Improving profitability in restaurants

The predicament currently facing restaurant owners is a real one and something needs to be done to improve their chances to earn a fair rate of return on their business.

The Malta Hotels and Restaurants Association (MHRA) recently announced in a joint study with Deloitte about the sector that nearly half said they had declining revenues when compared to the previous winter. They faced an escalation in operating costs of 2.3%.  

The alarming trend is the increase in hiring costs which went up by 5.7%. This exceeds the national average. The Times reports that at a recent presentation of the study by Deloitte the presenter warned of a weaker trend ahead. He said “results aren’t what we got used to.

Previously, we had a number of years when the graphs kept going up.”  

This was the result of various factors but the main theme was oversupply of hotels and restaurants increasing at a rate faster than the demand for rooms and tables.

The prognosis leads one to conclude that the future is not so bright unless something is done to reverse the trend. One cannot simply blame the drop in profits on the unbridled increase in hotels and restaurants which we experienced these past years when most hotels opted to avail themselves of the option to build more floors.

How can government intervene (if any) to help the tourist sector going forward?  

Hotels already enjoy a competitive rate of 7% in vat when booking all-inclusive accommodation for visitors but the rate for restaurants remains high at 18%. The MHRA report shows inter alia, how restaurants are facing problems with some 56% claimed to have had an unsatisfactory winter performance.  

A solution can be a tax reform to achieve parity in vat rates reducing them to match those charged in other Med countries. Really and truly, there exists a sclerosis in the system that so far has blinded restaurant operators not to protest that they are being charged a higher rate of vat than similar business in other EU counties which compete head to head in the game to attract quality tourists. The author suggests how with a smart initiative one can achieve a level playing field.

The problem is not being tackled and while evasion and the black economy does mitigate some of the cost escalation registered in catering products (mainly food and drinks) there is a silent majority which says that it is better not to rock the boat - let sleeping dogs lie and try make hay while the sun shines.

Such an attitude exacerbates the dire sustainability of the industry in the long term. This brashness may well be anathema and if allowed to reduce quality levels in such an unbridled fashion and left unchecked may lead to tomorrow’s deterioration of our image as a quality cuisine resort.

This article explains how taxation of catering establishments (whether it is fast food or silver service) can be improved by lowering vat to match the rates charged by our competitors in the Med. It is no surprise to note Luxembourg charges only 3% on food. Another novelty is Greece.

At the peak of the Greek financial crisis, in September 2011, the VAT rate for non-alcoholic restaurant sales increased from 13% to 23%, yet following pressure from the sector, government was persuaded to reduce it to 13% in August 2013 for a two-year experimental basis during which it transpired that more taxes were collected.

On a business trip to Vietnam, I was charged 10% on dining.  If Konrad Mizzi, the minister responsible for tourism is bold enough to reduce the present rate of 18%, one hopes there will be a commensurate reduction in menu prices and due to higher compliance more vat is collected.

Three years ago, The Sunday Independent interviewed Julian Sammut about the future of the industry. He is managing a number of outlets at Kitchen Concepts Ltd., part of the giant food wholesaler and import firm Alf Mizzi & Sons.  

In his candid interview, he did not mince words and elaborated on the problems besetting the eateries. The classic approach is to criticise the sector tarnishing it for alleged tax evasion both on vat, payroll and corporate taxes while lamenting that kitchen and waiting staff from non-EU countries are engaged for long hours at low rates. Chefs who are the fulcrum around which quality turns demand high salaries - sometimes only partly declared.  

Really and truly, restaurants located in prime sites are facing increasing rents, a severe lack of entry-level staff and last but not least a race to the bottom to earn enough profits to be able to refurbish an aging restaurant ambience. These combined factors push owners to either abuse the system or conversely be tax compliant and trade on low margins.

Some face failure. The spectre of rising rents and licenses makes one doubt if the landlord is earning more than the catering operator who risks so much time and energy to meet all the health and safety requirements and succeed to retain an adequate number of qualified staff.  

In a spirited drive to float above the water, this may ultimately lead to ways how to undeclare sales and wages thus evading vat, social taxes and finally corporate taxes.  It goes without saying that such abuses will create a dichotomy – those who abide by the fiscal rules and suffer a lower return on capital invested and all the others which abuse of the system.  

The finance minister is well aware that abuse exists. He is reported to have exclaimed that “This is a continuous struggle.  Abuse can be limited, but never eliminated. What we need to do is address the black economy and treat it as a beast on its own. It creates unfair competition and loss of revenue”. Other observations centre on the quality of the service.  

As it is customary for foreigners to work as waiters, patrons complain that they cannot communicate effectively their orders. Equally there is a problem when engaging untrained locals as they are often found unreliable.

The list of complaints goes on including accusations that some restaurant owners pretending to be high class when most of the time they are nothing close to the Michelin stable. Perhaps, this year in budget discussions we can start by seriously trying to revise downwards the percentage of vat - this surely makes restaurants more competitive when compared to the rest of the world.