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News Article

High rates of hospitality business failure in UK


Annual rate of failure three times all-business average

Business in the hospitality and catering sector (restaurants, pubs and hotels) are around three times more likely to fail than businesses as a whole, according to a study by chartered accountancy group UHY Hacker Young. In a study of over 150,000 UK business failures, it was found revealed that 15.5% of businesses in the UK hospitality and catering sector fail every year, compared to just 5.25% for the economy as a whole.

According to UHY Hacker Young, difficulty in raising second round financing, poor market research and financial planning and the challenge of building a loyal client base are all to blame for the high business failure rate.

Partner Peter Kubik said inflation busting rises in the national minimum wage and long term increases in alcohol duty had added to the pressure.

"Not all licensees are successful in passing on the whole cost to customers," he said.

"Bars and pubs have the same vanity dimension as restaurants. Often inexperienced entrepreneurs decide to try their hand at running a bar, but when they find out that there is a lot of hard work and very little glamour involved, their enthusiasm wanes."

Peter Kubik said: "There are lots of anecdotal warnings about the failure of restaurants in their first year and they are all true. As Gordon Ramsay's and Jamie Oliver's experience has shown, even celebrity chefs can struggle to turn success into immediate positive cashflow. For an entrepreneur, who has less patient backers, it can be very tough indeed.

"The restaurant business is a very competitive sector. It takes time to build a loyal client base. With few assets against which restaurants can raise working capital, keeping the business running, while trying to build that reputation is tricky."

He warned that the forthcoming smoking ban in England (to be introduced on 1 July) may add to the financial pressure. Restaurants are also hit by increases in minimum wage rates and pressure to pay the taxman, who no longer gets preferential treatment if a business goes into administration.

"Before the Revenue lost its preferential creditor status it was more relaxed about late payment, but now it is far more likely to pull the plug," said Kubik.

A previous report also showed high failure in hospitality businesses. According to Small Business Service, of 125,000 hospitality businesses registered in the UK in 2001, around one in eight (15,685) closed down. Despite this, hospitality is one of the most popular sectors for entrepreneurs to start a new business. In 2001, while 15,685 hotels, bars and restaurants closed, 19,205 new ones opened.

Pratten (2004) examined possible causes of business failure in British public houses. In Spain, Villacorta Rodriquez and Ballina Ballina (2002) look at factors influencing economic success or failure of hotels. Earlier, Morse (1998) examined US lodging failure rates.

Article details

  • Author(s)
  • David Simpson
  • Date
  • 25 April 2007
  • Subject(s)
  • Hospitality Sector