The National Living Wage remains the “sword of Damocles” for the pub and restaurant sector, according to property advisers Christie + Co.
The firm has released a report gauging initial reactions to the mandatory wage rise.
Simon Chaplin, head of restaurants at Christie + Co, said: “Whilst the news of the NLW was greeted with some disquiet by the restaurants industry, it does not seem to have affected the appetite for deals so far, with a number of larger branded operators changing hands and receiving investment for expansion since July 2015. Of course the full impact of the NLW has yet to be seen on the bottom line but most are preparing for it or have started to introduce it in readiness.
“Over the coming year, we may well see a levelling off in values in the independent market as the minimum wage and other costs, such as rent, rise. The forthcoming business rate revaluation will also hit the bottom line and there is little doubt that some businesses will fail as a consequence. With Central London seeing around 180 new restaurants open every year, yet 35% closing down, it remains a Sword of Damocles for many.”
Neil Morgan, head of pubs at Christie + Co, said: “The combination of pension auto-enrolment and the NLW will have a huge impact on the sector and the extent will partly depend on the type of operator, and how prepared they are. With such a diverse offering within the sector there is no rule of thumb, with some operators able to pass the cost directly onto consumers. However, for those located in highly-competitive, price-sensitive areas, this may not be an option.
“Increasing prices will certainly be a challenge for many of the major nationals who operate off lower margins to drive volume. Operators with more flexibility to increase prices will have to manage this carefully to avoid damaging their operating model and market share.
“Inevitably, margins are going to be squeezed and in the longer term, other actions will have to be taken to compensate for this, whether it is a reduction in staff or reduced investment in facilities. As history has shown, where margins are tight, less capital is allocated to repairs and improvements, which in turn impacts stock quality and the ability to push prices up. Suppliers will be facing a similar challenge to the pubs sector, with some passing the increased cost on to consumers and others taking on the burden. Independent operators are more likely to switch suppliers in order to find cost savings at any level.”
