The closure of two high-profile restaurants in Dublin this week signals a deepening crisis in Ireland’s hospitality industry. Shanahan’s on The Green, a long-standing institution on St Stephen’s Green, and Dillinger’s in Ranelagh are the latest casualties of a sector in free fall. With more than 600 restaurants shutting their doors in the past year alone, the outlook for the industry looks increasingly bleak.
In the latest budget the Government failed to respond to widespread calls for a restoration of the VAT rate from 13.5 per cent to 9 per cent; now restaurant owners are bracing for what many describe as a fight for survival. The VAT rate was returned to 13.5 per cent (from a Covid relief reduction to 9 per cent) last September. This, coupled with rising costs, has created conditions that many in the sector view as unsustainable. Adrian Cummins, chief executive of the Restaurants Association of Ireland (RAI), issued a stark warning: “We’ve already seen 612 closures, and if nothing changes, we’ll see another 1,000 shut down in the next year.”
So what is the outlook for the hospitality sector? Is it, as Cummins predicts, “a perfect storm”?
Escalating costs, inflation, and wage increases continue to erode profit margins, while many businesses remain burdened by pandemic-related warehoused debt. According to Ken Tyrrell, business recovery partner at PwC Ireland, the average debt for insolvent hospitality businesses has been €380,000, which poses a significant challenge for smaller operators. Although some businesses have restructured their Revenue debt and stayed operational, those struggling for years find it difficult to generate profits and pay down legacy debt.
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“Banks won’t give us money because it’s such a sh*t business to loan to,” says Marc Bereen, who, with his brother Conor, opened three restaurants in the past two years: Orwell Road, Row Wines and Coppinger. “The Government gave all these loans to people in the form of this Covid fund to get us through it, and then they’re expecting it back. We had outdoor areas, so we didn’t do any of that. We didn’t do any warehousing, and I think that’s one of the reasons why we were in a position to expand when we opened up again after Covid. The VAT thing wouldn’t save everybody, but it would definitely make a difference.”
Bereen says that because the lower VAT rate was in operation for so long, it became baked into the figures. “We were just getting very used to it, and it was part of our sums, our accounts,” he says. He accepts that hospitality may not be top of the priority list for Government which is dealing with pressures from other sectors.
“When it comes down to it, if you have a Government that needs money to go to housing, and you have a choice to give it to us or to housing, housing should come first, it’s a more important thing,” he says. “The restaurant landscape has changed. Fridays and Mondays are gone. But businesses change, and you’ve got to work with it, and you need to change your model slightly and work with what you have.”
The impact of the Covid pandemic and hybrid working is not unique to the dining scene in Dublin, it is also influencing changing dining patterns in other major cities like London and New York. Bereen says it is time for the hospitality industry to accept the new normal. “This is the landscape that we will be working with for the next period of time. The problem is, if everything’s negative, and everything coming out of the restaurant and tourism groups is negative, the whole idea of going to dinner becomes a negative thing. I think we need to keep positive, to keep it a fun thing to be doing.”
According to Tyrrell of PwC, the hospitality sector has experienced 110 insolvencies so far this year, with 63 restaurants and 17 cafes making up the majority of these closures. However, these figures do not capture all restaurant closures, as many businesses close without formal insolvency. This includes voluntary closures, sole traders stopping operations, and businesses using restructuring processes. As a result, the true number of closures is likely higher than what is officially reported.
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Despite this, the insolvency rate remains lower than historic levels. Currently, hospitality insolvencies stand at 58 per 10,000 businesses, which is still well below the peak rate of 109 per 10,000 in 2012. This indicates that, while the sector is under pressure, the broader economic environment is not as severe as in past downturns.
There has been a certain amount of attrition, with some operators deciding it was as good a time as any to get out of the hospitality business. Other operators closed to adapt to changing market conditions. In the case of Happy Endings in Aston Quay, Dublin, it was an evolution in July into Achara, a more upscale style of restaurant; and with Farmgate in Co Cork, it was a move from its flooded premises in Midleton to Lismore, Co Waterford.
