More than 5,000 restaurant companies risk insolvency as a result of rising costs.
That’s according to research from accountancy firm Moore Stephens, which found that a total 5,570 restaurant companies have at least a 30% chance of going insolvent within the next three years.
The accountancy firm said that the sharp fall in the pound 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, Moore Stephens said.
Meanwhile, disposable incomes are stagnating, just 0.5%, from £17,872 to £17,965, over the last year according to analysis of ONS figures.
The company also pointed to increased popularity of different cuisines and food styles that has led to a spate of new openings leaving others 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 Living Wage to £7.20 per hour from £6.70 earlier this year and the government has announced that it will raise the National Living Wage to £7.50 per hour in April next year.
Mike Finch, restructuring partner at Moore Stephens, said: “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.”
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