Services Sector Doing Well Despite Warnings of Restaurant Closures in 2017

Figures (dated December 5th, 2016) show that the UK’s services and restaurant sector continued to strengthen in that November according to the IHS Markit/CIPS purchasing managers’ index. The sector rose from 54.5 in October to 55.2 in November; the highest figure for the sector since that January. Any figure above 50 usually indicates the industry in question is growing.

Consequently, the services sector has been described as ‘remaining on a firm growth path’ despite the uncertainty in Britain due to Brexit.

These figures are good news for the UK economy, as the services’ sector accounts for 80% of it. This news, combined with surveys of the construction and manufacturing sectors, points to a 0.5% growth for the last three months of the year according to IHS Markit.

High competition, and narrow margins

One of the cornerstones of the services sector; the restaurant industry is fiercely competitive, and with so much choice available, a restaurant needs something special to entice customers into their establishment.

Many chain restaurants are reluctant to pass on growing costs to their customers in the form of price rises, but this creates a problem of smaller profit margins to buffer any lost profit, increase in costs or drop in sterling. However, small and medium-sized businesses operate on tighter budgets so they are likely to either lose money or raise prices, which could result in a loss of custom.

These tight margins and fragile finances show just how significant the threat of insolvency will be in this sector. Mike Finch, a restructuring partner at Moore Stephens, spoke to The Guardian regarding this issue;

“There may be further challenges to come as the UK’s trading agreements with Europe remain uncertain. Many in the restaurant industry would consider the idea of additional import tariffs on foodstuffs with horror.”

Increased employment, and costs

As the services sector continues to grow, employment in this sector has increased, reaching its fastest pace since April. However, this news comes among weakened business expectations for the next 12 months, which is being put down to ‘ongoing uncertainty and inflationary pressures.’

As the value of sterling has fallen, it has pushed up the price of imported goods, including the cost of food that we import. The UK currently imports 48% of its food, so many restaurants heavily rely on food and wine imports.

With importing ingredients costing more, and the increase in the price of labour due to April’s national minimum wage rise, many restaurants are predicted to struggle into 2017.

Accountancy firm, Moore Stephens recently warned that thousands of restaurant businesses in Britain could fall into insolvency as a result. They say that 5,570 restaurants have at least a 30% chance of insolvency in the next three years as a result of inflation, and stagnation in disposable income.

Although things seem good for the services industry, when you look at current figures, 2017 may be a tough year for many restaurants, whether big, small or medium-sized. With the services sector being so important to the UK economy, a high number of insolvencies in the industry could negatively impact that economy and GDP for the next year.

In summary

Despite uncertainty around inflation, fluctuations in disposable income, and Brexit uncertainty, the UK services sector continued to grow towards the end of 2016. With April’s minimum wage increase, there will be a rise in employment costs, and with the value of sterling falling, import costs are also going up. There is a lot of competition in the restaurant sector, where an increase in price to customers could lead to them going elsewhere. These increases in costs and potential for loss of custom could see some in the services sector pushed into insolvency.