Begbies Traynor: Rapid rise in restaurants and bars facing financial distress

The latest Begbies Traynor Red Flag Alert​, which provides a snapshot of British corporate health, placed restaurants and bars at number nine in a list of the 10 sectors facing the highest levels of ‘critical financial distress’.

It comes after figures released by the Government last week showed that insolvencies in accommodation and food service activities, which includes restaurants and bars, rose 20% in the 12 months to May​​, the highest year-on-year increase of any sector.

A total of 1,587 restaurants and bars are listed by the Red Flag Alert​ as being in ‘critical financial distress’ in Q2 of the year, a 7.3% rise on Q1.

Additionally, the number of restaurants and bars in ‘significant financial distress’ rose by 12.2% between Q1 and Q2 of this year.

Travel and tourism and hotels and accommodation also saw rapid rises in the number of business in ‘significant financial distress’ – +20.1% and +16.4%, respectively – which Begbies Traynor says is reflective of the ‘ongoing weakness of consumer confidence in the UK’.

"It looks like 2024 will prove to be another tough year for UK businesses,” says Julie Palmer, partner at Begbies Traynor.

“Six months in, and we're seeing clear signs that financial distress is growing across almost every sector.

“It is a particularly difficult situation for businesses in consumer facing sectors, such as hospitality.

“While a fall in inflation to more palatable levels will likely provide some relief, consumers simply aren't behaving like they used to and these businesses, who are still grappling with higher costs pushed up by higher wages, are really struggling.

“This, combined with one of the wettest summers on record, continues to significantly impact trading.”

A ‘grave situation’ for many British firms

In total, the level of firms across the UK in ‘significant financial distress’ rose by 8.5% to 601,950 in Q2 2024 (Q1 2024: 554,554), considerably higher than Q2 2023 (439,815), up by 36.9%.

A further 40,613 UK businesses are in ‘critical' financial distress’, up 1.1% on the prior quarter (Q1 2024: 40,174) and 34.5% higher than Q2 2023 (30,186).

“We are a little over halfway through the year and the macro-economic environment for UK companies remains extremely testing,” says Ric Traynor, executive chairman of Begbies Traynor.

“There might be a greater sense of optimism in certain corners of the economy, but this is yet to translate into anything meaningful for the hundreds of thousands of businesses fighting for survival.

“The situation for many British firms remains grave, with the latest Red Flag Alert data highlighting a substantial increase in the number of businesses in significant financial distress in comparison to this time last year.”

Traynor notes that some momentum should begin to build following the recent general election, with all eyes now on Labour and Prime Minister Keir Starmer to see what can be done to kickstart economic growth in the UK.

“Sadly, the reality is that the Government may not be able to act fast enough to stop many struggling businesses from succumbing to the economic pressures with which they are currently grappling,” he continues.

“In short, the prevailing economic situation means that we still expect to see heightened levels of company insolvencies extend into 2025 and beyond.”