Restaurant Groups See Profits Fall 44% in a Year as Tax Rises Squeeze Margins

The UK’s Top 100 restaurant groups saw profits fall by 44% in the last year* to £204 million, down from £365 million the previous year, as rising employment costs and higher operating expenses squeezed margins, says national accountancy group UHY Hacker Young.

Martin Jones, Partner at UHY Hacker Young, says the fall in profits reflects the cumulative impact of increases to the National Minimum Wage and employers’ National Insurance contributions. Higher business rates for many operators and continued inflation in food and energy costs also ate into the profits of restaurateurs.

The fall in profits came despite the combined turnover of the UK’s Top 100 restaurant groups increasing to £13.3 billion in the last year from £12.9 billion the year before.

Says Martin Jones: “A lot of individual restaurant companies are showing that they can attract customers, but turning those sales into profit has become far more difficult.”

“Rising taxes on employment and higher operating costs have absorbed all the benefit of the increased turnover and then some. Restaurants are also struggling with food prices that are much more volatile. For example, the price of olive oil, beef, chocolate, coffee, eggs and pasta have all easily outstripped broader inflation.”

“Many operators are now finding that simply getting more people through the door is no longer enough. They have to work much harder to protect already thin margins.”

Martin says that the sector is also seeing more interest from private equity which may help to fund more expansion and other capital expenditure. Lion Capital, a British private equity investor behind Wagamama, increased its investment in the Gordan Ramsey Restaurants to help their expansion.

Martin Jones says that some of the tactics that UK restaurants are employing to protect margins or increase turnover include:

• More chicken on menus to feed the high protein craze but also as a substitute for beef which has experienced record inflation in recent years
• Continued growth of mocktail offerings which offer higher margin drinks to an increasingly alcohol-free young generation
• QR code menus to reduce printing costs and speed up menu adjustments
• Automation of basic food mixing and preparation in order to reduce staff costs
• Continued investment in automated payment points to reduce staff costs
• More dish customisation allowing customers to modify their dishes for a fee
• Continued transition to small dishes that can achieve much higher profit margins
• Value for money menu options. Research by BCG has identified “value for money” as the number 1 customer requirement in “fast food” and “fast casual” outlets
• AI powered procurement to source cheaper ingredients

Restaurants focus on creating experiences not just food to increase turnover

Many restaurant groups are increasingly focusing on ‘experience-led dining’ to build brand loyalty and encourage customers to visit more frequently. This often involves creating hybrid leisure destinations that combine dining with entertainment and events.

Loungers, one of the UK’s fastest-growing hospitality businesses, is an example of this trend. Its Lounge and Cosy Club brands have successfully positioned themselves as community hubs that combine the functions of café, pub and restaurant, helping drive strong sales growth.

Martin Jones says: “Consumers are thinking much harder than they used to about where they spend their leisure budgets. If people are eating out less often, restaurants have to give them more reasons to come back and spend money.”

Among the Top 100 restaurant groups, some of the businesses that were among the largest increases in turnover were Loungers UK (Cosy Club), The Restaurant Group (Wagamama and Barburrito), Lemon Pepper Holdings (Wingstop UK), Gordon Ramsay Restaurants (Bread Street Kitchen, Street Pizza and Street Burger)