Doing business isn’t easy for anyone at the moment, but with costs escalating and continuing downward pressure on consumer discretionary spend, the restaurant and casual dining sector in particular is feeling the pinch. 

An amalgamation of factors are exerting unprecedented pressure and resulting in a boiling frog effect, says Phil Reynolds, a partner at FRP Advisory. “Since COVID-19, it’s been one issue after another, but the heat keeps getting turned up and it gets to the stage where suddenly a restaurant may only realise it’s well and truly cooked too late.”

The latest Red Flag Alert report from Begbies Traynor, published on 25 April, found that bars and restaurants were the businesses showing the biggest increase in critical financial distress in Q1 2025, up 31.2% on the same quarter in the previous year.

Impact of employers’ NI

Reynolds, who will present a session at the ICAEW Restructuring and Insolvency Conference on 24/25 June, says changes to employers’ national insurance announced in the Spring Budget have been the last straw. In particular, the lower employee earning threshold is the main problem, given the sector’s reliance on flexible hours working. At the same time, an increase in the National Minimum Wage is pushing up salaries across the board, as supervisors and managers demand to earn more than their entry-level colleagues. “When you raise wages at the bottom, everything else goes up,” he says.

Meanwhile, the cost-of-living crisis is continuing to reduce footfall, prompting big questions about whether being open early in the week is a sustainable strategy, bearing in mind that staffing and energy costs are likely your biggest overheads. And then, although recruitment challenges have eased, staff will vote with their feet if restaurants can’t offer them enough hours, Reynolds warns. 

The challenge is managing increases to staff cost in the face of relatively high inflation. To offset these mounting costs, service charges are cranking up, inevitably pushing up the cost of eating out. And as consumers tighten their purse strings to save money, they are choosing to eat out less often. 

Popularity of “fake-aways”

Top-end restaurants are bearing the brunt of these difficulties despite their relative price inelasticity, not helped by small cover numbers, high overheads and the exacerbation of the exodus of non-doms, particularly in London. In the mid-tier, the rise of ‘fake-aways’ – branded restaurant meals available in the supermarkets – is biting into restaurants’ profit and loss. Pizza Express now sells more pizzas in supermarkets than in restaurants, Reynolds says. TGI Friday, Itsu and Harry Ramsden are other brands now available in the chiller aisle. 

“People can’t afford to go out, but they still want a treat,” says Reynolds. “Supermarkets love them because they’re higher margin. Your family loves it because it’s almost like going out.” The question for the restaurant chains considering this omnichannel approach is, what’s the risk of it eating into your brand? “It’s the balance between bringing you extra revenue, but without accelerating decline.” 

The right proposition can be a significant source of revenue, he adds. However, it’s important to ensure that the experience of dining in a restaurant – whether that’s contributed through environment, service or a more extensive menu – is enough of a draw to keep punters coming back. 

The push towards value

The push towards value is an inevitable trend across this market. For restaurants, it means that reducing your cost base will pay dividends. Effective stock control and potentially rationalising your menu to reduce food waste is a good starting point. “That's why pizza restaurants typically work very well; there’s minimal wastage and it’s probably one of the highest-margin foods you can offer.”

Given the tight margins in play, a tight grasp on the numbers and solid cash-flow forecasting is essential if you want a sustainable business. Without that information and the ability to perform robust data analysis, it’s very hard to make decisions, Reynolds warns. 

If a restaurant can see that things are not going in the right direction, what should they be doing? “First of all, speak to your key creditors and suppliers, including your landlord,” Reynolds advises. “Nobody wants to lose a customer and the relatively low barriers to entry across casual dining mean failure rates across the sector are high.” 

Failure rate in the first three years

Between 40%-60% of restaurants fail in their first year, probably up to 70% in the first three years. From a supplier perspective, taking a punt on a new venture is often riskier than a restaurant that has been trading for two years.

Some local councils have schemes offering support. There are also wider restructuring tools such as Company Voluntary Arrangements and Restructuring Plans that can enable a business to correct its balance sheet and return to viability. 

But the earlier you start those conversations the better, Reynolds says. “One client had been using the same meat and vegetable supplier for 10 years. They didn’t want to lose a loyal customer so he successfully negotiated a 20% discount on the arrears and for six months of future trade, which was enough to give him the breathing space he needed.”

Online food delivery platforms

While the popularity of online food delivery platforms such as Deliveroo, Uber Eats and Just Eat may seem like an opportunity to boost takings, you should go into any such arrangement with your eyes open, Reynolds warns: “Make sure the numbers stack up with the commission paid and make sure you don’t damage your in-house experience as a result.” 

In particular, many restaurants who have signed up to these platforms underestimated the value of the data they were giving away. “Your data will tell them exactly what’s popular and what’s selling, and you’re giving them a big commission for the privilege. It’s a lot cheaper than running your own delivery staff and it can help smooth out sales by bringing in additional revenue, but it can be a double-edged sword.”

Despite the challenges the sector faces, the resilience it has shown over the past few years will stand it in good stead, Reynolds says. “If you can get through the first three years, you probably have a concept that will work. With larger chains, the issue is, have you stretched your brand too far?” He points to The Ivy as a great example of managed expansion. “If you’ve got the right proposition, the right concept, at the right price point, people will continue to spend money with you.”