Irish food-led businesses have been put into ‘survival mode’ with a new report warning of razor-thin profit margins as the industry grapples with rising operational costs and government pressure.
The report by accounting software firm, Outmin and the Restaurants Association of Ireland (RAI) found that average net profit margins among food-led hospitality businesses reached just 0.8% in the first three months of 2024, after suffering a net loss of 1.6% in the final months of 2023.
“Our data shows that this challenge is even more serious than previously thought,” the report said. “For many owners and operators, the slight uptick in early 2024 offers little solace.”
Falling margins have coincided with the introduction of Ireland’s largest minimum wage hike, the report added, with labour costs now eating up almost 41% of revenue.
“Our findings highlight the urgent need for innovative solutions to relieve the financial pressures that these businesses are facing,” warned Outmin’s Co-Founder, David Kelleher.
Mounting labour costs have been compounded by growing government pressure, the report said, with new measures such as the reintroduction of the 9% VAT rate, increased minimum wage, pension auto-enrolment and expanded sick pay “burdening the sector with additional costs.”
The cost of sales has also been outlined as a key issue for the sector, with the report noting that despite a slight decrease compared to 2023, sales costs still comprised 34% of revenue in the first three months of this year. With fluctuations expected for the remainder of 2024, energy and food costs remain a “major concern,” for the industry, the report added.
Speaking on the findings, the RAI said Government action was critical to counteract rising costs, adding that the industry as a whole needed to continue advocating for the reinstatement of the 9% VAT rate.
“If the Government wants to return long-term viability to small, independent restaurants, cafés and other food-led businesses across the country, the reinstatement of the 9% VAT rate must feature in Budget 2025,” said Adrian Cummins, CEO of the RAI.
Earlier this month, the RAI said Budget 2025 will be the ‘Budget of VAT9’ for the entire hospitality industry and, as such, how positively or negatively it will be assessed “will hinge solely on the Government’s decision surrounding VAT on food.”
The industry group has warned of mass closures if the 9% VAT rate is not reinstated, citing a recent survey in which almost three-quarters of its members said they do not expect their business to be open this time next year if the 9% VAT rate is not reintroduced.
Despite continued efforts by the industry, the reintroduction of a 9% rate would constitute an “enormous transfer of taxpayers’ money” to businesses operating in these areas, the Government’s Tax Strategy Group (TSG) said earlier this week, calling the proposed taxation measure “regressive”.
Cutting the sector’s VAT rate would cost an estimated €764m, with the RAI suggesting a splitting of the rates of the food and accommodation elements, which would allow food services to return to 9% VAT while accommodation would remain at 13.5%.
However, even when restricted to food and catering services, the estimated full-year cost is €545m.
The TSG made it clear that the measure was unlikely to be reintroduced for several reasons, with the price tag constituting an “enormous fiscal transfer of taxpayer’s money to the sector which the evidence available at present does not support.”
It went on to say that households are now on a “stronger financial footing” and this will “support demand for contact-intensive services, including the tourism and hospitality sectors”.
“In this respect, there is no equity case for a lower rate of VAT,” it said.
The group’s report also looked at whether it is possible to split the food and catering sector from accommodation, but Revenue advised that there would be “significant operational concerns” in having different VAT rates given how the sectors operate.
“This could lead to the underpayment of VAT because the charge for accommodation and meals would have to be apportioned,” the TSG said.