The Number of Restaurants Shutting Down Increases

According to research by Wilkins Kennedy, the 21st largest accountancy firm, the number of restaurants going bust increased by 31% to 194 in the…

According to research by Wilkins Kennedy, the 21st largest accountancy firm, the number of restaurants going bust increased by 31% to 194 in the last quarter of 2011, up from 148 in the last quarter of 2010.

This is the biggest figure of restaurants going bust in any quarter since the first quarter of 2009, which was the start of the last recession.

A total of 684 restaurant businesses became bankrupt over the whole year of 2011, an increase of 19% from 576 in 2010.

Wilkins Kennedy says that the economic downturn has led to consumers cutting their discretionary spending on dining out.

Restaurants have also been struggling with the rising food costs to their customers, the increased cost of restaurant insurance UK, the latest increase in minimum wages and the increase in VAT.

Partner at Wilkins Kennedy, Anthony Cork, said, “It is the proverbial “perfect storm” but the sheer number of restaurant groups that have been sunk by it is still surprising.”

“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.”

Other stakeholders and the banks were forced to pull the plug on many struggling restaurants in the run up to Christmas, Wilkins Kennedy said.

Anthony Cork says, “If a restaurant can’t trade profitably in the run 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. Also, some restaurants might have shut down simply because the owner decides to throw in the towel.”

“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.”

In addition to the previous reasons explained, the rise in alcohol tax in April 2011’s budget has contributed to the erosion of restaurants’ profit margins, according to Wilkins Kennedy.

The most recent restaurant businesses that have closed down include Little Chef and Moshi Moshi, which introduced the first conveyor belt sushi restaurant to the UK.