Should the UK Hospitality Sector start to worry about their profitability?

Hospitality within the UK is one of the most dynamic and diverse sectors not only within the UK but across the world. This sector brings together tourists and locals alike, so why should this sector be starting to worry about their profitability?

Across the UK the hospitality sector is facing increasing pressure from changes in their micro and macro environments. Internally increasing costs, staff shortages, and rises in interest rates threaten the ability of many businesses to stay afloat let alone turn a profit. Externally the cost of living crisis has affected many consumers disposable income and ability to justify expenditure on luxury products and services deemed as ‘wants’.

The Hospitality Sector differs from other industries that offer products or services that fulfil needs, as opposed to luxury products or services that provide fulfilment to wants. Consumers are facing mounting financial pressure and are being more selective on their discretionary spending. Thus some operators may thrive whilst there will be many that continue to struggle.

In response to rising costs and businesses struggles to stay afloat, the government has provided some relief in the form of the Energy Bill Relief Scheme replaced by the Energy Bill Discount Scheme. Their focus going forward is on those businesses identified as, being the most energy and trade intensive, primarily those in manufacturing. The lower budget and level of support means businesses in the hospitality sector will see an estimated £4.5 billion increase in bills. Furthermore, businesses in the hospitality sector are concerned that the discount scheme will unintentionally encourage energy suppliers to increase prices in order to profit from the governments discounts, without an Energy Cap suppliers possess strong pricing power, passing the costs onto the businesses.

Additionally, Business Rates Relief: 2023/24 Retail, Hospitality and Leisure Scheme is available in England and Wales but has not been passed on to Scottish businesses furthering the pressure they face.

The Scottish Hospitality Group who represent the interest of hundreds of businesses across the country launched a campaign called Save Our Scottish Hospitality in order to raise awareness of the difficulty within the sector ahead of the Scottish Budget in December 2023.

Our friends at Quantuma provided some thoughts to consider when trading is getting tougher:

Directors Duties  – Directors have a duty to act in the best interests of the company, especially when facing insolvency. When a company is in financial trouble, directors must consider creditors’ interests, potentially ceasing trading to prevent further losses or liabilities. Continuing to trade while insolvent can lead to personal liability for directors if they’re found to have acted negligently or recklessly, worsening the company’s financial situation. Striking a balance between exploring restructuring options and avoiding wrongful trading is crucial, and seeking professional advice during such times is highly recommended.

Delayed action – Overall, engaging a restructuring professional at the initial signs of financial distress can significantly increase the chances of a successful turnaround or an orderly wind-down, benefiting both the company and its stakeholders – a delayed appointment of an Insolvency Practitioner can lead to the following concerns ;

  • Avoiding Insolvency – Timely intervention might have prevented the company from reaching insolvency, providing a better chance for successful turnaround and continued operation.
  • Diminished Assets – Delayed intervention often means that the company’s assets might have been dissipated or transferred, making it harder to recover them for creditors.
  • Legal Compliance – There might be breaches of legal obligations or director misconduct that could have been addressed or mitigated with earlier involvement.
  • Limited Rescue Options – Delayed intervention reduces the window for exploring restructuring or rescue options, leaving liquidation as the only viable solution.
  • Creditor Dissatisfaction – Delayed action can exacerbate creditor frustration or lead to accusations of preferential treatment if certain creditors seem to have received favourable treatment.
  • Increased Costs Handling matters at a later stage often incurs higher costs due to increased complexities and a more intricate winding-up process.
  • Personal Liability Directors might face heightened scrutiny regarding their actions if the company’s financial condition worsened due to delayed intervention.

Maintaining Control Early involvement allows the company and its directors to maintain greater control over the restructuring process, preserving their influence over the outcome.