128 have a Delphi Risk score in the Maximum Risk category (12% of the total population of 50,900 restaurants). That is an increase of 1,172 from 12 months ago when 4,956 restaurants were classed as both technically insolvent and in the Maximum credit risk category, representing 10 per cent of the total number of restaurants.

Price Bailey explains that businesses deemed ‘maximum risk’ find it difficult to access funding without personal guarantees from directors and are highly likely to be subject to winding up petitions or intention to dissolve notices in the next 12 months.

Restaurant closures are currently running at their highest level in over a decade, smashing the previous decade-high total set only a year previously. 1,409 UK restaurant businesses entered insolvency in 2023/24 (year ending 30th September 2024), up from 1,180 in 2022/23, beating the previous decade-high total by 19%.

The number of restaurant insolvencies has continued to rise in 2024 despite numbers falling in most other sectors of the economy. There were 363 restaurant insolvencies in Q3 2024, slightly down on Q2 when there were 370 insolvencies (the highest quarterly total in over a decade).

According to Price Bailey, a convergence of adverse factors is squeezing the hospitality sector, including high energy, labour and wholesale food and drink costs. At the same time the disposable income of restaurant-goers has struggled to keep pace with inflation in recent years.

The Bank of England’s interest rate began 2023 at 3.5% but was hiked aggressively throughout, finishing at 5.25% by the end of the year. While the rate was cut to 5% this August, other measures announced by the Government, including a sharp increase in the minimum wage and national insurance contributions, are likely to offset any relief afforded by the rate cut.

Matt Howard, Head of the Insolvency and Recovery Team at Price Bailey, said “Unlike most other sectors of the economy, insolvencies in the hospitality sector are still rising. There has been a sharp rise in restaurants entering insolvency over the last six months and the sector’s woes look set to continue.

“More than one in 10 restaurants are technically insolvent with maximum credit risk scores, which means that roughly half of them will close in the next 12 months. These businesses will find it almost impossible to access extra funding unless the owners provide personal guarantees, which few are likely to do in the current climate.

“Uncertainty in the run-up to the Budget dented consumer confidence just when the sector was starting to feel the benefit of lower interest rates. The sharp acceleration in inflation in October may well delay further rate cuts and will act as a drag on restaurants as we approach their busiest time of the year.”

“Like most High Street businesses, restaurants operate on profit margins of just three to five percent, which means that they often walk a balance sheet tightrope from one quarter to the next. While a bumper festive season may tide struggling restaurants over into the New Year, increases in the minimum wage and national insurance from the second quarter of 2025 could sound the death knell for many.”

Price Bailey says that restaurant businesses will be hoping that cuts in interest rates continue into 2025, offsetting some of the cost pressures from the opposite direction. Many restaurant businesses piled on much more debt during the Covid lockdowns, which they have struggled to service as interest rates climbed.

Howard continued “Restaurants are capital-intensive businesses and often carry high levels of debt due to fit-out costs. While rate cuts will ease some pressure on heavily indebted restaurants, it is likely that higher employment costs will more than cancel out any relief provided by falling rates.

“More restaurants are likely to restrict opening times to the busiest times of the week and reduce menu options so they can obtain bulk discounts on ingredients and reduce food waste.”