UHY Hacker Young | Chartered Accountants

Brexit part four – how will restaurant businesses be affected?

15 August 2016

Surely something as fundamental to British life such as pub lunches, curries and our increasingly diverse dining habits should be safe from the Brexit backlash? Perhaps not! If you’re in the restaurant or pub trade, there could be substantial changes on the horizon, with some effects already hitting home.

In our fourth instalment of what leaving the EU could mean for businesses in the region, we look at how post-referendum changes could affect the restaurant trade.

How will restaurant businesses be affected by Brexit?

For the time being, Britain is still in the EU and will be until at least Autumn 2018, so some of the deeper effects won’t be felt for a while. However, since the referendum result has been known, the currency has dropped and uncertainty is upon us – both of which bring immediate effects. Either way, in both the short and long-term, the effects of Brexit could be complicated for restaurant businesses.

The following post looks at three ways we expect business to be affected, and what you can do to plan for these changes.

  1. Changes to costs
  2. Changes to staffing
  3. Changes in consumer spending

Costs could go up – both in the short and long-term

Since the morning of 24 June, Sterling has dropped significantly against the Euro and the US dollar. This has brought about one of the first effects of Brexit: a weak pound raises the price of imported food. For example, if you’re a pizzeria, importing many of your ingredients from Italy, the currency effect alone can be blamed for a 5–8% increase in costs since the start of 2016. Meanwhile, goods such as coffee and bananas are globally traded in US dollars so the cost in pounds could rise even more.

Currency movements are hard to predict but, in the long-term, there could be other issues on the horizon; primarily uncertainty over Britain’s future relationship with European trading partners.

Nobody yet knows what the terms will be for Britain’s continuing trade with EU countries. However, it’s highly likely that they will not be as accommodating as they are now. As full members of the Single Market, we’ve enjoyed zero import duties on luxury items. In the future, it’s possible that items like olives, chorizo and Mediterranean seafood could be subject to border costs, which would force up prices on the menu.

All in all, although price changes are always difficult to predict, the potential is there for an increase.  Lynx Purchasing and Prestige Purchasing have both cited a potential 11% rise in the cost base for restaurants. This takes into account the effect of a weaker pound, the prospect of import tariffs and rising energy costs. However, it might not all be bad news. Take, for example, wine. Importing wine from EU countries may be subject to higher taxes. However, perhaps importing from outside EU will cost less? Some establishments are already importing more wines from Australia, New Zealand, South and North America, which are currently subject to EU import duties – these could potentially drop after Brexit.

Getting the staff – what will happen to talent from overseas?

Employment is one of the most discussed areas for the sector. According to a pre-referendum survey of 800 industry professionals, 61% thought that the hospitality industry would benefit from staying in the EU, with staffing concerns one of the major reasons given.

As things stand, the UK’s restaurant industry sources many of its staff from overseas; with around 28% of this workforce foreign-born, half of which are from the EU. In large cities, such as Birmingham, this proportion may be higher. Whether or not freedom of movement from EU countries will continue as before remains to be seen. In the eventuality that it does not, restaurant owners may need to budget for visas or work permits to retain some of their most valued staff.

If rules around migration from outside the EU are changed, it could give a boost to the UK’s curry restaurants, which employ 100,000 people and contribute around £4 billion to the economy, yet have have difficulties recruiting enough trained chefs from overseas.

The then home secretary Theresa May, now Prime Minister, acknowledged in 2015 that there is a noticeable shortage in curry chefs as an occupation. Part of the reason for this are rules which determine that chefs from outside the UK must be paid £29,570 after deductions for accommodation and meals, and cannot be employed in a restaurant with a takeaway service. Restaurant owners have found this too restrictive on both counts. If these rules were to change, it could reverse the trend of curry house closures and revitalise this part of the industry.

Consumer confidence – will it hold steady or falter?

Apart from concerns about staffing and food costs, there’s also the concern of economic uncertainty. Just the prospect of change can cause people to hesitate over spending, and the leisure industry is often the first to feel the effect. For example; Greene King, which operates around 3,000 pubs, revealed even before the referendum that “consumers appeared more reluctant to spend discretionary income due to the uncertainty”.

It’s still too early to see whether this effect is noticed by the industry as a whole, but this makes it all the more important that business owners control what they can and make sure the business plan is robust enough for contingencies.

As a restaurateur, what should you do next?

Ultimately, owners of pub and restaurant businesses have to choose the best way to react to the new reality. It may well be possible to take a “wait and see” approach and hold on for the details of each change, however, this does risk being the last among your competitors to adjust. We believe it would be better for businesses to be prepared.

Regarding the few things we are fairly sure Brexit will change, it should be possible to revise your business plan, take preventative actions and make sure the accounts are ship shape to safeguard your business going forward.

If you would like to discuss any areas of your business, please contact Glenn Thomas at Glenn.thomas@uhybirmingham.co.uk.