Insights for the Coming Months
The data so far this year shows promise in the demand for hospitality and an upward momentum in turnover from when restaurants and bars could start to reopen. This uptick has now peaked and is returning to the levels of turnover of pre-pandemic years.
For gross profit on food and beverage, we expect to see much greater GP in Q3 this year. The VAT reduction on food and soft drinks continues until September and, since 19th July’s Freedom Day, restaurants and bars have been able to trade without restrictions. There is a question mark over what happens when VAT increases to 12.5% in September (before returning to 20% in March 2022). Will restaurants take the hit on profitability, or will they increase prices to accommodate the greater level of VAT?
Labour costs have been at a median rate of 35% of turnover for our clients this year so far. Now in Q3 of 2021, the industry is operating without restrictions since 19th July, but is also facing a staffing crisis. Many restaurants and bars are unable to fully staff certain services meaning that they cannot maximise revenue. The data for Q3 will be interesting. Will there be a higher labour cost to turnover percentage, as hospitality businesses spend more on wages to attract staff and because turnover is down with services being cancelled due to staff shortage? Alternatively, will the percentage be down because fewer staff members are taking on more and more work? Would this be sustainable?
Whilst sales rose dramatically for a large part of Q2 this year, Q1 was a disaster and the background to this is that fixed costs remain and debts from last year must be paid. These include HMRC agreements, Bounce Back Loans (repayments start after one year) and CBILS. The business rates holiday finishes at the end of June and returns at 66% in July before returning to 100% in March 2022. The rent moratorium has been extended to March next year, meaning tenants cannot be evicted from premises before then, but doesn’t in itself solve the problem of accruing rent debt if a deal hasn’t been struck between landlord and tenant.
Most independent restaurants and bars do not – even in a good year – make huge profits. Successful examples can make decent profit to support business growth and comfortable lifestyles for the owners, but the business model is not one that makes an easy buck. Reading the first chart with this in mind would suggest that any turnover line from 2020 or 2021 that runs below the steady-ish pre-pandemic ones is probably at a loss-making level. Within the context of mounting debts, we can see how precarious this makes the health of a business.
On a macro level, Brexit is exacerbating the UK’s staffing crisis, as Europeans who returned home pre-pandemic find a lack of incentive to return, but Brexit is not the only issue here.
The US is also facing a staffing crisis, trying to attract employees to pursue hospitality as a valid career when in that country and our own it is often not treated or regarded as such.
This is leading to some soul searching within hospitality about how remuneration packages should be structured to attract staff, including what to do about service charge and how that in turn might affect a company’s bottom line. There are questions being asked about what a fair price looks like for a customer to pay for a meal out, whether prices should increase and how? There are also challenges being addressed about how landlord / tenant relationships should look going forward – about turnover models or rent reductions, or other less obvious, clever models.
This is a time of stress, reflection and for the most adaptable – innovation. The smartest businesses will not only survive but positively reshape the industry that they embody.