Written by: Alex Downes
A return to normal?
As Boris Johnson brought forth a return to a tiered system of restrictions in his so called ‘winter plan’, millions are hoping this marked the beginning of the return to some semblance of normality. This hope of normality has however, been almost entirely reliant on breakthrough vaccines from Moderna, Pfizer and AstraZeneca, each of whom have indicated their vaccinations may be between 90 and 95% effective against Covid-19. Although the Pfizer vaccine is being rolled out, for now, social distancing measures will remain in place. It is hoped that mass roll out of vaccinations will catalyse economic recovery and negate the need for any future restrictive measures. For restaurants however, COVID-19 poses a more existential threat.
A catastrophic year for restaurants
For many businesses, the devastating economic damage already sustained by the pandemic may prove far harder to remedy. Nowhere has this devastation been more clearly felt than in the hospitality sector. Restaurants and bars have borne the brunt of Covid-19 restrictions; they were the first to close their doors in March when the nation went into its first lockdown. Since then an estimated 660,000 hospitality workers have been made redundant and many more are still expected to lose their jobs. The pandemic has proved particularly catastrophic for restaurant operating companies. The Casual Dining Group, whose restaurant chains include Café Rouge and Bella Italia called in the administrators. The Restaurant Group, with Wagamama and Frankie and Benny’s, have entered into a Company Voluntary Agreement as they battle insolvency. Approximately 80% of restaurant companies ceased trading in April; more than in any other sector.
Whilst Rishi Sunak’s notorious ‘Eat Out to Help Out’ scheme in August boosted restaurants that had survived the initial lockdown, (with an impressive 100 million discounted meals) it has not come remotely close to repairing the damage. The problem is still ongoing. The Coffer Peach Tracker, the institution responsible for collating and monitoring restaurant brand performance in the UK, reported that October sales in restaurants were down 29.6% on last year, with like for like sales down 19.5%. It is clear the industry faces huge challenges in the weeks and months ahead. As December approaches, it seems this Christmas will be the ultimate acid test of the viability of restaurants in the UK.
But what can the nation expect the future of hospitality to look like? Has the Covid-19 pandemic changed the restaurant dining experience for good?
Do you have a reservation?
Restaurants have been amongst the quickest businesses to adapt to changes during the pandemic. The relaxation of severe restrictions in the summer saw the introduction of new initiatives, all aiming to gently usher consumers back to the dining experience. Such initiatives have for the most part been a success. A consumer pulse poll indicated that 55% of consumers in England feel safer in restaurants than they do in supermarkets whilst a survey by Yumpingo suggests 86% of those eating out are satisfied with safety precautions. Stringent Covid-19 procedures such as temperature scanning, track and trace, table service, and intermittent deep cleaning have all been essential in reassuring consumers that eating out is a safe experience.
But whilst these measures have successfully enticed consumers back through the doors, restaurants are still struggling to make ends meet. Social distancing has prevented restaurants from trading at their pre-lockdown capacity: they simply can’t put as many bums on seats as before. Caps on covers significantly detracts from sales, and operators have been hard pushed to cover their labour costs. Add to this the introduction of ‘curfews’, which have curtailed late-night revenue by an estimated £175 million, and it’s not hard to see why restaurants are struggling to hit their sales forecasts.
Thus far operators have mitigated this change by increasing takeaway capacity, despite delivery platforms such as Deliveroo and UberEats taking a considerable slice in commission fees (as much as 35% per transaction). Whilst Covid-19 restrictions have necessitated a takeaway centred strategy, the shift in focus raises questions about the longevity of the dine-in experience. Industry insiders are concerned that reduced in-door capacity and prohibitions on household mixing may render restaurant ambiance non-existent.
The true test of this comes over the next few weeks as hospitality prepares for what is traditionally its busiest trading period. But with the dine-in experience, for now at least, shackled by restrictions, many are fearing the numbers simply won’t stack up. Indeed, recent surveys suggests just 2% of workplaces will attempt to secure restaurant bookings as part of their Christmas celebrations this year. The lack of footfall could prove costly for the sector.
We’ll skip dessert
With such gargantuan threats to revenue, it is perhaps surprising that menu prices have remained relatively stable. In fact, many restaurants, spring boarding off the success of the Eat Out to Help Out scheme in August, have created similar discount schemes of their own. Big brands like Bill’s and Franco Mancha have continued to provide set menu options that pass on significant savings to their consumers. This has been largely possible thanks to Rishi Sunak’s colossal VAT reduction for the hospitality and tourism sectors from the standard 20% to just 5%. Although VAT reductions do not legally require businesses to pass savings on to consumers, most businesses have used the scheme to help standardise menu costs and encourage trade.
The scheme is due to end on 12 January 2021 when restaurants will face difficult decisions about future menu prices. In the event of a no-deal Brexit, restaurants may also find themselves subject to tariffs on food importation, according to Which? analysis. On average, restaurants spend 35% of revenue on food and beverage costs, but this is set to rise to 40% in the eventuality of a no-deal Brexit. The timing is far from ideal; January is typically the quietest trading period, and restaurants will be reluctant to implement prices that deter consumers. But industry experts warn menu price rises are an inevitability if the sector is to have any chance of survival.
Service Charge is not included
Restaurants are also coming under increasing pressure to scrap ‘discretionary service charges’, which are applied discreetly to consumer bills. The charge is used by restaurants to supplement employees’ wages through a system known as tronc. Unlike cash tips which pass straight to employees, the tronc system processes service charge through payroll and is therefore subject to tax. Typically, service charge payments compromise between 30-50% of hospitality workers’ monthly wages. Tronc systems have been highly contentious in recent years, with many high street chains facing criticism for retaining a percentage of the charge. Public desire to ban the tronc system altogether has even gained political steam. In October 2019 the government vowed to introduce its Employment (Allocation of Tips) Bill for consideration in Parliament. But the pandemic put these legislative plans firmly on hold.
The issue was brought to the forefront once more as hospitality workers were placed on furlough. The government’s job retention scheme was designed to cover 80% of workers’ salaries. But a decision from HMRC stated that tronc payments would be classed as a ‘discretionary bonus’, meaning they would not be covered by the employment support scheme. As a result, tens of thousands of hospitality workers received approximately 50% of their typical salaries whilst under the scheme.
Since then, many restaurant owners have vowed to scrap the service charge for good. London based companies Oklava and Hill & Szrok have already done just this by incorporating costs into menu pricing. Many other big hospitality brands are facing pressure to follow suit. So how will hospitality venues justify this additional cost to its consumer base and how much can we expect to see menu prices rise by? The answer isn’t clear. But the need to scrap service charge combined with other increasing cost considerations are likely to make the dining out experience substantially more expensive in the future.
It is too early yet to predict precisely how restaurants will forge their way through what has undoubtedly been their toughest year on record. What does seem certain is that restaurant meals are set to become more expensive as VAT discounting draws to a close and restaurants take more accountability for staff pay. Only time will tell how consumers will respond to these fundamental changes. But it’s not all bad news. Operators now face a unique opportunity to rethink and redesign restaurants in a way that will shape future prosperity. There are clear opportunities to evolve: improved digital engagement, healthier menu options and bespoke takeaway experiences are all potential ways restaurants might, in the future ensure they bring home the bacon.