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April 2017: a perfect storm for licensed hospitality businesses

There are several changes expected to hit the UK hospitality industry in April - but is it all bad news? Ramzi Qattan, Associate Director explores the potential effects and how operators will need to adapt.

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A wave of cost increases are set to come into force in April 2017 which threaten to place significant additional pressure on businesses across the UK. However, times of change also bring with them great opportunities – and whilst many operators will be hit hard by the rising costs, with some business failures expected, the licensed hospitality sector is known for its resilience and ability to innovate, and many are expected to grow market share, revenue and margins as a result.

Payroll costs have received much attention in the press. These are expected to rise materially in the coming four years due to legislative change in areas such as National Living Wage (NLW), the Apprenticeship Levy, and Pensions Auto Enrolment. The first of these added £900m to wage costs across the hospitality sector upon its introduction a year ago, and is due to add a further £400m of wage costs to the sector overnight when it increases from £7.20 per hour to £7.50 per hour in April 2017. The Apprenticeship Levy (effectively a 0.5% payroll tax on all wage bills in excess of £3m) and Pensions Auto-Enrolment (with employers’ contributions rising from 1% to 3% by 2020) will only exacerbate this.

Yet there has been minimal coverage of the potential benefits that are expected, such as increased disposable incomes from both direct beneficiaries of NLW and those who see their pay increase as a result of pay differentials being maintained. The positive impact apprentices can have on morale, staff retention and the bottom line should not be ignored, the combined impacts of which could potentially offset rising payroll costs if businesses are proactive – targeting the right socioeconomic groups and embracing apprentices in kitchens and management.

The business rates revaluation is a similarly polarised debate, and in truth will bring with it winners and losers in April. Unfortunately for the licensed hospitality sector, businesses where rateable value is based on turnover (i.e. pubs, restaurants and hotels) are being hit the hardest, with some increases reported in excess of 600%, and the winners are expected to be those businesses in rural and tertiary locations which now fall outside the scope of business rates due to the increased reliefs for small businesses. The rest can take some comfort in the admirable efforts of trade bodies such as the ALMR as they attempt to secure additional relief for the sector through reform campaigns. These have already had an effect in Scotland, and stand a good chance of achieving something south of the border following relentless campaigning and increased media coverage.

The cloud of Brexit remains on the horizon, raining uncertainty. However, whilst the future is hard to forecast, the devaluation of the Pound has manifested itself in a number of tangible outcomes. Imported beers, wines and spirits now cost more, and we are seeing a reduction in the labour pool with net migration down 50,000, many of whom are expected to be from Poland, on which the sector relies so heavily. Yet there is again a silver lining – investment in the sector has not just been maintained, but has grown, with our agents remaining very active. The strong growth in inbound tourism and the staycation boom will also be good news for the hospitality sector, and particularly those providing accommodation.

With the above topics dominating mainstream media, utility cost increases have managed to fly under the radar for a lot of businesses. However, with wholesale gas and electricity price increases over the past year, energy providers are set to pass cost increases of c.10% on to consumers in the first half of 2017. Yet, despite the increases, the average user could save 18% if they switch to the cheapest available tariff.

Individually, these costs would be manageable for most businesses. However, April brings with it a culmination of all of these pressures, and it is those businesses which are taking proactive steps to prepare that will be the ones to weather the storm.

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