The UK economy has obviously had a tough five years. Many cash strapped consumers reined in their discretionary spending and whilst eating and drinking out have proved remarkably resilient, operators have clearly faced a very challenging environment. But after the recent strong quarter things may at last be looking up, says David Campbell partner, head of Restaurants and Bars, BDO LLP.
The monstrous hangover from the 2008 financial crisis may at last be fading, with 0.8% growth in GDP over the third quarter of 2013. Not only was July-September the best quarterly performance since 2010, but it built on the 0.7% growth that we saw in Q2. This has prompted a U-turn from the IMF, which accused George Osborne of “playing with fire” with his austerity programme.
Now the IMF forecasts GDP growth of 1.4% for the year, double its prediction back in April. All the signs indicate a recovery that is gathering pace, and we should see growth accelerate through the final quarter of 2013.
However, even as it stabilises, the UK economy is still at risk from the global markets, and a shock from Europe or Asia may hinder the return to prosperity. Nevertheless these risks are slowly receding, with a rebound expected in Asia and emerging Europe. It is Western Europe that still poses the greatest threat, though the tide may have turned there too, with growth expected over the next two to three years.
The upturn is being felt across a variety of sectors. Retail sales, investment spending and net exports are all up, and the BDO business trends survey showed a steady recovery for manufacturing and services. What’s more, consumer confidence is at its strongest since November 2007, and it is many years since business confidence was so high. Quite simply, the economy has got its spark back. Progress is a bit less upbeat for inflation.
The consumer price index currently stands 0.7% above the 2% target set for 2013 by the Monetary Policy Committee, though the outlook has improved a little. Hikes in utility prices remain the largest inflationary pressure, with food and fuel prices also expected to rise. The labour market continues to post strong employment growth, albeit with few signs of an imminent reduction of unemployment (currently 7.7%).
The strong figures come largely from falling levels of underemployment, as many employers squeeze more out of existing workers rather than hiring more. This lack of real wage inflation is though a drag on the consumer that may yet hold back a real resurgence in consumer spending – wage inflation still lags cost inflation and until this reverses consumers will have reduced spending power month on month, regardless of how confident they may be feeling about the future.
As for the much talked about strength in the housing market, this should be treated with caution. The rise in house prices is by no means uniform across the country, with the North and Midlands seeing static prices at best, while they continue to fall in Wales and Northern Ireland. The apparent boom is entirely driven by growth in the South, particularly London, where international property demand has driven double digit growth.
The government’s Help to Buy scheme has given the market a shot in the arm, but at the risk of causing a housing market bubble if issues on the supply side are not addressed. There is also a real danger of a retrenchment in consumer spending when interest rates eventually rise and make mortgage payments more expensive, which may happen sooner than we would like.
Trading picks up
Trading conditions have undoubtedly improved in 2013, with both total sales and like-for-likes demonstrating relatively robust growth over the past six months. During the economic downturn many consumers chose either to cut spending on eating out completely or to trade down to cheaper alternatives such as takeaways. The improving consumer climate has helped people become less cost conscious, and they are going out more.
Even though in real terms consumers are no better off than they were 12 months ago, average spend per head and restaurant patronage are up. The UK consumer has never put up with poor customer service, but in these uncertain times many operators have chosen to invest more in providing quality food at affordable prices. This value for money has been a key driver in bringing some of the volume back into the market – but it remains crucial to give excellent customer service.
Technology has really helped to invigorate this sector, with the likes of Square Meal and Top Table offering operators better access to consumers, albeit at the expense of increased competition and cost. The resurgent services sector should help to boost demand at the high-end of the restaurant market, with business lunches and client entertainment regaining popularity, particularly in London.
There is still however a strain on profit margins, with the cost of wages, rent, utilities and food costs going up, and with no signs of slowing in the future. But there is a drop of relief to be had in the fall of wine prices over the past five years, thanks to global over-supply and strong competition from New World producers.
Legislation still a burden
The sector continues to wrestle with an ever-changing tax and legislative environment. Despite the government supposedly championing SMEs, the number of alterations in policy mean that trading in this sector is not getting easier. Employment costs have also risen due to an increase in minimum wage and the introduction of auto enrolment pension schemes for staff, with take up on these schemes being higher than many anticipated.
At least a quarter of this sector’s workforce is hired at the minimum wage, so any rise translates into a major hit for restaurants and bars to take.
Moving onto other legislation, the use of late-night levies and early morning restrictions continues to be hotly contested, with a number of local councils choosing to reject outright the possibility of future use. Some fear that local businesses could suffer from their use, which may lead to trade migrating to neighbouring areas.
Minimum wage brings mixed fortunes
From 1st October, the minimum wage for workers aged 21 and above rose 1.9% from £6.19 an hour to £6.31. For those aged between 18 and 20 the hourly rate is increasing by 5p to £5.03, while those aged 16 or 17 will see their minimum wage increase by 4p to £3.72.
Personal licences – should they stay or go?
In September the government launched a consultation into whether personal licences should be abolished. If this were to happen, licensing authorities would be able to apply relevant conditions to premises licences where appropriate. So far the response has been mixed, with opinions divided as to what effect this review may bring. A number of operators have suggested that, although the current system is flawed, a complete overhaul may not be the answer.
Conclusion
The worst of the recession is clearly behind us, and growth forecasts and expectations for consumer confidence and spending look positive. Whilst the limited rise in wage inflation may hold consumers back a little in 2014, we remain confident that the sector is well placed to enjoy its most buoyant year for some time.
