Written by Aiym Zhomartova
In June 2016, Britons voted in favour to leave the European Union, leading to the so-called ‘Brexit’ which is now underway and in the process of negotiating a new agreement between the UK and EU to regulate their relationship post-Brexit and which will be implemented once the UK withdraws definitely from the EU at the end of this year. The negotiations period has been taking place since 2016 and the official withdrawal has been delayed several times. As a result, the UK’s present and future economic landscape has been held in the state of continuous uncertainties, which has forced large companies to prepare in the case the UK leaves the EU with no deal.
While large companies are all set for such an outcome, small and medium-sized enterprises (SMEs), which ‘represent a core constitutive part of the UK economy and are crucial for job creation, innovation and productivity growth’, have been generally overlooked, though it is them who will struggle the most (Brown, Linares-Zegarra & Wilson, 2019). The challenges that SMEs are likely to face are related to ‘access to EU markets; access to finance (via EU regional and industrial funding schemes); access to raw materials and labour inputs; and increased regulatory barriers’ (Ibid).
This report focuses particularly on SMEs in the hospitality sector, which is the most profitable for SMEs business industry (Figure 1). Despite being on the rise in recent years due to increased inbound tourism caused by the depreciation of the pound, in 2019, this boom has seen to be waning as Brexit uncertainties and potential challenges are taking over the situation, which are examined in this report.
(Figure 1) Source: Statista, 2019
The substantial challenge that is most likely to be faced by SMEs in the hospitality sector during and after Brexit is the shortage of employees. The ONS (Office for National Statistics) has revealed that around 12% of the hospitality workforce in the UK – almost double the level of the UK workforce as a whole – is represented by EU immigrants and composes nearly 40% of the London’s workforce (Mintel, 2018). Following the restrictions on freedom of movement into the UK after Brexit, it would lead to a significant challenge of recruiting low-skilled labour for the industry, since the major workforce would not be allowed to enter the country freely (Mintel, 2018). Moreover, current EU workers are feeling unwelcome in the UK as a consequence of Brexit. Planday company in cooperation with the Institute of Hospitality and YouGov has conducted a survey among UK hospitality workers and managers and revealed that already 3% of managers are expecting to close their businesses due to Brexit, which would result ‘in an economic loss to the UK economy of £1.1 billion’ (Ready for Brexit, 2018). Besides, training of the novices in the hospitality sector, when many experienced and talented EU workers decide to leave, will incur in higher costs, which would greatly hit SMEs’ profitability in the hospitality sector. Furthermore, to attract UK workers, companies might need to increase payrolls, which again is likely to affect negatively the companies’ profitability (Epos, Lexology, 2018). SMEs that are already struggling with high financial risks – around 43% of SMEs (Figure 2) – would not be able to survive. Therefore, in order to survive in such turbulent times, hospitality companies should focus on the retention of talents and expanding recruitment criteria, for example by recruiting older employees or working parents. Hospitality managers should be more flexible and approachable when it comes to dealing with employees’ queries, especially regarding their working shifts. And at last, managers should create more welcoming corporate culture, which is as much attractive and important as an increase in salary (Ready for Brexit, Lexology, 2018).
(Figure 2) Source: Statista (2019)
External Macroeconomic Pressures
After Brexit vote in June 2016, the hospitality sector experienced a slight economic growth: an increase of 1% in the first quarter and 2% increase in Q2 (Office for National Statistics). It was expected to rise even more in the short-run due to a sharp fall in the value of the pound. ‘During 2018, rates have stabilised at a value around 11% lower against the euro and 9% lower than the Dollar, compared to pre-referendum levels.’ (Mintel, 2018). Weaker pound led to cheaper travelling and staying in the UK, which attracted many tourists. In addition, fall of the pound has increased the number of domestic staycations, as travelling abroad became more expensive and Brexit uncertainties have adversely affected consumer confidence making them more cautious about their spending (Mintel, 2018). Consequently, it has allowed growing opportunities for UK’s SMEs in the hospitality sector (Figure 3). However, as Figure 3 shows, growth plans in the second quarter of 2019 has dropped to 44% from 52% in the first quarter. Mintel warns that the 2016-17 boom in the hospitality industry caused by a weaker pound is waning as consumer demands are falling due to the ongoing Brexit uncertainties and inflationary pressures imposed on disposable consumer incomes (Mintel, 2018; FTI, 2017).
