As we step into 2025, the hospitality sector faces a complex landscape shaped by economic pressures and evolving market dynamics. What key challenges is the hospitality sector likely to encounter in 2025? And how might they be mitigated?
The UK insolvency statistics for 2024 reveal a mixed picture, with an overall slight decrease in total insolvencies year on year masking high levels of distress in some sectors. The rise in compulsory liquidations (which are insolvency processes commenced and driven by creditors) indicates a tightening of financial conditions. It seems that lenders and other creditors (such as HMRC), after a period of leniency during and immediately after the COVID-19 pandemic, are now less willing to extend forbearance to struggling businesses. For some in the hospitality sector this shift could spell trouble.
The increase in minimum wage and national insurance contributions set for April 2025 is a significant concern for the sector. These changes will squeeze margins further, particularly for small and medium-sized enterprises (SMEs) in the hospitality industry as will the reduction in the percentage rate of business rates relief for retail, hospitality and leisure businesses. Coupled with ongoing inflationary pressures, uncertainty around the speed of interest rate cuts, and consumer confidence which fell by 5 points in January, the outlook for 2025 remains challenging. And while there is plenty of capital around, lenders and investors are cautious of investing in sectors which are heavily impacted by both the Budget measures and the uncertain consumer outlook.
Despite these challenges, the hospitality sector has proven resilient over the past few years, and there have been some recent hopeful indicators. The most recent GDP release from the Office for National Statistics, for November 2024, shows that the largest positive contribution in the services sector that month came from accommodation and food and beverage services, where output rose by 2% in the month. Consumers flocked to pubs and bars in December, with reports of a strong performance for the hospitality sector over the festive season. Although this masks significant variations by region and sub-sector, it demonstrates that, post-pandemic, there is still consumer appetite for spending on social activities and experiences. Long term, the promise in the Budget of permanently lower business rates for hospitality, retail and leisure businesses may give some reason for optimism, although the precise shape of this remains to be seen.
So, what can we deduce from insolvency trends? Despite a rise in compulsory liquidations, the figures do give some indication that rescue procedures (such as administration and company voluntary arrangements (CVAs)) are coming back into favour. In contrast to liquidation, which is a terminal insolvency procedure, administration and CVAs offer the potential to rescue a company or its business. The use of restructuring plans – which enable financially distressed businesses to restructure without entering a formal insolvency process also continues to grow. They have been used to good effect in the hospitality sector (for example by Prezzo, Tasty PLC and Revolution Bars), typically to compromise debt and “right-size” leasehold portfolios. We are seeing increasing use of these plans in the mid-market.
Tasty PLC’s restructuring plan offers a good case study in how this procedure can be used to help a company stabilise its financial position with a view to returning to growth. The company (operator of Dim T and Wildwood restaurants) successfully proposed a plan which involved the closure of 20 underperforming sites. Together with new debt funding, and other cost-cutting measures, the group expects the focus on profitable sites to contribute to a return to profitability going forward. However, it is also focusing on other measures to improve growth including a new electronic point of sale system and loyalty platform. Organisational and financial restructuring is only the beginning of the story continued innovation and improvement is necessary to capitalise on opportunities and drive successful growth.
Whether through the use of a formal procedure such as a restructuring plan, CVA or administration, or through internal operational measures (focussing on cost-cutting, innovation and streamlining operations), larger groups have demonstrated the ability to survive and emerge from financial challenges stronger and with increasingly future-proofed businesses. The challenge remains, however, for small operators who have less opportunity for rationalisation in the first place, and this is where, unfortunately, we are likely to continue to see most casualties in the sector through 2025.
This article was first published in CLH News and can be accessed here.
Helen Martin