Restaurant owners have too much on their plate

Energy use, rent, rates, an unfair tip system – if you’re in the restaurant or pub trade, everything can feel stacked against you, writes Chris Blackhurst. With spiralling costs, many owners are now running ‘dark kitchen’ operations and ruing the day they ever went into the industry

Billionaire Richard Caring may be smiling, but many other restaurateurs are struggling just to keep their business open (PA)

As Richard Caring contemplates selling The Ivy Collection restaurant chain and pocketing hundreds of millions of pounds, others in his trade are not so lucky or able.

This Christmas and New Year, plenty of restaurateurs and bar owners are ruing the day they ever went into the industry.

First, Caring. From buying The Ivy and its sister restaurants in 2005, the fashion manufacturer has shown himself to be a dab hand in another sector. Today, Caring, 75, sits atop an empire of restaurants and private members’ clubs, including Annabel’s, Sexy Fish, Scott’s, J Sheekey and The Ivy group.

He’s looking to sell his 75 per cent stake in the latter, which totals 41 cafes and brasseries, plus eight The Ivy Asia outlets.

For the year to January 2023, they had sales of £302.9m, up from £200.4m previously, as customers returned after the pandemic. Pre-tax profits rose to £20.9m from £20.4m, with underlying earnings hitting £54.8m. On a normal valuation multiple for restaurants of seven or eight times, he can expect to collect at least £440m, probably more, given the national and international worth of the brand.

Despite bars and restaurants being packed in the run up to Christmas, the fact is that many are struggling, and they can only dream of being in the Caring league. As soon as the holiday ends, and the accountants do their sums, “closed” signs and shutters will be going up.

Such are the fixed costs of doing business that only those with the very highest revenues, like Caring, are prospering.

A normal pub or restaurant has energy costs, rent and rates to meet. The government made a song and dance about providing “75 per cent relief” for the latter. But rates relief is capped at £120,000 per owner, not per outlet. So, if a chain has 10 branches and the rates are, let’s say, £50,000 for each one, they still get relief of £120,000; if they have 1,000 again the relief is only £120,000.

Lighting, gas, electricity, use of the building – they all must be paid for – and those bills have spiralled upwards. Then there’s labour charges. In an average restaurant, wages account for 35 per cent of the costs. So, out of every £10 in takings, some £3.50 goes on staffing. In some establishments, the wages account for an even greater proportion.

What this translates into is higher prices. Wine, in many places now, is four times the supermarket price. In my part of London, a pint of very ordinary pale ale in the pub nearby is £7.35, this for a product that costs pennies to make.

Consequently, wine producers are looking at ways of lowering their prices. UK duty on alcohol is based on the drink’s ABV – alcohol by volume. The higher that is, the more the tax. Instead of making a wine with 13 per cent ABV, some growers are seeing if they can bring that down to under 10 per cent, just for the UK market.

Another consequence is that more restaurant chains are running a “dark kitchen” operation, effectively pre-producing most of their food in a mini-factory and transporting what are effectively ready meals to their branches. It saves on expensive, skilled chefs and kitchen staff.

Pay continues to climb. A bone of contention is the national living wage. While the objective of reducing exploitation is commendable and is to be pursued, its execution leaves much to be desired – at least from the hospitality operator’s standpoint.

The government wants the minimum to be 60 per cent of the median for the sector. The median wage may be earned by someone who has worked hard all their career and been promoted five times. Now, the career-minded hard worker earns only 40 per cent more than someone who turns up, washes the pots, and the next week goes somewhere else because they’re not interested.

The idea of motivating people is being destroyed by the concept of everyone being paid a certain amount of money, no matter how experienced, how good, or how motivated they are.

Additionally, every time the statutory minimum increases, so does the employer’s National Insurance contribution. It’s also a base, so everyone higher up the chain wants their remuneration to rise accordingly – adding to the costs for the proprietor, jacking up prices for the consumer and ultimately, reducing trade and threatening the place’s viability.

Another source of frustration is tips. Most bars and restaurants follow the tronc system, where the tips, usually made via credit cards, are collected centrally. The company takes off the income tax for their employees before they’re distributed.

The tipping portion of a staff member’s wages can be substantial. In London’s West End and other high-end areas, waiters earning £50,000-plus a year are commonplace. With a national living wage of £10.42 an hour (£11.44 from April 2024), the service charge element is large. What infuriates proprietors is that unlike the US, for example, tips are not counted towards the living wage. There, the employers are allowed to include them; here, they’re separate, adding to the burden on the owner.

One restaurateur told me: “As businesses, we need to make money for our shareholders and for our employees. We get that. But the system also must be fair and equitable. How can it be if waiters are earning more than £50,000? In some places, the tip pot is more than their profitability, such are the costs they must pay. That cannot be right.”

Caring has hit on a winning formula. For many it is an uphill struggle.