With 2022 sparking fears of a global recession, not to mention Russia’s “special military operation” in Ukraine, ridiculously high energy prices, incredibly high fuel prices, double-digit recession, and talk of the BoE increasing interest rates, it was clear that an economic storm was brewing in the UK.
2023 came along, and with inflation still in double digits, energy prices still far higher than ever, and the UK gripped by a ‘Cost of Living Crisis’ banks started to increase interest rates in a bid to tackle inflation. Not only that, but the UK government also decided to implement a new Alcohol Duty Tax, which would threaten virtually every business in the hospitality trade in some way or another.
Sure enough, as time went by and the bleak statistics started to roll in, experts found that the hospitality industry was one of the worst affected.
Testing Times for Hospitality
During the first six months of 2023, research found that the hospitality industry accounted for a very worrying 10% of all company administrations. This is the fourth highest sector in the UK.
Between the 1st of January, 2023 and the 30th of June, 2023, we saw a total of 759 businesses file for administration. Of these 759 businesses, 79 were from the hospitality industry. That means that 1 in 10 businesses filing for administration worked in hospitality.
Administration is a legal process found under the Insolvency Act 1986, with the primary aim of achieving one of the statutory objectives of an administration. Often this is basically to save a viable business that is at risk due to cashflow problems. UK company Wilko is a prime example of this, as they entered into administration on the 10th of August, 2023 and are at risk of collapse.
Directors, the courts, or a creditor will appoint an administrator to carry out this process. There’s a lot more technical jargon, but basically administration gives a business some breathing room and frees them from creditor enforcement actions. Companies in administration can still trade, but daily control will pass from the directors to the administrators instead.
As bleak as these figures are, they are not as bad as they were in 2019, where 940 companies entered administration for the first half of the year.
The four sectors that have suffered the most thus far have been retail, manufacturing, construction, and of course, hospitality. These four sectors accounted for more than 57% of all administrations during the first half of 2023.
July 2023 was the UK’s wettest on record, which will of course be a bigger blow for industries such as those involved in retail, construction, and hospitality. Put simply, if the weather is bad people are less likely to shop on the high street, although online shopping will help soften that blow.
For construction sites getting rained off jobs however, it’s a different story. The weather will also have affected hospitality as people are less likely to go for meals or sit having drinks outside if it is cold, windy, and pouring with rain. August is looking more promising, though.
With HMRC seemingly clamping down on businesses and taking a harder approach, their threats of enforcement are not going unheeded and are causing smaller businesses to consider their options. Any further blows to businesses or the economy, and we will likely see even more businesses enter into administration.
UK Hospitality recently warned that rising interest rates will put even more pressure on businesses that are already struggling.
Why Rising Interest Rates Matter
On Thursday the 3rd of August, the Bank of England once again hiked interest rates. This would be the 14th consecutive rise and would put interest rates at 5.25%.
The BoE hikes interest rates in an attempt to control inflation and bring it down. Rising interest rates however, can be a huge threat to businesses. When interest rates increase, this essentially means that debt rises. If a business has a business loan, their monthly repayments will increase. Purchases on credit cards will increase, mortgage repayments or rental payments will increase. Put simply, businesses will be spending more money each month, so their profits will take a hit.
Add to this, the fact that increasing interest rates also mean that people will likely have less disposable income and so will spend less, and you can see why it’s so worrying.
The BoE also said that they would continue to hike interest rates until inflation is brought under control. Inflation, incidentally, is the rate in which prices rise.
Those in the hospitality industry are especially exposed because, when they were forced to take out Covid loans during the pandemic, repayments were incredibly low. Now, they’re higher than they have been in decades.
Add to this, the ridiculous costs of energy, fuel, food and drink, labour shortages, and the government’s controversial new Alcohol Duty Tax, and you can see why businesses such as GreatDrams.com are feeling the squeeze more than ever.
Light at the End of the Tunnel?
As grim as the last several years have been, there is just a very dim glimmer of light at the end of this long, dark, bleak tunnel.
Mortgage rates are finally coming down, energy prices are also following suite, and so is inflation. Inflation, which at its peak was at 11.1% in October 2022, dropped more than expected in June, falling to 7.9%.
As items begin to become more affordable once more, inflation does appear to be falling, which indicates that the BoE’s strategy is working. Once inflation is under control, interest rates will likely be reduced which means that businesses won’t be spending as much each month. Not only that, but people will have more disposable income and will likely be able to spend a bit more and treat themselves once again.
We’re not out of the woods yet, but the worst does appear to be over.