The number of restaurants going out of business was 50% higher last year than at the height of the recession – with 1,294 becoming insolvent in 2014/15, up from 865 in 2009/10*, says Moore Stephens, the Top Ten accountancy firm.
Figures show that failure rates among restaurants jumped 20% in just one year, up from 1,082 in 2013/14, even as consumer confidence and spending power are boosted by a return to wage growth.
Moore Stephens says that the recent boom in ‘pop-ups’, innovative mobile street food operators and concept restaurants opening, coinciding with a more favourable economic outlook, could be inspiring many would-be restauranteurs and chefs to start a food business.
However it says that despite improving consumer spending, increasing competition and rising rents mean that the financial pressures on restaurant and catering businesses remain extremely high.
High profile failures in the past year include four of Marco Pierre White’s pubs, which went into administration in January, and Swiftsure Projects, the firm behind last year’s Masterchef pop-up restaurant, which collapsed despite the event reportedly selling out within days.
Steve Ramsbottom, Restructuring & Insolvency Partner at Moore Stephens says, “You don’t expect to see restaurants failing at their fastest rate in years in a rebounding economy.
“Whilst consumer spending on eating out is increasing, the competition for that restaurant spend is intensifying at a faster rate. Innovation in the sector is leaving some older formats for dead.
“At the same time costs – particularly rents – are rising. The combination of these factors is creating very challenging market conditions and increasing numbers are closing as a result.
“In a more buoyant climate, as rents, wage bills and other operational costs increase, it can be easy to underestimate the true impact of set-up costs and on-going overheads on profits,” says Steve Ramsbottom.
“The buzz surrounding innovative new food and restaurant concepts may be a big draw encouraging people to ‘have a go’ but the inexperienced can get out of their depth very quickly.
“That’s true for pop ups and mobile street food businesses as well as restaurants. Installing equipment in a converted warehouse or serving lobster rolls out of a vintage fire engine doesn’t come cheap.
He adds, “As new, trendy eateries open up in towns and cities, existing restaurants and food outlets which may seem less exciting and inviting by comparison are inevitably at risk of getting edged out.”
Moore Stephens explains that key factors impacting profitability in the sector include:
- Tough competition for good sites, especially in crowded metropolitan centres such as London. Many prime sites don’t even come to market – instead they are sold or rented off plan, often to well-known brands
- Market over-saturation in some areas
- High demand swelling rent expectations from landlords – creating the risk that revenue fails to keep pace with overheads
- Expansion of chains driven by private equity investment making it harder for independent and privately owned businesses to compete against their economies of scale, purchasing power and brand reputation. For example, private equity backed Byron Burger, healthy fast-food chain Leon and branded Thai restaurant chain Busaba Eathai are among those who have recently announced further expansion plans
- A shortage of chefs, with even top restaurants such as double Michelin-starred Midsummer House in Cambridge reporting that they are unable to fill posts. This can make it harder for restaurants to maintain quality and consistency – leading to potential reputational damage and higher costs to recruit the best staff or to employ agency chefs