(Figure 3) Source: Statista (2019)
Furthermore, pound depreciation has increased the cost of imported goods and services (e.g. food and drink), which is contributing to the financial challenges to be encountered by SMEs in the UK hospitality sector and their growth plans. So, in the worst case when no trade deal is reached between the UK and the EU, tariffs and quotas would be imposed affecting the cost of materials imported to the UK (Lexology, 2018). It means that the trade between the UK and the EU would need to comply with World Trade Organisation commitments. Consequently, companies importing from the EU would face not only costly tariffs, but also more thorough customs clearance procedure, which will add to the administrative burden that takes time and money to deal with. In such case, contingency measures need to be prepared. As an example, some of the hospitality-sector businesses have already been reserving inventory that is manufactured mostly in Europe to lessen the risk of the disruption of their supply chains (Lexology, 2018). Others should follow the example and be ready to tackle alike issues by monitoring and influencing ‘legislative programmes to protect commercial interests’ (FTI Consulting, 2017).
Legal and Regulatory Pressures
The next challenges that SMEs need to be aware of are legal and regulatory pressures, which they cannot fully control, but can monitor and influence to protect companies’ interests. Most relevant legislative amendments to be recognized are those related to the contract law, which will arise when the UK’s access to the Single Market changes (FTI Consulting, 2017). For example, commercial contracts with suppliers will need to be reviewed, which will increase the costs. Moreover, a number of generic changes will arise after transition period such as ‘changes in VAT legislation and procedures; changes in dividend taxation; changes in data protection legislation; changes in employment legislation; enforceability of contracts; changes to UK legislation through the EU Withdrawal Act; and other draft Brexit legislation.’ (Lexology, 2018). Not to mention, additional administrative burdens like time-consuming and complicated immigration compliance (e.g. additional work permits) will need to be considered, which also would increase costs and demotivate EU workers to come to the UK (FTI Consulting, 2017). Henceforth, SMEs need to ensure that they have the right investment and financial strategies in place, ‘obtain political and regulatory insight and intelligence to create clarity’, ‘undertake market analysis and economic scenario modelling to inform [their] business decisions’ (FTI Consulting, 2017). Even better, they should seek advice from consulting firms that can save them time and energy to do the job, in which consulting firms specialize.
As it could be seen, Brexit has brought many issues and challenges to the SMEs in the hospitality sector. One of the already pushing ones is the sterling pound that has fallen by 20% by now and which volatility is affecting profitability and cash flow of the companies. In such uncertain times, wherein financial problems are inevitable, especially for SMEs that do not have enough resources to cover all the costs brought up by Brexit, businesses can generally take a flexible approach and prepare practical contingency plans. In order to successfully navigate Brexit and help themselves to survive, companies should be informed about the implications of Brexit (such as potential fall in demand, rising quotas and tariffs) and obtain accurate forecasting (Lexology, 2017; Forbes, 2019). A consulting firm such as Westminster Business Consultants is there with the combination of political, business, policy and legal expertise to provide a certain level of Brexit advice.
References & Bibliography
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Statista. (2019). Distribution of small and medium enterprises (SME) in the hospitality sector in the United Kingdom (UK) in the years ending June 2014 to June 2019, by financial risk rating. Available at https://www-statista-com.ezproxy.westminster.ac.uk. [Accessed 27 November 2019].
Statista. (2019). Percentage of small and medium enterprises (SME) in the hospitality sector with growth plans for the next 12 months in the United Kingdom (UK) from 4th quarter 2011 to 2nd quarter 2019. Available at https://www-statista-com.ezproxy.westminster.ac.uk. [Accessed 27 November 2019].
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