Ali Carnegie, a commercial energy broker based in southwest England, spends most of his working day on the phone delivering bad news to clients.
In normal times, Carnegie wrangles gas and electricity suppliers over single-digit percentage increases in bills for the more than 250 small and medium-sized businesses it has on its books. But now it has to recommend contracts that could put some of its client companies on the edge as energy bills have started to rise sharply, driven mainly by Russia’s pressure on gas supplies to Europe.
Last month, a hospitality company he works with was offered a new electricity contract priced at £605,000 a year, a sevenfold increase on the previous one. The owners are now looking into whether their business can survive the increase.
Spiraling energy costs are just one of several pressures on the UK’s 5.5 million small businesses. “This winter would be very sad if only energy prices went up,” said Carnegie, who runs consultancy Total Energy Solutions in Cornwall.
The rising wage bill, rising commodity costs, the supply chain crisis and the fallout from Brexit are only adding to the pressures. The result is that many SMEs, which together employ around three-fifths of the UK workforce, are likely to collapse without government intervention.
In 2020, the first year of the pandemic, the UK lost nearly 390,000 small businesses, more than a twentieth of the total. Tina McKenzie, policy chair of the Federation of Small Businesses (FSB), predicted this winter “could easily be just as devastating … if not worse”.
In the three months to June 30, almost all small businesses in the hospitality, manufacturing, construction and retail sectors reported higher input costs than in the same quarter last year, according to the FSB Small Business Index.
During the same period, there were 5,629 business insolvencies in England and Wales, a 13% increase on the previous quarter, according to official figures.
“The government needs to wake up to the fact that there is a real crisis facing small businesses,” said Andrew Goodacre, chief executive of the Association of British Independent Retailers. “If you lose businesses, you lose high streets, you lose jobs and you lose livelihoods. It’s hard to recover from.”
Industry groups have called on ministers to help small businesses with their winter energy bills and provide an increase in the full business rate relief threshold.
Both candidates in the race to replace Boris Johnson as prime minister have made limited pledges that would help small businesses. Leader Liz Truss has pledged to scrap the planned rise in corporation tax, while Rishi Sunak has pledged to extend the 50% discount on business rates.
A government spokesman said: “No national government can control the global factors driving up energy prices, but we will continue to support businesses to navigate the coming months.”
Last week, as temperatures rose again, family-owned Cornish ice cream maker Roskilly’s celebrated its best day of trading since it started selling the treat 35 years ago. But the outlook is less sunny.
The wage bill for its 60 employees is rising by 10 percent and the company has rejected a contract renewal by its energy supplier, which risks leaving it at the mercy of rapidly rising variable rates in October.
Producing and freezing 400,000 liters of ice cream a year is a company that consumes a lot of energy. With margins of 4 per cent on a turnover of around £2.3m a year, the company is heading for a big loss.
“All the staff are terrified because they know that if I don’t get the money, I might have to cut hours or jobs in the winter, if we even get that far,” said Silke Roskilly, one of the directors.
Silke Roskilly, director of Cornish ice cream maker Roskilly’s: “All the staff are terrified because they know if I don’t get the money I may have to cut hours or jobs in the winter, if we even get that far” © Kai Greet/FT
In the energy market, small businesses have been “thrown to the wolves”, argued the FSB’s McKenzie. While consumers benefit from some protection from the energy price cap and state financial support, and large corporations can protect themselves from rising energy costs, SMEs are “a target easy” for suppliers, he added.
“If you’re an energy company, where are you going to get your big increases? Small businesses, because there is no protection,” McKenzie said.
A particularly tight labor market has conspired with rising energy, food and beverage costs to hit the hospitality sector particularly hard. The food and accommodation sector has a vacancy rate of 8%, the highest of any industry, according to the Office for National Statistics.
Earlier this summer, Anthony Pender, co-owner of Yummy Pub Co, which has three sites in London and the south-east of England, was so short-staffed he was picking up pints himself. Now, staffing levels have increased, but the company’s wage bill has risen from 26 to 31 percent of turnover. Its main supplier of draft beer has raised prices by a quarter and the electricity bill has doubled.
“We can’t pass those costs on because we won’t have any customers left,” Pender said. He warned that over the winter he may have to cut trading hours, cut the menu and make chefs redundant to save money, adding that he was already seeing the “tell-tale signs” of a recession.
“I think we’re heading for a catastrophic market event. Our business will survive on a turnover of £5 million, but how do Dick and Rita in Dog and Duck survive on a few thousand a week?
Yummy Pub Co has four months of cash reserves to draw on, a rarity for companies in the industry where most cash piles were depleted by the Covid-19 pandemic. One in six hospitality businesses have no bookings, according to trade body UKHospitality (UKH).
Anthony Pender, co-founder of Yummy Pubs: “I think we’re heading for a catastrophic market event. Our business will survive on a turnover of £5m but, like Dick and Rita from Dog and Duck, survive on a few thousand a the week? © Yummy Pub Co
The British Institute of Innkeeping estimates that independent pubs will need to trade 20% above pre-pandemic levels just to break even, but 86% report profits below 2019 levels.
“Not all businesses will be able to survive this attack, and those that can will be looking closely at how they can reduce their costs just to stay afloat,” said Kate Nicholls, chief executive of UKH.
In the coastal town of Lymington in southern England, Raoul Perfitt, managing director of organic hair dye maker Herb UK, is also trying to figure out how to get through the winter.
After Brexit, the rising cost of exporting to the EU, which accounts for a fifth of revenue, had already cut into margins. But in recent months the price of essential raw materials has risen dramatically, in some cases up to five times.
The company, which employs more than 50 people in the UK and has a turnover of more than £7.5m a year, has also been hit by a three-fold rise in electricity costs . Fortunately, Herb moved to a new, more efficient location in January. “If we were still in the old unit, it would have been horrible,” Perfitt said. “We’ve invested heavily in more efficient heaters, smaller production units . . . so we’re trying to mitigate as much as we can.”
As they face a sharp winter slowdown, many small businesses are wondering how much help they will get from the UK’s new prime minister with the leadership contest creating a political vacuum.
“It feels like we’re on a pause button, as everyone goes into a winter of discontent,” said the FSB’s McKenzie.
This article has been amended to correct data showing that entry costs for small businesses nearly doubled in the second quarter compared to a year earlier.