Scott Wright: Fears of slew of bar and restaurant failures across Scotland

Labour shortages, supply-chain disruption and the fall-out from Russia’s war in Ukraine are driving up costs at precisely the same time as consumers are facing a cost-of-living crisis, with inflation running at a rate not seen for decades. Official figures published yesterday showed that annual UK consumer prices index inflation rose to nine per cent in April, the highest rate for 40 years, propelled by surging energy bills. And it is not going to stop there, as the Bank of England forecasts the rate of inflation will increase to more than 10% by the end of the year.

As if the cocktail of spiralling overheads and fragile consumer confidence was not enough, the hospitality industry is learning to live without government support for the first time since the early days of the pandemic. The rate of value-added tax applied to the industry has been restored to 20 per cent, having initially been cut to 5% then upped to 12.5% at various stages in the last two years, and the moratorium on rents has ended. In Scotland, the current business rates discount for hospitality, retail and leisure will soon be no more.

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With so many challenges to face on so many fronts, it was no surprise to hear Mr Cook say the conditions will result in more distressed assets coming on to the market. His company, which floated on the stock market in November, is planning to add to its 85 Fridays outlets, but he said it is a time to proceed with expansion plans cautiously.

Mr Cook, who said he has never seen so many acute difficulties converge on the industry at once, told The Herald: “We jumped on the first distressed asset wave that came through at the beginning of Covid. But we believe there will be a bigger wave of distressed assets coming to the market [given the challenges]. Really, we just have to sit patiently and see what unravels.

“But equally we have got to be protective of the business and be prudent in how we deploy our capital, given the uncertainty of the Ukraine war and the headwinds inflation are presenting to us.”

Mr Cook acknowledged that Hostmore is approaching the current crisis from a position of strength. He cited the strength of its balance sheet and the experience of its management team, who have navigated tough times before.

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However, other businesses within the hospitality sector are not so blessed. It is widely acknowledged that the periods of inactivity necessitated by lockdowns in the last two years have elevated the level of indebtedness across the industry.

Even though the industry is free to trade, pubs, hotels, restaurants and tourism businesses are facing cost increases at a rate not seen for a generation. That was underlined yesterday by the pub giant Mitchells & Butlers, owner of the famous Horseshoe Bar in Glasgow, when it warned that cost “headwinds present a significant challenge to the industry, particularly those costs related to utilities, wages and food”.

At the same time as businesses are facing higher costs, their potential customers will inevitably cut back on discretionary spending as the cost of living becomes ever-steeper and inflation is not matched by wage growth. And, moreover, the industry remains beset by a skills shortage that has its roots in Brexit and the UK Government’s regrettable stance on immigration, with businesses robbed of the talent they need.

The skills shortage is so acute that hospitality firms and businesses in other sectors are increasingly having to pay “signing-on fees” to ensure they are able to recruit the experienced personnel they need.

Given the expense that involves, it is not an option that will be open to every business, and as such the shortage of staff across the hospitality sector means that it remains common for businesses to be operating at less than full capacity.

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Hotels are still keeping whole floors closed, and bars and restaurants are only opening for part of the week, partly because they cannot afford to take on staff and also because they need to give exhausted employees a break. Industry figures also say they want to ensure businesses can continue to provide a high level of service to customers, which is now almost impossible to do seven days a week because of constraints on staff numbers.

It was little wonder, then, to hear the chief executive of C&C Group, David Forde, say this week that there is a feeling of “anxiety” across the on-trade when he was asked to sum up the prevailing mood among operators.

“Our customers have had to take price increases and people are asking the question: 'how much more inflation has to come into my business as a pub owner? And equally, how much inflation can I pass on to my customers, and are they willing to take it?'.”

Amid such trying circumstances, the prediction from Mr Cook of Hostmore that there will be a further “wave” of distressed assets seems likely to hold true.

Indeed, according to Mr Forde, it is “inevitable” that more hospitality businesses will be forced to close the doors for good as economic conditions worsen, adding to the closures we have already seen since the pandemic started.

“There are plenty of pubs in the towns and cities of Scotland, but I think there is an inevitable decline,” he said. “The strongest will survive and probably prosper, and unfortunately again the weakest will probably fall by the wayside.”

But Mr Forde did strike a defiant note. Referring to the travails sparked by the pandemic in the last two years, he said: “The outlook is a bit uncertain. We all know that inflation is with us, the cost-of-living squeeze is with us.

“But if I look at the challenges [that] we have lived through over the last two years, what is ahead of us pales into insignificance with the challenges we have come through.”