The key challenges for the UK retail and hospitality industry

4 Dec 2023

challenges to UK retail industry

Bouncing back after the Covid-19 pandemic was a hope for many industries across the UK. Even with the ‘Eat Out to Help Out scheme in place around strict curfews and restrictions to counter the pandemic’s economic impacts, the hospitality sector was one of the hardest hit – and continues to be.

In this article, we get key insight from one of our clients, an entrepreneur in the hospitality industry, on how businesses can navigate these challenging times to heal from the “deep scars” of the pandemic as well as how innovation from the entrepreneurial community may be the key to longer term success in the sector.

A difficult trading environment

It’s difficult for businesses to underpin what is currently affecting the sector the most: the cost-of-living crisis, expensive overheads or post-Brexit staff losses and soaring labour costs. However, one announcement from the recent Autumn Statement will have eased the fears of many.

On 22 November 2023, the Chancellor of the Exchequer, Jeremy Hunt announced a package of support in excess of £4 billion over the next five years for small businesses and the high street with respect to business rates. The biggest help for many is the extension of the Retail, Hospitality and Leisure (RHL) scheme, which had expected to end in 2024, but has been extended for another year until 2025. This provides a 75% relief for eligible RHL properties.

In a recent call for business rates reform, the British Beer and Pub Association stressed the importance of extending the relief scheme, noting that since the pandemic, UK pubs have faced endless challenges, including complications from the ongoing energy crisis and for many the business rates increase would have been “the last straw.” Concerningly, nearly 400 pubs closed for good in the first six months of 2023, almost matching the 386 lost in the whole of 2022.

Trade association the British Retail Consortium echoes the sentiment, confirming that the current economic situation in the UK continues to make for a challenging trading environment for retailers. With interest rates predicted to be higher for longer, the financial pressures on businesses and consumers are only anticipated to increase, so the extension of the scheme would have been a great sigh of relief to these businesses.

There is of course calls within the hospitality sector for a reduced rate of VAT to be applied on a permanent basis. During the pandemic, the government introduced a reduced rate of 5% for the sector which increased to 12.5% before returning to the standard rate of 20%. A permanent reduced VAT rate in the sector would bring the UK in line with many major economies in the EU.

How entrepreneurs are navigating challenging trading conditions

Entrepreneurs and business owners across hospitality are undoubtedly affected by the current trading conditions. However, what we’re seeing is that those who innovate, best leverage technology, and pivot away from traditional business models by being creative and doing something different to stand out from the crowd, are not just surviving but coming out the other side in a healthy position.

Views from within the hospitality industry

Andy Lennox is the founder of Fired Up Collective, a hospitality business born out of the pandemic in 2020, which has seven sites under its belt in just two years. He’s also the founder of the Wonky Table, a group which connects hospitality businesses within the Bournemouth, Christchurch and Poole (BCP) Council area, and has championed nationally for hospitality and VAT relief. Here he provides an insight into how hospitality businesses can succeed in the face of continuing adversity.

“The last four to five years in hospitality has been, to put it mildly, an uphill battle; a constant slog against events outside of our control, like Brexit, Covid-19, the cost-of-living crisis, a utilities crisis, inflation, staff shortages, the war in Ukraine, rising wages, rising interest rates, and increased taxes. All of this against a backdrop of an industry that was already reaching over-saturation back in 2017 and had only just really learnt how to grapple with the likes of Deliveroo and Just Eat, who came galloping out of the blocks in 2015/2016.

“Those who are still here must take a moment to pat themselves on the back. We’re not there yet, by any stretch of imagination, but we are still here – which is no mean feat. However, there are deep scars which will take a long time to heal; the Covid-19 pandemic has left an indelible mark on the hospitality sector, with lockdowns and travel restrictions severely impacting revenue. However, as we move forward into 2024, the industry is gradually rebounding, although many are burdened with a catalogue of bounce-back loans, the Coronavirus Business Interruption Loan Scheme (CBILS), rent arrears and Covid-19-related debts that will take decades to settle.

“The state of play in the hospitality sector in 2023 is marked by resilience, adaptation, and transformation. The industry is recovering from the pandemic, but challenges persist. To succeed in this new landscape, businesses must continue to embrace technology, meet evolving guest expectations, prioritise sustainability, and find innovative ways to address labour challenges. Even more so, they must learn how to be hospitable again. In many ways it’s the hardest thing to have lost, as technology has replaced staff, Covid-19 guidelines have in many ways become a cheaper form of operating, and hospitality needs to re-learn the ‘art of hospitality’.

“By doing so, the hospitality sector can not only survive but thrive in the years ahead. However, there are some significant problems that need to be addressed. The metrics have changed for the industry and a re-balancing needs to happen for it to grow properly again. Finding a way back to the art of hospitality is now key. With an industry that is now becoming a big player in the economy, more and more people are looking to hospitality as a career.”

What is the art of hospitality?

“It embodies the practice of creating outstanding guest experiences. It involves warmly welcoming guests, offering a personalised and attentive service, curating inviting atmospheres, providing exceptional service, attending to small details, and demonstrating empathy and active listening. It combines professional care, attention to detail, and a commitment to ensuring every guest feels genuinely welcomed, valued, and well-cared for during their stay or visit. Yet, to achieve and keep it requires a high-end product, money to fit out, staff etc – all the things that are squeezing our margin to the extent that it’s becoming untenable to make a profit.”

The case for reducing VAT

“In my opinion, it’s not labour or rates, landlords or inflation, but the way the tax system works for our industry. VAT is, and will remain to be, one of the most challenging areas for us, and reducing VAT for the hospitality sector has several compelling arguments:

  1. It serves as an effective economic stimulus by encouraging consumer spending and tourism, benefiting hotels, restaurants, and related businesses.
  2. It preserves and creates jobs in a sector known for its significant employment opportunities, particularly during economic challenges.
  3. It promotes tourism, a crucial industry in many countries, attracting both domestic and international visitors, thereby boosting revenue.

“Additionally, a VAT cut would support hospitality businesses with narrow, if any, profit margins, and will enhance our sector competitiveness, allowing us to invest more. Moreover, lower VAT rates can lead to increased long-term tax revenues by stimulating economic activity, encouraging investment in the hospitality industry, driving expansion and improvements.

“It’s the one single thing that can change the course of the industry; pubs and restaurants are closing at an alarming rate and something bold needs to be done to change this current trajectory. It would allow us to secure labour from non-EU countries, which whilst available is expensive, allow us to pay our rates and would rebalance the cost-of-living crisis we have been so hard hit by. Not to mention help us in repaying the debt that we have had to take on to survive.”

How Saffery can help your business

Whether you’re a restauranteur or an entrepreneurial business grappling with any of the issues discussed, please get in touch with Nick Hart, VAT Director or Stuart Macdougall, Partner and Head of our Entrepreneurs Practice Group for further guidance.

Contact Us

Stuart Macdougall
Partner, London

Key experience

Stuart joined Saffery in December 2022 as a partner from a Big Four firm.