Next year's introduction of the National Living Wage, combined with rising rents and a possible increase in business rates could prove a lethal cocktail for London's restaurants.
That's the warning from Joel Kissin (pictured), co-founder of Conran Restaurants, and now owner of Boulestin in London's St James's.
Restaurateurs still haven't got to grips with how to handle the introduction of the National Living Wage and it is likely to hit independent businesses hard, Kissin cautioned.
Speaking to The Caterer, just five months before the new National Living Wage (announced unexpectedly by Chancellor George Osborne in his last Budget) is introduced, Kissin said: "It is the first time I have seen people in the restaurant industry at a loss in the way that I have seen it. We had no warning of this."
The National Living Wage is set to be introduced in April 2016 at £7.20 per hour, rising to £9 per hour in 2020 for people aged 25 and over.
While Kissin said he was not opposed to the principle of having such a wage, he was concerned about the way in which it was being calculated for restaurants, which are not allowed to include the service charge they levy on customers in the figure.
"If the service charge is good enough to be taxed and we all know how much it is, why is it not good enough to be part of the minimum wage? I wish someone would answer that," he said.
"The fact is that we in this business [Boulestin], along with many restaurateurs, are mostly already paying above minimum wage. However that minimum wage is comprised of a basic and service charge."
"Discretionary service charge is not subject to national insurance, either by the employer or the employee. This is a benefit that the restaurant business has over and above retail or fast food outlets that don't charge a service charge. What I find extraordinary is that some restaurateurs seem quite happy to walk away from that," he added.
In order to afford the rise in basic wages, Kissin said that restaurants would probably be forced to reduce their service charge and increase the prices that they charge customers.
However a 5% drop in this levy would have to be compensated for by an increase of significantly more than 5% in prices just to leave the restaurant in the same financial position as it was before, because of the added costs of PAYE, national insurance and VAT. This could potentially alienate customers and make businesses less profitable, Kissin said. "Of course the public will also end up paying much more tax."
And he warned that when combined with other factors like rising rents and rates, the consequences of the government's decision could be severe.
"My understanding is that the government has already done their calculations on rates and that they are going to go up with a bump. Along with the combination of huge rent increases and rates and the way in which they are allowing us to calculate the national minimum wage means there is going to be a very big clear-out in my opinion," Kissin warned. "Restaurants can't afford to put their prices up by the amount they would have to to maintain their profitability."
He called for restaurants to be treated as a special case, given that their cost base is different to a retail shop, in that restaurants manufacture and then sell their product all under one roof.
And while there were several possible routes to mitigate the effects of the National Living Wage - either by a combination of reducing the service charge and raising prices, airline pricing whereby customers could see they were being charged a ‘staff supplement', or cover charges - Kissin said that none appeared particularly palatable as far as customers were concerned. "Although it is settled EU law that the service charge legally belongs to the business, the recent adverse publicity regarding this has made it difficult for restaurants to retain much of it - but it may be the only way to survive."
"What is really scary is that no-one has come up with a solution to this," he added. "It probably needs one of the bigger groups to say what they are doing and be bold about it and then restaurants will say ‘if they are doing it, we will do it'."
Meanwhile, representations to the government by several hospitality trade associations, including the British Hospitality Association (BHA) and the Association of Licensed Multiple Retailers (ALMR) are still ongoing.
In a recent letter to Simon Blake, Secretary to the Low Pay Commission, the BHA said it was "particularly concerned at the potential impact of the National Living Wage on smaller businesses in those parts of the UK which are struggling to attract business and visitors".
It called on the Low Pay Commission not to increase the National Minimum Wage rate for 21-24-year-olds by the same rate at which the National Living Wage is to increase, warning that higher increases could have a "damaging effect" on youth unemployment.
Kissin's comments chimed with those of restaurant heavyweight Jeremy King, co-owner and chief executive of restaurant and hotel operator Corbin & King, who, speaking about tipping and the soon-to-be mandatory National Living Wage for workers aged 25 and over at The Caterer Summit earlier this month, said they could be a "massive problem" for some operators, and were not easy to solve, not least because the industry lacks unity.
"There are threats ahead and we need to be ready. We need consistency on pricing and tipping, but who's going to lead? I don't know what the solution is, yet," he said.
Meanwhile at the same event, Peter Davies, a former Inland Revenue investigator and now tax expert with accountants WMT, made the stark warning that, in order to remain cost neutral after the introduction of the National Living Wage, operators will have to increase costs to customers by 21.43% to cover PAYE, National Insurance contributions and VAT, if restaurants abolished discretionary service charges of 12.5%.
"The National Living Wage will have a knock-on on the way up the line as employees seek for [pay] differentials [from lower-paid] colleagues," he added.
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