UK Hospitality Firms Confront Cost Triple Blow Amid Economic Strain
Nick Evans, co-owner of the Old Crown Coaching Inn in Faringdon, Oxfordshire, is meticulously reviewing financial figures, striving to achieve profitability. This historic pub and hotel, with its crooked wooden beams and cosy snugs, once hosted Oliver Cromwell in 1645 and features a honeymoon suite in a room once used by the notorious "hanging judge" Lord Jeffreys. As a former City trader, Evans is accustomed to profit, but the hospitality sector has endured relentless challenges since the onset of Covid-19.
Triple Whammy of Rising Costs
The latest blow to the industry is a triple whammy of escalating expenses. The Old Crown is among thousands of hospitality businesses facing a punishing increase in costs due to a rise in the minimum wage and business rates, effective from the start of April. Additionally, the Iran crisis has triggered a surge in energy prices, with oil and gas remaining well above prewar levels despite a recent two-week ceasefire announcement. This spike will inflate the cost of ingredients and heating for guests, while customers themselves are bracing for reduced disposable income, making them less likely to splurge.
Evans remarks, "The only way you can make it work is to have a microwave, staff who can open a packet and put it on a plate. That’s not the reason we entered this industry," he says, glancing at his co-investor, Mike Webb, another City retiree. The pair purchased the business for £625,000 shortly after the pandemic and invested a similar sum to transform it into the charming hostelry it is today. They own the freehold and also rent two other pubs from the brewing business Greene King.
Financial Struggles and Investment Hurdles
At the Crown, they aim to add six more rooms to reach a total of 20, a project requiring an additional £350,000. "That would allow us to grow and would also create work for construction workers, carpet fitters and handymen from the area, who all pay tax," Evans explains. However, he notes that everyone in the industry has halted investment due to current conditions.
A rough accounting spreadsheet, sketched by Webb in ballpoint pen, illustrates the financial strain. Overall annual revenue, including VAT, is about £1.4 million, up from £440,000 when they took over. The cost of drinks and ingredients for meals is approximately £430,000 and rising, with beef prices for steaks and beer and wine costs soaring. To maintain a sustainable margin, the pub would need to charge prices that customers are unwilling to pay.
Evans states, "Diageo is about to put Guinness up, so the cost of a pint would need to be close to £8. We can’t increase our prices any more without people not coming in." Additional annual costs include £20,000 for water bills, £100,000 for laundry, cleaning, and maintenance, and a similar sum for rent and insurance.
Energy Crisis and Tax Burdens
The looming spectre of surging energy bills adds to the pressure. Energy consultancy Cornwall Insight warns that some firms risk being locked into high-priced energy deals if they renew at the wrong time, while others may struggle to secure fixed-rate deals. Ofgem has reminded suppliers to treat customers fairly, but Kate Nicholls, chair of UK Hospitality, predicts the sector could be "hurtling towards another energy crisis."
The Crown’s annual gas and electricity bill is about £80,000, with its supply contract up for renewal in July. Evans anticipates a significant rise of several thousand pounds annually if the Iran crisis persists. Even after these expenses, the business makes a small trading profit, but VAT of £234,000 must be paid. UK hospitality businesses face a higher VAT rate than European counterparts, a persistent grievance across the sector. An additional £45,000 in national insurance contributions further pushes the business into the red.
Impact of Government Policies
Nearly every cost and tax line is rising, often due to geopolitical factors beyond control. However, two increases from last week stem from government policies aimed at boosting tax receipts for public services and state support. The Crown’s wage bill, currently about £350,000, will rise to nearly £370,000 with minimum wage increases, compounded by higher employers’ national insurance contributions from the chancellor’s 2024 budget, criticized as a tax on jobs.
Evans supports higher wages but warns of unintended consequences. "You’re running the risk of pricing young people out of the market," he says, referring to wage hikes for under-21s. "We take 16-year-olds from ground zero to being rounded individuals. But now I might as well hire an adult for a pound more." He argues the national insurance change is misogynistic, as it disincentivises hiring part-time workers, often mothers seeking extra income.
Business Rates and Survival Threats
The sector-wide increase in business rates, effective from 1 April, adds another £24,000 bill for the Crown. Although pubs receive a 15% discount and a two-year freeze, the venue’s 14 rooms classify it as a hotel, excluding it from the discount. This results in no profit and rising costs as consumers cut back spending.
Evans warns, "We can’t sustain a business employing 20 people if we end up losing money. We’ll have to just say let’s go and live in Spain, we don’t need this shit any more." Kate Nicholls of UK Hospitality echoes this sentiment, noting a recent survey shows one in five businesses fear they may not survive the next 12 months. "Our pubs, restaurants, cafes and hotels are unable to absorb any more cost, so hikes will simply be passed through to the consumer, driving inflation and hitting jobs," she says. "For some it will be the final nail in the coffin and they’ll have to shut for good."
For now, retirement to Spain is on hold at the Crown. Instead, Evans and Webb are contacting HMRC to negotiate a more lenient payment plan for their VAT bill. "It’s been a struggle," Evans admits. "It’s tough, tough, tough."
