Business rates and the restaurant sector

Duff & Phelps has recently indicated that 2019 is set to bring further pain to the UK restaurant sector.

Today, the government has launched an inquiry into the impact of business rates on businesses; Colliers International has welcomed this with some caution.

Brexit pressure building for restaurant chains

2018 was certainly a turbulent year for the UK restaurant sector. In 2019, Duff & Phelps has claimed that it is “unlikely” that there will be any sort of turnaround in industry fortunes.

The firm has explained that this is due to “multiple economic factors and an over-saturated market continuing to put pressure on revenues and consumer spending.”

A consistent focus on quality and expansion through “demand-driven and organic growth” has been argued as essential if restaurant chains wish to survive the challenging climate. They further emphasised that it is vital they businesses invest in their infrastructures, in order to help them continue to meet the pressures of online orders—something that is becoming more common.

“We are seeing a number of fundamental issues disrupting the restaurant sector, but Brexit is the largest issue looming on the horizon,” said Jimmy Saunders, director at Duff & Phelps.

However, Saunders goes on to state that, although Brexit may be the primary cause given by businesses for failure, he believes that it is unlikely this was directly the only scenario that prompted to collapse of restaurant businesses.

He said: “Rather more likely is that economic concerns and general uncertainty, among both business owners and consumers, is leading to declining consumer spending—a trend that is almost certain to sharpen in then lead up to Britain’s departure from the EU.

“The more tangible impact of Brexit on the restaurant trade is the availability of staff. EU citizens make up a significant proportion of restaurant staff, and trade body UK Hospitality has already expressed concerns that a significant reduction in EU migrant workers will severely impact staffing levels in the sector. Again, this is only likely to worsen in the run-up to, and after, Brexit. Add in rising wage costs due to the uplift in the national minimum wage, and staffing will be one of the biggest headaches of 2019 for restaurant operators.”

Private equity firms

Duff & Phelps revealed in their statement that, increasingly, private equity firms have been investing in small chains, thus “significantly building up their footprint while cutting costs to exit within three to five years at a profit.”

Their statement continued: “This practice has seen many chains over-expanding, opening restaurants in areas that do not have the footfall to support a number of chain restaurants, while cost-cutting drives have reduced the quality of ingredients and overall experience for customers.

“A number of popular chains that expanded rapidly in recent years have already begun reducing their footprint, many through CVAs, and this may prove to be a common feature of the UK restaurant market in 2019.”

What will change the “restaurant game” in 2019?

Saunders claimed that the will likely be an increasing impact felt from online delivery services.

“While these platforms are expanding restaurants’ potential customer base, restaurants must adjust their business models to absorb the 20-25% commission that these online services charge, as well as the loss in alcohol sales,” he added.

It is entirely possible that 2019 will mark the spread of dark kitchens across the UK—restaurant owners operating “facilities that are just kitchens, with no space for diners”.

Social media platforms – like Instagram – are presenting another demographic that restaurants need to adapt to: the ‘Insta-friendly’ aesthetic. This is forcing “many restaurants to spend significant sums on their interiors, branding, and other elements,” Saunders said.

The Duff & Phelps director concluded: “However, these high costs can place additional strain on the debt servicing costs of a new restaurant. In addition to rising wage and food costs, a restaurant that targets the young, social media-savvy market may find it has to refresh its look regularly to keep pace with rapidly changing trends, further increasing costs.

“Adjust business models and investing in new premises to meet the demand of online orders can help operators to access new revenue streams. The key is market analysis; operators need to understand the local market and recognise that rolling out mediocre offerings is not going to drive footfall. With declining discretionary spending, consumers are more likely to spend money on a special experience and make it count.

“A restaurant business that sees organic growth, driven by demand, without losing its focus on quality, should have a real chance of succeeding through 2019 and the broader economic challenges that the UK faces.”

But what about businesses more broadly?

Today the Treasury Committee launched a new inquiry looking into business rates and the impact this has on businesses.

Colliers International has welcomed the announcement with some caution.

“Obviously, any review that tries to stem the current carnage on the high street is welcome,” John Webber, head of business rates at Colliers International, said.

“However, this does feel like loud banging on the stable door long after the horse has charged off down the street.”

Webber concluded: “As we have long been saying, the current business rates regime needs a roots and branches reform: regular revaluations, a proper review of reliefs, a sensible multiplier, a reform of the appeals system (which ground to a half in 2017), and a properly funded valuation office, as well as some immediate action—to freeze rates rises this year, and to remove the downwards transition that is strangling many of the provincial retail stores who are paying higher rates than they should.

“But whatever review takes place, if the government insists on raising the same amount of money by the same group of people (over £7bn of the £27bn of business rates taken are paid by the retail sector), then we will be no further forward.

“In many ways, it is too late for many of the hundreds of store closures and thousands of jobs lost that we have already seen—and this pattern will only continue until something drastic is done quickly. The system needs action now.

“I suppose the one good thing is that this is at last an admission by the government that what it has been doing over business rates in the last nine years has desperately failed. However, whether anything will change in time is unlikely.

“My fear is that, in the next four to six weeks, when the new rate bills drop through the letterbox, demanding even further increases, it will be the end of the road for many businesses. All too little and all too late.”