When we last reported on the financial health of the hospitality sector in June this year, the position was far from positive.

In particular, we noted that:

• The average financial health rating for the hospitality sector is only 31 out of 100, compared to the whole economy at 45.
• Over half of hospitality companies are at serious risk of insolvency or a major financial restructuring over the next three years.
• 20% are ‘zombie’ companies with negative balance sheets. Their combined deficits total £2.2bn.
• 26% have negative working capital. Their total shortfall is £7.4bn.

Given this, the sector was already vulnerable without any more negative pressures.

The Budget

As trailed by endless briefings and leaks, private sector businesses are to be asked to contribute the majority of the extra revenue the government needs to fill the ‘black hole’ it claims to have discovered in the public finances through an increase in employer’s National Insurance contributions. But more than this, the Chancellor also confirmed rises in the National Minimum Wage three times the rate of inflation and more. The final blow was a reduction in certain reliefs against Business Rates

The details are:

National insurance (NI)

• A 1.2% rise in the rate paid by employers, taking the figure to 15%.
• The threshold at which they start paying these contributions drops from £9,100 to £5,000.
• The extra amount raised for the Exchequer is estimated to be £25bn.
• The Employment Allowance against their employers’ NI liabilities has been raised from £5,000 to £10,500 in each tax year and made applicable to all companies, not just small businesses. 

National minimum wage (NMW)

From April 2025:

• The NMW rises by 6.7% for workers aged 21 and above.
• Younger workers between 18 and 20 get an even bigger boost of 16.1%.
• Apprentices get the biggest bump of all, an increase of 18%.

Across the whole economy, the Low Pay Commission (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. The trade body UKHospitality warned that this would add £1.9bn to the industry’s wage bill for its 1.15m workers.

An aspect often ignored is the ripple effect of these increases as those higher up the pay scale press for their differentials to be protected.

Business rates

• Reliefs due to expire in March 2025 extended.
• But discount cut from 75% to 40%.
• Without the continuation of the current reliefs, the bill for smaller premises would have quadrupled. Now they will only double.

What’s the bill for hospitality?

Analysis by UKHospitality reveals that the employment tax measures in yesterday’s Budget will increase the annual labour cost of employing:

• a full-time staff member working an average of 38 hours a week and earning the NMW by at least £2,500.
• It will be £2,100 more expensive to employ a single parent working 9am to 3pm, five days a week.
• £1,140 more expensive to employ a student working 14 hours at the weekend.

The sector employs 3.5m people, over 10% of the entire UK workforce.

UKHospitality’s CEO, Kate Nicholls says:

“Hospitality venues will now have to ditch their ambitions to employ more people and do the very opposite – cut hours, scale back recruitment, and, in extreme circumstances, let people go, because they simply can’t afford the scale of these costs.”

The Employment Rights Bill

In the background to all of this but every bit as important is the draft legislation introduced to Parliament on 10 October 2024. This will certainly improve workers’ rights, but it will be bound to have cost and operational implications never mind its potential effect on business confidence, in particular as regards hiring intentions.

Hospitality has a high staff turnover rate and so will likely be badly hit by the objective of bringing forward most rights so that they apply from Day 1.

What can hospitality businesses do?

Faced with this huge increase in costs, the options are simple: raise prices, cut pay or cut staff, or a mix of any two or all three. The first will be difficult for those companies operating in price sensitive markets, which is almost all hospitality businesses. The second is tricky in practical terms because of employment legislation, except perhaps for new joiners. The third threatens their ability to operate efficiently or effectively. There is unlikely to be meaningful scope to transfer any of the extra burden down supply chains.

Unlike some other sectors, the scope for hospitality to deploy technology to address these labour cost issues is limited. AI might make hotels, restaurants and pubs more efficient and facilitate some minor staffing cuts in back offices, but it’s unlikely to enable any major trimming of kitchen and server staffing levels.

Will hospitality insolvencies rise?

There were 3,420 hospitality failures in England & Wales in the twelve months to August 2024, which represented 14% of all insolvencies. Over 50% of hospitality companies were in the Company Watch warning area as per our June 2024 report and at high risk of needing a major restructuring or having to file for insolvency.  Add these latest cost burdens onto their struggling finances and it isn’t difficult to predict an increase in both the absolute number and percentage of hospitality casualties, possibly a significant one.

Being realistic about the future

Hospitality businesses tend to be headed up by enthusiastic entrepreneurs, but, in the current scenario, there are no silver bullets. Business owners need to take a pragmatic look at their finances, their business model and, most of all, get expert advice about the way forward. A cool-headed, experienced outside view is priceless when the pressures are this great and the problems are this fundamental.

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.