Is inflation the last straw for the food & beverage sector?

Is inflation the last straw for the food & beverage sector?

April 22, 2022

We reported in detail on the finances and risks in the food and beverage sector in early December 2021, just as the Omicron variant was emerging as the latest wave of the pandemic. With the exception of the travel industry, no UK sector has suffered more disruption and commercial damage than our pubs, clubs, bars and restaurants.

Four months on, we have had a badly dislocated Christmas and as of April Fool’s Day, the last of the raft of government measures designed to protect struggling businesses and prevent those that have a viable future from failing have been stripped away.  What is the state of the food and beverage market now?

How many food and beverage businesses have survived?

Statistics from Alix Partners shows that at the end of 2021, there were 106,880 licensed premises still trading, a drop of 8,228 (7%) since March 2020. This equates to 13 businesses closing every day since the start of the pandemic. The worst affected sub-sectors are casual dining restaurants, which are down 17.3%, other types of restaurant (10% down) and night clubs (17% down).

There were encouraging signs in Q4 2021, which saw an overall increase of 1,672 premises, but it will remain to be seen what the traditionally quiet post-Christmas period in Q1 2022 will bring as rampant consumer and cost inflation casts its pernicious spell.

Insolvency statistics for the sector

Before Coronavirus struck, food and beverage accounted for some 12.5% of company failures in England & Wales, despite only generating 5% of UK GDP. There were 17,198 failures across the whole economy in 2019, of which 2,151 were in the sector. Since then, government protection measures have driven down insolvency filings, but even so there were just over 1,500 food and beverage company insolvencies in both 2020 and 2021 despite the ban on the use by creditors of Winding Up Petitions and the prohibition against the enforcement of rent arrears by landlords.

Soaring debts

Our December 2021 report revealed that borrowings had soared for smaller food and beverage businesses during the first year of the pandemic. Those with assets between £100k and £250k saw their debt levels rise by 60%, while their smaller brethren with assets of less £100k had more than doubled their borrowings. These are the least robust businesses in the sector with only modest assets to support this borrowing binge, the most fragile profitability and the most strained cash flow to pay back the interest and the debt itself. Although the terms for most of the additional debt are relatively ‘soft’, the repayment schedules for these loans are now in force after the initial holiday.

The ending of government protection

The various government loan schemes, such as providing Bounce Back Loans and CBILs ended in March 2021. The furlough scheme, which undoubtedly saved hundreds of thousands of jobs and thousands of businesses in the sector, was closed at the end of September 2021. The 100% business rates holiday for eligible hospitality businesses ran from March 2020 until June 2021, whereafter it was reduced and then reduced further and capped as from the end of March 2022. The ban on creditors using Winding Up Petitions to collect unpaid debts also ended at the end of March 2022, so it is open season once more on embattled food and beverage businesses.

Legal remedies for rent arrears

Landlords have had their hands tied behind their back by government policy since the start of the pandemic, with all legal forms of enforcement prohibited. Estimates currently put the total of rent arrears across all sectors at between £7bn and £8bn.  A limited amount of unpaid rent (incurred during periods when businesses were forced to close by government regulations) is still protected and must be settled through mandatory arbitration, otherwise landlords can now use the full range of legal remedies to collect unpaid rent.

Labour shortages

Although there are some reports that labour and skill shortages are beginning to ease, normal operation of many food and beverage premises is some way away yet. Many have had to restrict opening days and hours, whilst maintaining the level of service expected by customers is a constant problem and staff scarcity drives up labour costs.

The impact of rampant inflation

The elephant in every pub, club and restaurant is rampant inflation. Bank of England predictions that consumer inflation could peak at 8% or more later this year are widely seen by economists as an understatement of the problem, but wherever the figure ends up, there will be a double whammy for the sector. Not only are input costs for energy and food out of control (and rising much faster than the official CPI rate), but customers’ disposable income is being decimated. Businesses face having to raise prices to maintain margins at a time when consumers have less and less to spend. The government’s refusal to delay the restoration of VAT for the hospitality sector from 12.5% to 20% at the end of March 2022 has been condemned by industry chiefs as financial vandalism.

Sadly, in the months ahead, inflation will kill many food and beverages businesses, already weakened by two years of constant disruption and staggering under the burden of unsustainable debt.

Taking expert professional advice

If your business is affected by these issues, Opus is here to help. We have extensive experience of the food and beverage sector. Our nationwide network of offices gives us the invaluable insight into local conditions, which leads to identifying workable solutions and achieving positive outcomes. You can contact us at your nearest local office to arrange a no obligation and confidential call with one of our Partners.