23 April 2007
Restaurants and bars are three times more likely to go bust than other UK businesses, a stark warning to the growing number of entrepreneurs following celebrity chefs and opening restaurants, reveals research by our experts.
15.5% of businesses in the UK hospitality and catering sector (restaurants, pubs and hotels) fail every year, compared to just 5.2% for the economy as a whole.
Our study included over 150,000 business failures over the past year (table of results below). The sample includes smaller unincorporated businesses usually excluded from statistics on business failures.
According to our experts, difficulty in raising second round financing, poor market research and financial planning, the challenge of building a loyal client base that can protect against rapidly changing consumer tastes in bars and restaurants, are all to blame for the high business failure rate in the UK hospitality and catering sector.
Peter Kubik, Partner at our London office, comments: “There are lots of anecdotal warnings about the failure of restaurants in their first year and they are all true. As Gordon Ramsay’s and Jamie Oliver’s experience has shown, even celebrity chefs can struggle to turn success into immediate positive cashflow. For an entrepreneur, who has less patient backers, it can be very tough indeed.”
“The restaurant business is a very competitive sector. It takes time to build a loyal client base. With few assets against which restaurants can raise working capital, keeping the business running, while trying to build that reputation is tricky.”
He adds: “Increasingly it is the taxman which sends these businesses to the wall. Before Revenue & Customs lost its preferred creditor status it was more relaxed about late payment, but now it is far more likely to pull the plug. ”
Our experts say that businesses across the hospitality and catering sector, including bars and hotels, have seen their costs rise significantly as a result of inflation-busting increases in the minimum wage.
Long term increases in alcohol duty on beer and wines have hit pubs and hotels hard and not all landlords are successful in passing on the whole cost to customers, Peter Kubik points out.
Says Peter Kubik: “Bars and pubs have the same vanity dimension as restaurants. Often inexperienced entrepreneurs decide to try their hand at running a bar, but when they find out that there is a lot of hard work and very little glamour involved, their enthusiasm wanes.”
Peter Kubik also points out that the smoking ban, which takes effect in England in July 2007, may add to the financial pressure on hospitality and catering businesses still further.
Courier and haulage companies the most likely to fail in the UK
Courier and haulage companies rank number one for UK businesses most likely to fold. 17.3% of courier and haulage businesses go under every year.
According to our experts, the rising price of fuel and other factors such as the congestion charge in London have pushed up costs for businesses in the distribution sector.
Says Peter Kubik: “Costs have risen dramatically in a very short period of time for distribution businesses, but the success with which these costs have passed on to customers has been mixed. At the same time the demand for couriering documents has been wrecked by the growth of the internet.”
“We could see a higher failure rate for distribution businesses in the future as congestion charging is introduced in other UK cities and road tax for higher emissions vehicles is ramped up.”
Retailers and beauticians
The research shows that sectors in which there are a high weighting of sole traders and small companies – such as personal services, retail and marketing services- also tend to have a high failure rate.
- Personal services. 8% of all personal services businesses fail every year (e.g. hairdressers, beauticians etc). Peter Kubik says that low barriers of entry that keep competition at a high level, coupled with above inflation rises in the minimum wage, may be factors in the high failure rate.
- Retail. 7% of all retail businesses fail every year. UHY Hacker Young says that small high street retailers are being squeezed at the moment by interest rate rises, rent increases, competition from large supermarket chains, and the growth of online retailing.
Manufacturers of household furnishing have the third highest failure rate (11% fail every year). Our experts say that UK based companies in this sector are often small scale and frequently suffer from low margins because of stiff competition from overseas manufacturers based in lower wage economies. These low margins leave the companies vulnerable to sudden shocks.
Failure rate of businesses in the UK
| Industry | Failure rate |
|---|---|
| Distribution (includes couriers) | 17.3% |
| Hospitality & catering | 15.5% |
| Manufacture household furnishings | 11% |
| Marketing services | 8.9% |
| Personal services (includes hairdressers, beauticians) | 8.1% |
| Private hire transport | 7.5% |
| Retail | 6.9% |
| IT services | 6.3% |
| Financial services | 6.3% |
| Manufacturing – paper/printing | 5.6% |
| Average failure rate | 5.2% |
| Building & construction | 5% |
| Legal & accounting services | 4.4% |
| Industrial manufacturing | 3% |
| Real estate and services | 2.7% |
| Engineering | 2.7% |
| Media & Entertainments | 2.5% |
| Agriculture | 2.4% |
| Food Manufacture | 2.1% |
| Recruitment and other professional services | 2.1% |
| Wholesale | 1.6% |
| Electronic manufacture | 1.4% |
| Chemicals and pharmaceuticals manufacture | 1.1% |
| Health related services | 1.1% |
| Education | 1% |
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