Restaurant insolvencies up as costs rocket and spending falls

THE NUMBER OF RESTAURANT insolvencies has jumped by 15% over the past 12 months to 747 restaurant business insolvencies, up from 648 in the previous year, according to the restructuring and insolvency team at Moore Stephens.

This was set against a fall in overall business insolvencies which fell from 15,993 to 15,356 over the same period.

The top ten firm said the tipping point for many restaurants has been the extremely bad weather last winter, with heavy flooding through key trading periods like Christmas, New Year and Valentine’s Day hitting trade hard.

Allied to this, gas and electricity prices have risen by 6.9% over the past year, and 5.8% per annum since the credit crunch in 2008 – with energy prices felt most keenly at the lower end of the market. Average food prices have also increased, by 4.5% per annum since the financial crisis.

At the same time consumer spending on eating out has only marginally increased in real terms by a paltry 0.8% over the past year – despite falling unemployment.

Mike Finch, partner in the Moore Stephens restructuring and insolvency team, said: “The fact that the weather can push so many restaurant businesses into insolvency shows how fragile the finances can be in this sector.”

“Restaurants are being squeezed between rising costs and stagnant consumer spending on eating out. Many have struggled through five years of belt tightening by customers, which has seen cash reserves run extremely low.”

Many smaller restaurant businesses used to be able to keep costs down by avoiding paying National Insurance on tips they passed on to staff as part of their wages, or by paying some staff at below minimum wage.

Mike Finch said: “That kind of cost cutting isn’t sustainable and it isn’t legal, but some restaurant businesses saw it as the only way to scrape by. However, HMRC is now looking very closely at this sector to ensure tax and minimum wage compliance.”

With consumers still reluctant to increase spending on eating out, restaurant groups already have to plan for a possible increase in interest rates that may push disposable income down.

“Restaurant owners should start to plan ahead for the inevitable interest rate increases. These will certainly have a knock-on effect for their businesses, and it is important to be prepared for this eventuality,” added Finch.

Only top-end restaurants were escaping the worst excesses of the downturn, the research revealed.