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Large operator profit doubles, though challenges remain

Published:  17 July, 2023

The percentage of the UK’s largest restaurant companies turning a profit has doubled in the last year, according to new figures. However, further interest rate rises now hover over the horizon. As a result, hospitality’s biggest operators could be facing new challenges on their return journey to profitability.

According to national accountancy group UHY Hacker Young, ROI has improved for the UK’s Top 100 restaurant companies over the past year. The percentage of those making a profit increased from 35% to 78% in the year to 31 March 2023, as businesses continue to recover from the lockdowns and challenges now closely associated with Covid.

UHY Hacker Young places this recovery largely at the door of a rise in restaurant M&A deals over the past few years. Several rounds of dramatic restructurings have taken place since the start of Covid; and these have been “instrumental in returning the UK’s biggest restaurant companies to profitability”, UHY Hacker Young.

The number of deals within the UK’s hospitality sector reached a five-year high of 186 in 2022, after company valuations fell sharply during the pandemic (CGA figures).

However, growth is in danger of being jeopardised by the most recent round of interest rate rises from the Bank of England – disastrous for a sector now loaded with debt.

“Given the challenges faced by UK restaurants over the last few years, the majority have done exceptionally well to generate a profit in 2023,” Peter Kubik, partner at UHY Hacker Young said.

“However, the sector still faces an exceptional tough trading environment caused by high inflation and the rising cost of debt. It will be a delicate balancing act to implement cost cutting measures while also providing a service good enough to attract and retain customers. Some restaurant groups are exploring if they can offer more affordable food and drink options to attract customers affected by the cost-of-living crisis. However, this would lower profit margins.”

The figures only show a snapshot of the market. It paints a picture of those larger companies with greater financial pulling power, which are often better able to insulate themselves against economic downturns.

In addition, many have taken radical steps. Several major operators have resorted to closing down loss making branches, alongside cutting staff numbers and operating hours as a way of reducing overheads.

For many, the challenge is now to establish a balance between footfall and margin. Cost cutting measures, including reducing menu options and even switching to cheaper food suppliers, might get customers through the door, but – quite literally – at what expense?