It’s always news when a research study published by a professional firm comes out with findings that catch the headlines, such broadcasts are naturally taken seriously. So it was when a survey revealed that a total of 14,000 restaurants faced the prospect of closure as a result of rising labour and food costs, the latter caused by the weakened pound as a consequence of Brexit.
Those of us who have worked with the hospitality industry for years will not view these findings as surprising. The financial management of restaurants reveals they can be low margin businesses, forever opening and closing; they are often under pressure to keep costs under control. The rise and fall in their economic fortunes tends to mirror the economic health of the nation.
It’s certainly true that costs have been on the rise. The National Living Wage (NLW) is thought to affect as many as 60% of the workforce, the annual hike in NLW is impacting on the hospitality industry more than other sectors. Far more workers are enjoying enforced pay rises. Further pressure on payroll costs is said to be being applied by those in better paid jobs as they seek to maintain the existing differential in wage levels.
Perhaps even more worrying, Brexit will result in a further rise in wage costs as any shortage of migrant workers will mean that employers will have to compete for inevitably fewer staff by offering better wages.
Increases in business rates are also hurting restaurants, situated as many are in high streets where rate values are highest. At the same time, high rents are forcing low margin restaurants to compete with high-end retail businesses, making most independent restaurant operations in the high street wholly uneconomic.
That said, there is no shortage of branded chains willing to chance their arm. Given the majority succeed shows how operationally skillful they are.
But restaurants have met similar adverse conditions many times before and the most competently run have survived and, indeed, prospered. Only the weakest have gone under – sadly that’s the natural order of things. The restaurant industry is no stranger to poor management and bad decision-making at a senior level.
So, let’s get the 14,000 figure into perspective. There are over 60,000 restaurants and casual diners, not to mention 40,000 pubs and nearly 40,000 outlets in contract catering and the leisure sector. This means the 14,000 outlets represent barely 10% of the total food service industry.
There are about 11,000 new restaurant start-ups a year, while a 58% survival rate after three years suggests the restaurant industry is – and always has been – highly volatile. It’s not really an industry for the unwary amateur and even experienced restaurateurs make mistakes. Just look at some of the big named groups currently experiencing trouble.
However, these cost increases have come at a time when operators are fighting other pressures. The pub industry is now a major competitor; since the smoking ban, most pubs are now food-led and could not survive without increasingly sophisticated food offers. Coffee shops have opened up a new segment of the casual snacking market, while all day grazing has influenced demand for conventional meals.
Furthermore the significant increase in home deliveries has affected burger and pizza restaurants. It looks like a perfect storm of business pressures on restaurants!
The restaurant sector – by far the most innovative element of the hospitality industry - has fought back with new concepts; many succeed but quite a few don't. Restaurateurs recognise that while old favourites remain popular they begin to lose their appeal without constant replenishment and flexible, skilled management. Ultimately it’s the quality of management that will dictate success or failure, no matter how seriously the economic situation impinges on costs and demand.
Lose a couple of percentage points on the margin and the profits begin to disappear. Wise operators produce accurate, daily (weekly at most) food cost information: without that, they lose all hope of survival. How many chefs know their daily food cost?
The last point is interesting because an extra cup of coffee, glass of wine or dessert, multiplied over a year, can add a lot to the bottom line.
1. The cash position of the business
2. The food gross profit percentage
3. The payroll percentage to turnover
Thankfully specialist providers can help access this vital information relatively easily.
In the final analysis, the good, well run, high value restaurant will survive profitably. It will be the poorly run ones that go under. Not a lot that's surprising about that because that tends to be the nature of the restaurant sector and a capitalist economy.
The content of this post is up to date and relevant as at 15/01/2018.
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