We have been seeing a number of hospitality and leisure businesses in recent weeks that are looking for assistance to keep their businesses going during this current situation. The most common issues, are related to staffing and costs across all aspects of the business.
The dramatic increase in energy costs is really only beginning to bite. With the recent good weather many businesses are yet to switch on the heating and so costs have only increased in relation to food storage & production, running dishwashers etc and lighting. However, there have been reports of increases in energy costs in excess of 100% already. With autumn approaching and the need to heat premises this is going to get far worse. Some businesses, faced with these spiralling costs and the ongoing staff shortages, have elected to open just three or four days a week which is understandable but this action has consequences, not all of which are positive.
Fixed overheads are exactly that and need to be paid whether the business is open or not and there will still be a significant energy usage running refrigerators and maintaining minimal light & security whilst the premises are closed. By reducing trading hours logic says that businesses with fixed capacity will be unable to serve as many customers in half the week than they could if open all week, which means turnover will be reduced leaving less margin to cover the fixed costs. Staff will not be able to survive working just part of the week and will be looking for alternative employment which can only exacerbate the staff supply issue already blighting the sector. With the cost of living crisis affecting the majority of the population, the sector is already faced with a shrinking customer base as families look to cut discretionary spend. In client businesses, we are seeing both reduced customer numbers but also reduced per head spend by those customers still visiting the premises. Inevitably, reduced trading activity results in reduced cashflow into the business to cover overheads and meet increasing finance and property costs.
To combat this, a number of businesses that we have seen have tried to mitigate these issues through improved wastage control, improved churn of covers during their restricted opening times and changes to their menus, with reduced portions and cheaper ingredients. However, a number of restaurants stated that this was noticed by customers and the feedback had been negative and, in some cases, had led to a further reduction in customers.
Some of the businesses have tried unsuccessfully to negotiate price reductions with their suppliers which is hardly surprising given that they are facing the same issues.
As part of their reviews of client businesses, we have also seen an increase in insurance costs, rent arrears where previously rent had been paid on time and the additional pressure of repaying the covid support loans they received.
Given this situation it is not surprising that national pub chains are lobbying for Government support and some are already closing pubs.
We have all read recent reports of the type of support the Government are considering and we obviously welcome these proposals. The last vat reduction was helpful during the pandemic and we feel would certainly help again but that alone will not enable all businesses to survive. Until energy prices are brought under control the sector is going to struggle and there needs to be a cooperative approach by Government and property landlords if the sector is to survive the next twelve or twenty four months and avoid losing possibly as many as 50% of hospitality businesses.
If you are involved with, or know of any business that is facing similar issues we urge you to talk to us. We urge every business owner/director that is facing financial difficulties to act decisively and seek independent professional advice before it is too late and that is why we are always available for an initial zero cost assessment which can be arranged by contacting Alistair Dickson.
The directors of SKSi look at a formal insolvency process as the last resort – not the first. It is their long held belief – borne out with proven experience – that seeking advice at the first sign of financial pressures will lead to a more favourable outcome.