UPDATE ON BUSINESS CONDITIONS IN RESTAURANT SECTOR

by ECONOMIST JIM POWER – AUGUST 2019

• The Accommodation and Food Services sector employed 175,000 workers in the first quarter of 2019, which is equivalent to 7.6 per cent of total employment in the economy. This is made of 53,300 employees in the Accommodation sector and 121,700 in Food & Beverage Activities. The sector has delivered the second strongest employment growth of any other sector since the bottom of the labour market in 2012. Between 2012 and the first quarter of 2019, employment in the sector increased by 53,900, equivalent to a growth rate of 44.5 per cent.

• The restaurant sector is a key component of the Accommodation and Food Services sector.  There are over 3,500 restaurants in Ireland, employing over 70,000 people. It is estimated that the sector contributes over €2.2 billion per annum to the Irish economy in terms of wages and purchases of inputs. The sector is also a significant employer of part-time workers, particularly students. Restaurants represent a crucial element of Ireland’s tourism offering.

• There has been significant growth in overseas visitor numbers to Ireland in recent years. However, the environment is becoming more difficult. Overall visitor numbers increased by 3.6 per cent in the first six months of 2019, but the Great Britain market is becoming more challenging. Visitor numbers from Great Britain increased by 0.5 per cent in the first six months of the year, but in May and June, there was a combined decline of 2.9 per cent. This reflects sterling weakness, a more difficult UK economic environment and intense Brexit uncertainty. The most recent Tourism Statistics released by the CSO for July 2019 now show that tourist visits were down 0.5% in July 2019 compared to July 2018.

• In the aftermath of the economic crash, prices fell sharply in the accommodation and food services sectors as businesses struggled to maintain business volumes. This has changed over the past five years. Between 2014 and 2018, the average costs of accommodation increased by 25 per cent and the average cost of restaurants, cafes, fast food & take-away food increased by just 6.6 per cent. Pricing power in the restaurant sector is constrained in what is a very competitive environment.

• Following the increase in the VAT rate on January 1^st 2019, the average cost of dining in restaurants, cafes, fast food & take-away food increased by 2 per cent during the month of January. In the first six months of 2019, the average cost of accommodation increased by 3.2 per cent on the first half of 2018 and the average cost of dining in restaurants, cafes, fast food & take-away food increased by 4.9 per cent.

• In Budget 2019, the Minister for Finance increased the VAT rate for the hospitality sector from 9% to 13.5%. This was effective from 1^st January 2019. At a time when the sector is facing a number of challenges from rising input costs, adverse exchange rate movements, intense Brexit-related threats and uncertainties, skills shortages, and general pressure on margins, this move is intensifying pressures on the sector.

• The operating environment for the restaurant sector is very challenging. The still-stretched Irish personal sector is extremely resistant to higher prices; cost pressures continue to increase on all fronts; labour shortages are becoming a very significant challenge; visitor numbers from the UK are under pressure from a combination of sterling weakness, Brexit uncertainty and a slower UK economy; and the growth in overseas tourist numbers is coming from a cohort of visitors who tend to spend more sparingly than UK visitors.

• It is very clear that the competitiveness of Irish tourism is being threatened by exchange rate developments that are outside of Ireland’s control. Hence, it is essential that other aspects of the competitiveness of Irish tourism are protected and nurtured. It is crucial that the cost competitiveness of the sector is preserved to the greatest extent possible. This is not happening.

• The restaurant sector is a key element of Ireland’s tourism offering. Having a high-quality and affordable restaurant offering is of vital importance to the success of the tourism sector, which is a major provider of jobs around the country.

• The decision to increase the VAT rate in Budget 2019 was ill-timed and mistaken, and it is having a negative impact on many seasonal businesses who are already operating with very tight margins in what is a very competitive environment. Consideration should be given to a re-instatement of the special VAT rate for a sector that is such a significant employer all over the country.