Critical financial distress falls in hotels but rises in restaurants and bars

The level of ‘critical' financial distress in UK hotels fell in the last quarter of 2013 as the sector experienced a seasonal bounceback fuelled by Christmas trading, but the same cannot be said for restaurants and bars.

The hotels sector saw a 24% fall in businesses with critical problems in Q4, against the previous quarter, but bars and restaurants saw an increase of 13%.

But on a year-on-year basis, the fortunes were reversed. There were 37% more hotels in financial hot water for the last quarter of 2013 than the previous year, but the number of bars and restaurants in a critical position fell by 9%.

That's according to the Begbie Traynor Red Flag Alert, which uses the term ‘critical' to refer to companies with county court judgements (CCJs) totalling more than £5,000 within a three-month period; with winding-up petitions against them; or which have entered Corporate Voluntary Arrangements.

However both sectors saw a 4% quarterly rise in the number of businesses facing ‘significant' financial distress, which refers to companies with minor CCJs of less than £5,000 filed against them or which have been identified by Red Flag's proprietary credit risk scoring system.

Year-on-year figures were more bleak. There was a 28% increase in the number of hotels with ‘significant' problems, while the number of bars and restaurants in a similar boat rose 13%.

Julie Palmer, partner at Begbies Traynor, commented: "With earlier stage ‘significant' distress across all sectors reaching record highs this quarter, we are seeing growing fragility, particularly among the small businesses community, as smaller and newer companies struggle to keep up as the economic recovery gathers pace.

"As is common at this stage of any recovery process, businesses with inexperienced management teams or limited credit availability are simply unprepared to step up a gear and fund and execute the business strategies required to remain competitive in a growing market. Such businesses will need to take urgent action to avoid slipping into more critical distress and to ensure they are well placed to take advantage of the economic recovery.

"Our data shows that independent hotels and gyms are particularly at risk in the current economic climate as ambitious larger chains continue to slash prices and develop lower cost models, forcing smaller independent players to compete through price and operate at unsustainably low margins.

"With hotel occupancy levels and revenue per room in the last quarter of 2013 falling, the hotels sector is in a difficult position as it enters the lean Q1 trading period."