The hospitality industry is usually a good barometer of economic change; in times of prosperity, the champagne flows, but it is also one of the first industries to feel the pinch when the market turns south.
Prior to the Covid-19 lockdown, the sector was already facing some serious challenges, which should have been a warning sign for the wider economy. Now the impact of the pandemic will be monumental, and hospitality owners will need to make some difficult decisions if they are to weather the storm.
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In recent years the increase in property values nationwide has led to significant rent, rates and OPEX rises; the Christchurch and Kaikoura earthquakes have raised insurance and building compliance costs, which landlords are looking to pass on to tenants; supplier costs have increased significantly; and despite many businesses urging the Government to defer the minimum wage rise, (from $17.70 per hour to $18.90 per hour), the increase came into effect on 1 April 2020 – another blow to business owners already facing huge financial hardship.
Fit out costs have also grown significantly, and delays in finding contractors or obtaining consents or licenses can put hospitality owners on the back foot, before trading has even begun.
Delivery service apps, like UberEats, may actually end up doing more harm to the bottom line of a restaurant. Whilst it can be a great way to open up an establishment to attract new customers, it takes 35 per cent of the total price of every order made via the app.
Some owners may be able to negotiate a slightly lower rate, but it is still very likely to be unprofitable, particularly in the start-up phase.
There is no realistic way of passing on lost revenues from the lockdown period. Even when the doors reopen, the entire economy has suffered loss, so discretionary spending will have been drastically reduced.
While the Government has offered some financial aid in the form of wage subsidies and loans, this alone will not be enough to keep most hospitality businesses afloat. Owners need to plan ahead for when normality eventually returns, and come to arrangements with their landlords, bankers and creditors.
The Government's proposed Business Debt Hibernation (BDH) scheme may help with this, but it may only be delaying the inevitable, particularly if the business was already struggling prior to the Covid-19 outbreak. A formal creditor compromise may be a better approach, to give more certainty for the business in the longer term.
When the costs of doing business increase across the board, one of the answers can be to increase prices. But this is easier said than done in hospitality.
At the best of times, it takes time for customers to adjust to new price points: who would happily pay $20 for a green bottle beer in a bar? Or $30 for eggs benedict at Sunday brunch? These prices may become the new normal in time, but how do businesses survive until then? They can't stop paying suppliers or employees, or servicing loans or finance, as business quickly grinds to a halt.
Inevitably the first creditor to stop being paid is IRD as it can be some months before arrears are followed up, by which time the tax, penalties and interest have increased the outstanding amount significantly.
Failure to pay PAYE is a prosecutable offence, and over the past few years, custodial sentences have been dished out to company directors that default.
Your accountant or an insolvency practitioner may be able to negotiate a payment arrangement, but any plan needs to be adhered to as non compliance can often be terminal for a business.
Most importantly, many business owners themselves are unable to draw a reasonable salary. If that is the case, and you could earn more elsewhere as an employee without the stress and responsibility, then it makes sense to consider pulling the plug. You do not want to dig a deeper hole for yourself, especially if you have guaranteed business debts, or increasing your exposure against the family home.
If this sounds all too familiar, help is only a phone call/email away. A RITANZ Accredited Insolvency Practitioner (AIP) can help you to see the wood from the trees and assist with a financial strategy or an orderly wind down.
Most AIPs offer a free initial consultation, but the earlier you seek advice, the more options are available for saving a business. So, if you're in dangerous waters, signal for help before it's too late.
- Chris McCullagh is the director of PKF Corporate Recovery & Insolvency.