Ali Carnegie, an energy broker based in South West England, spends most of his working day on the phone breaking bad news to clients.
In normal times, Carnegie tussles with gas and electric companies for single-digit percentage increases in the bills of the more than 250 small and medium-sized businesses he has on his books. But now he has to recommend deals that could derail some of his customers’ businesses as energy bills have started to soar, largely due to Russia’s tight 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 calculating whether their business can survive the rise.
Rising energy costs are just one of a number of pressures on the UK’s 5.5 million small businesses. “This winter would be very grim if energy prices alone were to go up,” said Carnegie, who runs Cornwall-based consultancy Total Energy Solutions.
Rising labor costs, higher raw material costs, the crisis in the supply chain and the consequences of Brexit only add to the pressure. The result is that many SMEs, which collectively 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 at the Federation of Small Businesses (FSB), predicted that this winter “could easily be just as devastating . . . if not worse.”
In the three months ended June 30, SMEs in hospitality, manufacturing, construction and retail reported input costs nearly double the same quarter last year, according to the FSB Small Business Index.
According to official figures, 5,629 business insolvencies were registered in England and Wales in the same period, 13 percent more than in the previous quarter.
“Government needs to recognize that small businesses are facing a real crisis,” said Andrew Goodacre, chief executive of the British Independent Retailers Association. “If you lose businesses, you lose highways, you lose jobs and you lose your livelihood. It’s hard to recover from that.”
Industry groups have urged ministers to help small businesses with their energy bills through the winter and raise the threshold for full relief from corporate tariffs.
Both candidates in the race to succeed Boris Johnson as Prime Minister have made limited pledges that would help small businesses. Leader Liz Truss has pledged to scrap the proposed corporate tax hike, while Rishi Sunak has pledged to extend the 50 percent rebate on corporate tax rates.
A government spokesman said: “No national government can control the global factors driving up energy prices, but we will continue to help companies navigate the coming months.”
Last week, as temperatures soared again, family-run Cornish ice cream maker Roskilly’s celebrated its best trading day since it started selling the treat 35 years ago. But the prospects are less sunny.
Payroll costs for its 60 employees have risen by 10 per cent and the company has been rejected by its energy supplier to extend its contract, putting it at risk of being at the mercy of rapidly rising variable tariffs in October.
Producing and freezing 400,000 liters of ice cream a year is an energy-intensive undertaking. With a 4 per cent margin on sales of around £2.3m a year, the company is heading for a big loss.
“The staff are all scared because they know that if I don’t have the money I might have to cut hours or jobs over the winter if we even make it this far,” said Silke Roskilly, one of the directors.
In the energy market, small businesses “have been prey to wolves,” argued the FSB’s McKenzie. While consumers can benefit from some protection from energy price caps and government financial support, and larger companies can insure themselves against rising energy costs, SMEs are “an easy target” for suppliers, she added.
“If you are an energy company, where will you make your big hikes? Small businesses because there’s no protection,” McKenzie said.
A particularly tight labor market has hit the hospitality industry particularly hard, with rising energy, food and beverage costs. The food and lodging sector has an 8 percent vacancy rate, 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 locations in London and south-east England, was so short on staff that he was pouring pints himself. Now the headcount has increased, but the company’s payroll costs have increased from 26 to 31 percent of sales. Its largest keg storage supplier has increased prices by a quarter and its electricity bill has doubled.
“We just can’t pass on those costs because we won’t be running out of customers,” Pender said. He warned that as the winter progresses he may have to cut trading hours, trim the menu and lay off chefs to save money, adding that he is already seeing the “telltale signs” of a recession.
“I think we’re headed for a catastrophic market event. Our business will survive on £5m in sales, but how do Dick and Rita survive at the Dog and Duck turning a few thousand a week?’
Yummy Pub Co has four months’ worth of cash reserves to draw from – a rarity for companies in the industry, which has seen most of its cash holdings depleted by the Covid-19 pandemic. According to industry association UKHospitality (UKH), one in six hospitality businesses has no reserves.
The British Institute of Innkeeping calculates independent pubs need to trade 20 per cent above pre-pandemic levels to stand still, but 86 per cent report profits below 2019 levels.
“Not all businesses will be able to survive this onslaught and those that can will be looking carefully at how to keep their costs down just to stay afloat,” said UKH chief executive Kate Nicholls.
In the southern English coastal town of Lymington, Raoul Perfitt, managing director of organic hair color manufacturer Herb UK, is also working on how to survive the winter.
Post-Brexit, the increased cost of exporting to the EU, which accounts for a fifth of revenue, had already squeezed margins. But in recent months, the prices of important raw materials have risen dramatically, in some cases by a factor of five.
The company, which employs more than 50 people in the UK and turns over £7.5million a year, has also been hit by a triple rise in electricity costs. Luckily, Herb moved to a new, more efficient building in January. “If we were still in the old unit, it would have been horrific,” Perfitt said. “We have invested heavily in more efficient heaters and smaller production units. . . So we’re trying to mitigate everything we can.”
As they brace for a sharp winter downturn, many small businesses are wondering how much help they will get from Britain’s new prime minister as leadership competition creates a political vacuum.
“It feels like we’re on a pause button as everyone descends into a winter of discontent,” said the FSB’s McKenzie.