Loans repayment, inflation, staff shortages: what else we can expect from hospitality insolvencies?

What are the potential reasons for the continued increase in the number of hospitality insolvencies we’ve seen recently?

Glyn: I think it goes back to the pandemic. Covid was a big thing for the sector and rightly, both the government and HMRC stepped in to help companies with furlough and allowing them to repay VAT for example. But what this meant when we came out of lockdown is that there were an awful lot of businesses that had far more debt on their balance sheets. 

And then during the course of 2022 and 2023 we’ve had inflation, we’ve had interest rate rises, we’ve had increases in the minimum wage. So gradually, I think an awful lot of businesses have got to a point where they’re still struggling to repay that historic debt they built up during the Covid years.

Nick: I think hospitality businesses are in a perfect storm because all of their costs are going up. And the other side of the equation is that their customer base is declining, because people have less money in their pockets to pay for discretionary spending. Add to that, the fact that many businesses during Covid took government-backed loans and now the cost of borrowing money is starting to hit on top of all the other problems they’ve got.

Do you think the hospitality sector in particular is experiencing a higher impact compared to other industries?

Glyn: So I would say the hospitality sector is not alone. I think the construction sector is also feeling some significant headwinds. And if you look at both industries, both are reliant on workers, on supply chains and they’ve both been hit by inflationary pressures as well as interest rates.

Nick: I think so because it’s a public facing industry. So they’re dealing with members of the public who are themselves going through the cost of living crisis.

Analysing the recent case of Le Pain Quotidien shutting down its locations, can we say that even large chains are struggling under the current economic climate?

Glyn: I do think large chains without a doubt aren’t immune to business failure. And indeed they’re probably seeing pressure to find staff. Likewise, they would bear the burden with inflation and pressures on consumer spending. And if they built up quite a large amount of debt during Covid then they really would have just faced the same challenges as most other businesses out there. But on a larger scale.

Nick: Even though large companies have a higher number of stores, they still have to pay rent, business rates, staff costs, and food and drink. A lot of casual dining chains sometimes do a restructuring, like Prezzo has done recently. So what they’re trying to do is reduce the number of outlets and get rid of the loss making ones. It basically means that they keep just the profitable stores.

In terms of solutions, UKHospitality for example has been advocating for a VAT reduction to 10% for businesses. What do you think of that?

Glyn: The purpose of that is, of course, to try to reduce prices, to encourage more people to go out and spend money. I could see how that would work. But I don’t think it will be passed on. I can understand why the sector is asking for it but I think it could be just one factor in a package of solutions that would ease things for the industry.

Nick: It would certainly help. But I think the problem is that if the government started to assist hospitality, they would have lots and lots of other industries saying, well, we could do with a VAT reduction as well. I think if the government offered it, it would probably be for a limited period of time. And what we don’t know is how long a period of time hospitality needs to get itself back on its feet.

One of the areas that people have been asking for is business rate relief because a lot of these businesses are paying quite substantial business rates to the local authorities. And so for hospitality, there’s been a discussion that there should be some reform of the system, perhaps looking at what the business does with the property and what their turnover is. So that in other words, if a hospitality business has a poor year where they are getting less people to the door, they wouldn’t have to pay as much in business rates as they pay at the moment. 

What other type of assistance could the government provide?

Glyn: I would say that the fact that they are doing their best to bring down inflation is key. I think another thing the government could focus on is trying to increase workers within the sector, whether that means easing any controls or restrictions in place, so that it would be easier for people from outside the UK to come and work here. 

Nick: One thing the government could do to help is restructuring the loans in order to allow businesses more time to repay them. Whether they will do it or not, it’s a difficult one, because if they restructure it, then the government has to accept that they’re going to get less money back for the money that they originally paid out during the pandemic. 

What can we anticipate for the rest of the summer and for the rest of the year?

Glyn: We’re expecting insolvencies to remain at the same level. And for more businesses to be failing this year compared to the recent few years. 

Is there a way out of this? Well, we appear to be in a recession now which is obviously not good for businesses. I think the solution for the hospitality industry is for business owners to really look at their business and make sure they’ve got good control over the cash they’re spending, making sure that they’re relevant and they’re attracting people. They need to be very well-informed about their businesses, spot the problems early and get help from the stakeholders.

Nick: I think that 2023 will turn out to be the highest number of hospitality insolvencies that we will have seen since probably the financial crisis of 2008. What we hope is that by the end of this year, the rate of increase will slow. And by 2024 hopefully, we will have gotten past the worst of the situation.