According to research by accountancy firm Wilkins Kennedy, a total of 684 restaurant groups became insolvent over the whole of 2011 – an increase of 19 per cent from 576 in 2010.
Anthony Cork, partner at Wilkins Kennedy, believes that the increase can be put down to the renewed economic downturn which has led to consumers cutting their discretionary spending on eating out, while restaurants have also been unable to pass on the recent increase in VAT, the latest increase in minimum wages and rising food costs to their customers.
“It is the proverbial ‘perfect storm’, but the sheer number of restaurant groups that have been sunk by it is still surprising,” said Cork. “When income is falling, businesses can normally bail themselves out by cost-cutting - but restaurants have a very high percentage of their costs fixed by the property leases that they have to sign with their landlords.
“Under the terms of most UK restaurant leases, rents can only ever go up – even if the real rental value of that restaurant has plunged. That means that falling turnover can quickly plunge a restaurant into loss.”
Forced to pull the plug
Cork goes on to reveal that banks and other stakeholders were, in some circumstances, forced to pull the plug on many struggling restaurants in the run-up to Christmas.
“If a restaurant can’t trade profitably in the build-up to Christmas, then banks and other stakeholders might think it best to cut their losses sooner rather than to wait until January - and incur more losses.
“Sales to corporate clients, which are traditionally high during the festive season, were cut last year with a lot of public sector and financial service businesses undergoing a display of austerity. Entertainment budgets are still well below their pre-recession levels and are likely to remain so for some time.
“Restaurants have also had to face some one off problems last year such as the interruption to trade caused by the summer’s riots. This year they will have the uncertain trading conditions caused by the Olympics to contend with – especially in the London area.
“Restaurants might benefit from the influx of tourists but could also lose out if their regular, local customers shun the Games and go on holiday abroad.”
Alcohol duty
In addition to food prices, the rise in alcohol duty announced in April 2011’s budget has contributed to the erosion of restaurants’ profit margins.
Alcohol duty rates rose by two per cent above the Retail Price Index in March 2011, adding four pence to the price of a pint of beer, 15 pence to the price of a bottle of wine and 54 pence to the price of a bottle of spirits.
Recent insolvencies in the restaurant sector range from iconic roadside chain Little Chef to Moshi Moshi, the Japanese restaurant in London's Liverpool Street that introduced the first conveyer-belt sushi to the UK.