How are the latest business rates & minimum wage rises affecting the hospitality sector?
June 24, 2024
The embattled hospitality sector has another front to fight on. This week has seen media headlines about pub closures rapidly increasing by 51% in Q1 2024 compared to the same period in 2023.
This follows hard on the heels of data from accountants, Price Bailey that the 514 restaurant closures in Q4 2023 were the highest quarterly figure their research had ever revealed. For the full year 2023, pub closures were up 48% on 2022.
Our latest detailed report into the hospitality sector identified a continued weakening of the sectors finances, with notable negative changes to a broad range of key financial indicators.
Challenges in the hospitality sector
These worrying statistics are not a surprise, least of all to those running pubs, bars and restaurants. The industry has faced a continuous stream of problems in recent years, nearly all of which have been beyond their control:
- The pandemic was a huge disruption with its lockdowns and regional restrictions.
- The working from home phenomenon triggered by the pandemic still affects many hospitality businesses.
- Staffing issues continue to bedevil operators.
- The cost-of-living crisis caused by the surge in inflation to a peak of 11.2% in 2022 has restricted disposable income and, therefore, the spending power of diners and drinkers. This situation is easing, but many customers will be worse off on a long-term basis.
- High interest rates since the infamous mini-Budget in autumn 2022 have been a heavy burden and have made it difficult to service borrowings.
- Many hospitality companies took on extra debt during the pandemic to survive, but this has left a repayment hangover restricting investment in upgrading and improving venues, which is essential for future success.
Now, the government has made things even tougher for UK hospitality business.
Business rates
The biggest year-on-year increase since 1991 came into force from the beginning of April 2024, when the standard multiplier used to calculate business rates went up by 6.7%. There is no precise figure for the overall hit to hospitality costs, but the industry is a major component in the Valuation Officer Agency’s ‘other’ category for business premises. It is estimated that this category will see an increase in its 2024/25 business rates bill of just over £500m.
This may be the largest single increase, but this is a tax which has soared by 49% since 2010 according to commercial real estate data experts, Altus. They report that across the economy as a whole, businesses are now paying almost £9.5bn more than they were in 2010.
National minimum wage (NMW)
The cost of living crisis forced the government to accept recommendations from the Low Pay Commission (LPC) for a major rise in the various rates for the NMW. In broad terms, the hourly rate has increased by around 10%, although the increase is over 20% for certain categories.
Across the whole economy, the LPC believes that some 7% of workers are paid on the basis of the NMW. Unfortunately, this percentage is entirely different in hospitality. The LPC estimates that 46% of all employees in the industry fall into this category, which means that hospitality businesses have seen approximately 1.15m staff receive a 10% pay rise.
The way forward for hospitality
Despite the gloomy news on pub and restaurant closures, there was some encouragement in the most recent research by Alix Partners. This shows that taking into account openings as well as closures, there has been a very slight increase in the number of licensed venues in the first quarter of 2024, suggesting that the market may have stabilised.
Nevertheless, certain specific sub-sectors are struggling with the combination of falling customer numbers and rising costs, in particular nightclubs and larger venues with high fixed costs. It will remain to be seen how the industry as a whole deals with the impact of the sharp rises in business rates and labour costs, given the obvious difficulties they face in passing on these increases to customers.
Getting expert help
It is never too soon to take independent advice if a business is struggling, nor is it any reflection on the abilities of its management. Turnaround and business rescue strategies need to be led by professionals in this field who can support business owners and management teams through this transition.
If you are seeking professional advice for your business, Opus is here to help. You can speak to one of our Partners who can discuss options with you. We have offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.