The continued shutdown of iconic eateries in Dublin, specifically Shanahan’s on The Green and Dillinger’s in Ranelagh, underscores the growing troubles facing the Irish hospitality sector. Over the past year, more than 600 food establishments have called it quits, indicating a grim future for the industry.
The recent national budget did not heed the widespread demand to reduce the VAT rate from 13.5 per cent to 9 per cent. After its brief drop to 9 per cent as a Covid relief measure, it was brought back to 13.5 per cent last September. Rising expenses on top of this have created an environment that many entrepreneurs feel they cannot sustain. In the words of Adrian Cummins, CEO of the Restaurants Association of Ireland (RAI), the situation is severe: “We’ve already seen 612 eateries closed, and if there’s no policy change, another 1,000 could follow suit in the coming year.”
So how is the future shaping up for the hospitality sector? Coupled with inflation and wage raises, skyrocketing expenses have been eating into revenue, while a lot of establishments are still snowed under pandemic-induced bankruptcy. Ken Tyrrell, a business revival expert at PwC Ireland, notes that the average debt for businesses in the hospitality sector on the brink of insolvency stands at €380,000, proving to be a sizable hurdle for small-scale operators. Although a number of businesses have rearranged their Revenue debt and kept afloat, those that have been at the deep end for a while are finding it tough to generate income and repay longstanding debts.
Marc Bereen, together with his brother Conor, has inaugurated three eateries in the previous couple of years, namely Orwell Road, Row Wines, and Coppinger. He’s been open about the struggles they’ve faced in securing loans from banks due to the perceived risk in funding the restaurant branch.
The Bereen brothers didn’t utilise any aid from the government’s Covid fund, designed to help businesses weather the pandemic because they had to return it anyway. The brothers utilised existing outdoor spaces and refrained from warehousing, which Marc Bereen believes played a major role in their ability to grow post-lockdown.
The Bereen brothers had grown accustomed to the lower VAT rate, which Marc admits, has gradually become a substantial part of their accounting. However, he acknowledges that hospitality might not be a high priority for a government dealing with issues from other sectors.
Marc Bereen conceded that vital aspects, such as housing, should be prioritised by the government over their sector. He claimed that the restaurant scene is transforming, with certain days like Fridays and Mondays losing their significance. Despite these changes, Bereen emphasised the need to adjust their business approach and utilise what was available.
The consequences of the pandemic and the shift to blended working models are not only impacting Dublin’s dining culture but are also reshaping the dining patterns in major cities like London and New York. Bereen suggested that it’s high time for those in the hospitality industry to embrace the shifting landscape, highlighting that pervasive negativity will only tarnish the dining experience. He advocated for sustained positivity to keep dining an enjoyable activity.
Tyrrell from PwC has stated that so far this year, the hospitality industry has seen 110 establishments declare insolvency. The majority of these are comprised of 63 restaurants and 17 cafes. However, these numbers do not account for all closures in the sector, as many businesses shut down without officially going insolvent. This could be voluntary closures, lone entrepreneurs ceasing their operations, or companies undertaking restructuring. This implies that the actual count of businesses closing may surpass the documented figures.
Even though this is the case, the rate of insolvency is still not as high as in the past. At the moment, for every 10,000 enterprises in the hospitality sector, 58 are becoming insolvent. This is still significantly lower compared to the top rate of 109 per 10,000 observed in 2012. The inference from this is that the sector is facing challenges, but the wider economic conditions are not as harsh as they’ve been in previous economic slumps.
There’s been a certain degree of natural turnover in the sector, with some owners choosing to exit at this time. Other proprietors shut their doors to adjust to shifting market trends. For instance, Happy Endings on Aston Quay in Dublin transitioned into Achara, a more high-end restaurant, in July; while Farmgate in County Cork relocated from its flood-ravaged site in Midleton to Lismore in County Waterford.
Jamie McCarthy, co-proprietor of Achara, reveals that the pricing structure at Happy Endings was challenging to maintain and balance. The eatery had a relaxed atmosphere, serving items like burgers and chips, but increasing the prices for the market they targeted was challenging. They decided to revamp and adopt a unique model, targeting a more sophisticated audience and featuring a higher price range. Despite increasing costs of refurbishment, they aimed at creating a competitive menu price without compromising on the quality. Nevertheless, as the eatery began to grow busier, the challenge of maintaining low prices while increasing staff numbers became apparent, making every day an uphill battle, despite their relative success.
Meanwhile, Zsolt Lukács, who embarked on a venture to start Daróg wine bar last year in Galway with his wife and business associate, Edel McMahon-Lukács, concedes that starting a business amidst chaos might not have been the most prudent decision. Evaluating the financial prospects is still unclear, as they have only been operating for approximately a year and a quarter. However, the sustainability of earning profit from a restaurant business remains a question for them. Furthermore, they frequently find themselves wondering how to navigate through especially the quieter times of year. The locale relies on tourism, which unfortunately slows down significantly during this period.
Lukács, like many in the hospitality sector, asserts that a return to a 9% VAT rate could mitigate some of the increasing operational costs that many in the industry are currently facing. These costs are largely a result of a rising minimum wage. Lukács believes that effective planning, a little fortune and a team of top-quality professionals allow for a successful restaurant business. He highlights that his company, Daróg, has managed to keep costs low by operating with fewer staff than is traditionally seen in the industry, and advises those aspiring for great wealth to steer clear of entering the hospitality sector.
However, Brian Walsh, The Pigeon House co-owner who also launched Caladh and Koda restaurants this year, contends that the circumstances are currently far from ideal for opening a new restaurant. He points out that staff accounts for nearly 40 percent of total expenses and can even reach upwards to around 40 percent in some establishments. A slow midweek can lead to shutting down within a matter of months or weeks.
Conrad Howard, a co-owner of the Market Lane group of restaurants in Cork, remembers a time when profit margins in hospitality were somewhere between 10 to 30 percent. Currently, they have dwindled to mere single digits. He states that once you dip below a 5 percent expected profit margin, you’re operating within an error margin. A minor setback like an oven failure can easily push you into the red. The root of the problem, according to Howard, lies in the never-ending additional costs that keep piling up, slashing their profit margins.
For VAT purposes, the restaurant business is lumped together with the hotel industry, often causing issues. Restaurants can’t use dynamic pricing to maintain profitability like hotels do. Thus, the RAI, in its pre-budget proposals, asked for a different, lower VAT grade explicitly for food sales, separate from hospitality’s accommodation component.
In contrast to other sectors, Howard suggests, the hospitality industry operates with a price limit, where consumers will only offer so much payment. The approach of incrementally increasing charges as a plumber might, is not possible in the hospitality business.
He points out that it’s a tricky balancing game and continuous price increases cannot be afforded. It might not be the end of the line, yet it appears to be a challenging time presently. Presently, it’s vital to be creative with the type of assistance requested from the Government. Also, it’s essential to emphasise the notion of patronising local businesses to everyone, encouraging them to back their local eating establishments, and the domestic food trade. He believes that Irish eateries aim to back Irish manufacturers, and anticipates the Government might be able to support them by introducing a special rate for artisan foods, or alternatively a rate for those sourcing more than half of their food products from local or national suppliers.
Howard adds, now is the moment for the Government to intervene. He conveys gratitude towards the Government for their efforts during the Covid crisis, although notes the current increased attention around the hospitality industry, for legitimate reasons. People are paying heed to the rising costs and assessing the practicality of their business operations, and regrettably, it appears there are daily instances of businesses shutting down.