If forewarned is forearmed, then any review of the UK’s food and beverage and restaurant sectors must primarily focus on the economics of both, and both initially appear to be grim.
The newly elected Labour government released its first Budget in September 2024 with two key changes to employer-paid National Insurance which have had a devastating impact on the UK’s hospitality industry.
The first saw National Insurance, increase from 13.8 per cent to 15 per cent while the second saw the threshold at which payments needed to be made drop from £9,100 to £5,000, hitting many temporary and part-time workers for the first time.
Coupled with an increase in the National Living Wage (NLW) from £11.44 to £12.21 per hour from for adult workers while the minimum wage for 18-20 year olds increased from £8.60 to £10 per hour, the changes sent staff costs flying.
And although the rules were not introduced until 6 April, 2025, the changes have been blamed by British trade body UKHospitality this August for a loss of nearly 89,000 jobs in the sector, 54 per cent of the 164,641 jobs lost in the UK since the Budget.
The stark losses, seven times more than in any other sector, have led to the trade body’s chair Kate Nicholls calling on the government to rethink its policies which have driven up staffing costs across the country.
She says: “At a time when the country needs jobs, the government should be encouraging hospitality to grow and create jobs, not tax them out of existence.
“The government needs to recognise the devastating impact of its tax increases on working people and communities across the country.
“It should take action at the Budget to reverse this damage by lowering business rates, fixing NICs and cutting VAT.”
Scottish woes
While the situation might already be bad for the UK’s hospitality industry, Colin Wilkinson, the managing director of the Scottish Licensed Trade Association (SLTA) says the situation is even worse in Scotland where additional Scottish government policies have further driven up costs.
In particular, he blames the Scottish government’s decision to end the 75 per cent relief on business rates for retail, hospitality and leisure businesses in March 2024, while the rest of the UK enjoyed an extension of the relief.
He says this has been responsible for the latest report released by the association in August which shows that 59 per cent of Scotland’s pubs, bars and hospitality venues expect to make a loss in 2025.
This has been driven by 75 per cent of the 350 businesses surveyed seeing profitability fall this year with 56 per cent reporting a decline of more than 10 per cent while 14 per cent are closing or expect to close this year.
Wilkinson says: “The Scottish government have got a lot to answer for when it comes to the decision we find ourselves in.
“Two years ago we were crying out for staff and now we’re in a position where we can’t afford to employ more staff.
“It’s not just the lack of financial support, it’s the regulations that they are bringing in which are making it much harder to operate.
“The real killer is the National insurance contribution for employers; it’s the final nail in the coffin for many.”
Reasons to be cheerful
Despite the gloomy outlook for both the sector and the UK economy, Mark Edwards, the head of leisure and hospitality at the international network of public accounting, tax and advisory firms BDO, maintains a sense of optimism for the rest of 2025.
He says: “Even when things are all doom and gloom you have some very enthusiastic entrepreneurs who are happy to see opportunities emerge.”
Speaking to Hospitality Investor about BDO’s 2025 restaurant and bars report, he says consumers are returning to restaurants following an overall 10 percentage point increase in year on year in spend intention sentiment this year.
The growth has been largely driven by the 18-24 and 24-34 year old age groups focused on affordable and experiential dining as well as those aged 65 and over who prefer something more traditional.
These intentions chime with reality too, as the report shows that quick service restaurants (QSR) are now outperforming their 2019 pre-Covid performances, something that full service restaurants (FSR) are yet to achieve.
The report states that the QSR performance has led to strong investor interest in American fast-food chains operating in the UK like Popeyes or Wingstop, which sold its UK arm to US private equity firm Sixth Street for £400 million at the end of 2024.
Elsewhere, Edwards questions the ongoing popularity of themed pubs offering attractions like crazy golf or darts as he believes are in danger of only catering for people looking for a novelty night out.
He says: “A lot of the challenge will be site selection and getting those sites right, if you get it wrong and rely on repeat customers then that is harder to make work now.”
Edwards also adds that while the UK’s food delivery sector might offer opportunities for high-end operators, he urges operators to be cautious.
“From an operator’s point of view your margin is shot, you’re paying a fortune for delivery but you are not making anything extra on drinks, water or desert which is normally your highest margins and the bit you rely on,” he adds.
Instead Edwards believes the smartest investors can take advantage of a market where hospitality businesses are failing.
He says: “If you let the business go down the landlords are desperate, even on the good sites, so you can get the deals without having to take on any risks or the downside of taking on a corporate portfolio and that will be the situation for the next 12 months.”
BDO head of food and drink Cindy Hrkalovic agrees while costs are rising as suppliers have been hit just as hard by energy and staffing costs plus this year’s bad harvest in the UK, food and drink manufacturers are making money by moving fast and latching on to the latest trends.
She says: “There are always opportunities in terms of finding a niche and food and drink manufacturers are very good at doing that, they spot things early and with the use of social media they don’t need a massive marketing budget.”
Hrkalovic argues this attitude has helped drive the recent collaboration between restaurants and food manufacturing companies to provide meal kits consumers can make at home.
“You are getting that balance between the people who are maybe going out at the weekend but having the products at home during the week,” she adds.
Despite the opportunities out there, Edwards flags one major cloud on the horizon, this year’s Budget which is scheduled for 26 November and which he describes as “terrifying”.
The UK government has a £55 billion black hole in spending to fill and, having pledged not to tax working people, the hospitality industry is braced for further as yet unknown pain.
Edwards says: “Anything that gives confidence for long term thinking helps the business; it’s not the tax increases, it’s the uncertainty.”