Is Brexit beginning to bite in the hospitality and retail sectors?

Anna Thompson and Rob Bailey consider whether the consequences of the Brexit vote have contributed to the recent trend of insolvencies in the hospitality and retail sectors.

In the first few months of 2018 the news has carried a continuing stream of stories about high-profile retailers and restaurants that have faced financial difficulty. Michelmores' Restructuring and Insolvency team has also been asked to advise in relation to a number of struggling businesses within the hospitality and retail sectors. Can the blame be laid at Brexit's door?

A common theme in matters reported in the press and those in which we have been directly involved is that the effects of Brexit are increasingly being cited as a factor in why these businesses have failed.

While the UK remains a member of the EU, more cynical observers may remark that Brexit is simply a convenient excuse to cover other failings of struggling businesses, encouraged by the media fanfare on the topic. However, Brexit has been linked to the falling value of the pound and lower consumer confidence, both of which have caused difficult trading conditions for retail and hospitality businesses.

The Brexit effect on Hospitality

A large number of high-profile hospitality businesses have been reported to be struggling, including:

  • Byron Burgers, which announced the closure of up to 20 sites following approval of a Company Voluntary Arrangement or CVA in January.
  • Barbecoa, which appointed administrators in February.
  • Jamie’s Italian, which announced the closure of 12 sites following approval of a CVA in February.
  • Prezzo, which announced the closure of almost 100 restaurants following approval of a CVA in March.
  • Carluccio’s, which was reported to have sought advice from restructuring experts in March.

Michelmores’ Restructuring and Insolvency team has acted in relation to a number of insolvency-related matters in this sector including the sale of a local restaurant and bar business via a pre-pack administration deal. We have also advised a multi-site operator on how it might capitalise on the failure of struggling restaurant businesses to acquire new sites.

The 'casual dining crunch' is not just a 2018 phenomenon. According to accountancy firm Moore Stephens, 984 restaurant businesses entered insolvency proceedings in the year to September 2017, a 20 per cent rise on the same period a year earlier.

Commonly cited reasons for financial difficulties in these cases include falling revenue due to poor consumer confidence, and the rising price of imports due to the weakened pound. Both can be linked back to Brexit. The cost of imports has hit mid-market Italian chains particularly hard as, in search of authenticity, ingredients are often purchased from Italy in Euros.

Staffing is another key issue. The rising minimum wage may not be attributable to Brexit, but Brexit is a factor in the shortage of staff due to high levels of employment and the decreasing numbers of economic migrants from the EU. The falling number of EU workers has been widely blamed on the outcome of the Brexit vote and has also been cited as causing significant difficulties in the agriculture sector.

Other important factors in the poor health of the hospitality sector include rising business rate liabilities and over-competition for sites (driving up rents). The saturation of the casual dining market is now also being hit by the increasing popularity of takeaway and delivery food services.

The Brexit effect on​ Retail

Within the retail sector notable businesses struggling with financial difficulties have included:

  • Toys R Us, and Maplin, which both entered into administration in March.
  • New Look, which announced 980 job cuts and 60 store closures following confirmation of a CVA in March.
  • Conviviality and Countrywide, both of which entered administration earlier this month.
  • Select and Carpetright, who have both announced they are considering CVAs. The latter is reportedly considering closing around 100 stores.
  • Moss Bros, Mothercare, B&Q, Homebase and Laura Ashley, all of whom have reported to be struggling with falling profitability.

Whilst pure or predominately 'bricks and mortar' retailers have struggled to keep up with online or multi-channel retailers, a number of retail businesses and commentators have cited Brexit-related factors such as the cost of importing goods and falling consumer confidence as leading to ever tougher trading conditions. Some fashion retailers have also reported stock shortages as a result of changes made to the way clothes are now being sourced by retailers looking to off-set Brexit-driven inflation costs.

Michelmores’ Restructuring and Insolvency team has advised insolvency professionals, major landlords, creditors and group companies in relation to a number of recent retail insolvencies, including some of those mentioned above.

The Brexit effect, Our Conclusion

It is clear that the sole blame for the failure of these businesses cannot be laid at Brexit's door. However, the consequences of the Brexit vote appear to have compounded the problems of struggling businesses within the hospitality and retail sectors.

The EU and the UK have now agreed the main terms of a transition deal, which will largely keep the current status quo until the end of 2020. It is not yet clear whether this will help to allay consumers' concerns and assist businesses which rely on European imports. It seems more probable that the current uncertain trading conditions will continue until the terms of the final Brexit deal are known, and possibly for some time thereafter.

Michelmores’ Insolvency and Restructuring team regularly assists businesses and individuals affected by a company’s insolvency. This includes the struggling companies themselves, their creditors, their insolvency advisers or other interested parties. Should you require any advice in relation to a business which is at risk of insolvency, if you have been appointed an office-holder of an insolvent business, or if you are concerned with the solvency of your own business, please do not hesitate to get in touch with the team.

If you would like more information on this topic, please contact Anna Thompson, Associate in Michelmores' Restructuring & Insolvency team.

This article is for general information only and does not, and is not intended to, amount to legal advice and should not be relied upon as such. If you have any questions relating to your particular circumstances, you should seek independent legal advice.