Recession Report - Countdown to Uncertainty
Today, the economy officially goes into recession. A recession is not a momentary thing; we can expect it to last five quarters which means the fortunes of the economy will only start to turn next April by which time the complexion of trading will have changed markedly.
The definition of a recession is when people begin to fear for their jobs and, as a result, spend less money on goods and services. This lack of spend filters through to each sector of the economy which eventually grinds to a halt. Jobs are lost. It is a self-fulfilling vicious circle, to coin a tautologous phrase.
Fishworks went into administration a couple of weeks ago as did an international hotel chain. For every restaurant that goes under dozens of people are affected. Not only the people who work in these establishments lose their jobs, but also ancillary staff and creditors are deeply affected (fishmongers, veg and meat suppliers and wine merchants). We have seen numerous examples where one bad debt virtually brings a supplier to its knees. Some wine merchants, we have been told, are planning to write off £400,000 worth of bad debt this year and, in a recession where margins are actually being squeezed, this figure is even worse than it looks.
The first businesses that will go to the wall will be the groups that expanded unsustainably over the years and the smaller operations that have had their loans renegotiated (or rescinded) by their banks. The shrinking customer base will also vote with its collective feet: those establishments that offer poor value or poor quality won’t survive long. This may be a long overdue correction, but it will still be hurtful to many people.
The underlying economy is perceived as weak by investors at home and abroad. The pound continues to fall: It is now 1.06 against the euro and 1.36 against the dollar (its lowest since 1985). Since we are a country that buys products from abroad and borrows money this is very gloomy news. The wine trade needs a strong currency to preserve its margins and also to give something back to restaurants.
It is a fact of life that many businesses use their suppliers as banks or even charitable institutions. Wine merchants are expected to provide an endless source of subsidy. The chain of credit is, however, extremely fragile; the restaurant or retailer that doesn’t pay within the stipulated terms and conditions breaks the chain and the merchants lose the cash flow to pay their bills. If merchants were banks they would surely exact interest rate charges for late payment in the same way that they themselves are penalised by banks; instead they try to find accommodation with their customers and endeavour to reach a mutually convenient solution. Late payment (on top of discounts) slashes margins to an unsustainable level. There has to be a balance between the credit given by a wine company and the return from the customer. For years catering has been trading on the illusion of business created and has operated largely by the deferral of debt. When the economy is doing well there is sufficient money sloshing around the system to keep everyone afloat. When the economy is in recession the truth is laid bare; you can only give so much before you are completely financially compromised.
Banks have to write off debts themselves (or for the government to buy bad debt) and restructure loans for many businesses so that they can survive into the next year. Restaurants and retailers should also work with their suppliers to come up with viable repayment plans. Much can be achieved if everyone pulls together, but that would require better communication and a more honest mindset than we have in the catering trade at the moment.