“We found that the price point that we were at in Happy Endings made it very difficult to make ends meet, especially when there’s a couple of us involved,” says Jamie McCarthy, co-owner of Achara. “It was much more casual, with burgers and fries and stuff. We just found that it was very difficult to charge any more for the market that we were appealing to, so we changed. Even though it was a bit of a risk, we thought it was the right thing to do. Otherwise we would have been pretty close to handing back the keys. We decided to do a refurb, which is obviously costly enough, and go with a new concept geared at a slightly more mature crowd, on a slightly higher price point. We’ve tried to keep the menu price competitive without jeopardising the quality. But that’s becoming harder for us now. As we’re getting busier, we have to gear up staff wise, and it’s trickier to keep those prices down. It has been successful, but it’s still a battle every day.”
“It was not the smartest idea to open a business in the midst of all this madness, but yes, it is possible to make it work,” says Zsolt Lukács, who opened Daróg wine bar in Galway with his wife and business partner, Edel McMahon-Lukács, last year. “Does it make sense financially? I’m not sure. We will see. We’re only open about 15 months now, so I’m not sure, long term, how much sense it makes to try to make money in the restaurant business. There are plenty of days when I think, how are we going to get through this, especially coming into the quieter time of the year. Galway depends on tourism and at this time of the year, tourism slows down.”
Like many in the industry, Lukács says that a return to the 9 per cent VAT rate would help alleviate costs. He doesn’t view it as getting something back, more about offsetting the increasing costs the industry has incurred, particularly from the increase in the minimum wage. He says that the restaurant business is still viable, but proper planning is essential, and then you need a bit of luck. Working with highly professional staff has meant that Daróg has been able to operate with a lower staff level than would be typical, and has helped to keep costs down. “You can make it work,” he says. “But if you’re looking to be a millionaire, my advice is, don’t go into hospitality.”
“The dining experience is different now,” says Brian Walsh, co-owner of The Pigeon House, who opened Caladh and Koda restaurants this year. “Would I open a restaurant right now? If these restaurants hadn’t been in the process, I don’t think I would have. Staff costs in the restaurant industry at the moment run at maybe 38 per cent, and in some places are up in the 40s. You have a slow midweek, and it doesn’t take long, it’s a matter of months, if not weeks, and you end up closing the doors.”
“When I first started in hospitality, there’d be an expectation that you would be achieving anywhere from 10 to 30 per cent in terms of a margin, whereas now you’re in low single digits,” says Conrad Howard, co-owner of the Market Lane group of restaurants in Cork. “Once you’re lower than 5 per cent expected profit, then that’s within the margin of error. It doesn’t take an awful lot in terms of an oven breaking down, or something else to throw you off track, and then suddenly you’re looking at a loss. And that’s the real issue. It’s the cost base and all of the extra costs that are just being hoisted upon us.”
One of the issues the restaurant trade faces is that it is grouped in with hotels for VAT purposes, a sector that can rely on dynamic pricing to maintain profitability. In its pre-budget submission, the RAI requested the reinstatement of a lower VAT rate specifically for food sales, not the accommodation element of the hospitality sector.
Howard says that unlike other industries, hospitality has a pricing ceiling, and customers will only pay so much. A plumber can add a fiver to their costs, but that doesn’t work in the hospitality sector.
“It’s a bit of a balancing act. You can’t just keep putting prices up,” he says. “I don’t think it’s the end of the road, but I think it’s a particularly tough period now. Now is the time to start being innovative about the help that we’re asking for from the Government. And it’s the time to stress the “shop local” message to everybody out there, to come and support their local restaurant, and the local food industry. Irish restaurants want to support Irish producers, and I think the Government could help us by bringing in an artisan food rate, or a rate for those that are buying more than 50 per cent of their food produce from regional or national producers.”
Howard says that the time has come for the Government to start pulling some of their levers. “We’re very grateful for the work that they did during Covid. But there’s an awful lot of noise around hospitality at the moment, for good reason. People are looking at the costs that are increasing, and questioning if their operation is viable. And unfortunately, it seems that there’s a list of daily closures now.”
