Just like operators in other sectors feeling the pinch, restaurateurs need all the help they can get to weather the storm this summer, so the news of Malta being granted by the EU the flexibility to allow a reduced VAT rate at restaurants comes at the right time. It is now hoped that this flexibility is also applied in a timely manner.
Since when VAT was introduced in the 1990s, most restaurants – purchasing ingredients at zero-rate VAT, transferred the full VAT increment onto their customers. All of a sudden, dining rose by a full 15 per cent, followed by a further 3 per cent. Some operators waited a full ten years or more before adjusting their net-prices upwards, in spite of their operational costs rising at a much steadier rate.
Rightly so, consumers now doubt whether, in a similar way restaurant prices went up in the 90s, food items will take a 13 per cent slump once the impending reduced VAT rate at restaurants is announced.
Even if subtly, a number of restaurants in Malta have already started reducing their prices. Be it by means of a change in menu; by tweaking their wine list; by offering cheaper specials; by creating special Sunday lunch menus or by, in a more direct way, advertising “beat the crunch” menus, or even by advertising food items at half price – many operators have realised that unless they start chopping off prices, there are even less chances for them to get through the year.
As has always been, it is the operators who ultimately decide whether or not to respond to market forces. The only difference at this time is that those who choose not to react to the changing demand, will be the first to wither and die. The 1980s tourism boom is over, and although some may have not fully understood the implications, the restaurant market in Malta is now fully saturated. Losing customers now no longer means having shorter queues waiting for tables outside. It now means having empty tables, and in some cases even empty dining rooms – as many top restaurants witnessed last Monday, on the eve of a public holiday. Costs have increased, regulations have become more stringent and customers more discerning. When these factors are also tied in with the expected slump in tourism figures – the days of many restaurants may be counted.
The implications are serious. Staff will be made redundant, and people depending on their part-time jobs to spend back their yield into the entertainment and hospitality industry will have to make spending cuts. This could very well backfire onto the industry itself.
But not all of this is bad news. The process we are undergoing may be more a matter of rightsizing rather than downsizing. Those hanging on to the golden years will be the first to shut down, as many already have. Others who venture into the storm, who give up blaming the government for lack of business and make a genuine effort to improve their business – will stand a better chance to survive and make it through the storm to find themselves playing in a smaller, less saturated market after this summer.
Government must now calculate carefully when to introduce the reduced VAT rate for restaurants. If after the 2010 budget is announced, a VAT reduction is applied to a shrunk and less competitive catering industry – it may not be in the interest of operators to reduce their prices, but rather to recoup some of the investments they made and losses incurred throughout the previous summer.
Government might do well to consider introducing the reduction before the summer starts to increase chances of the move reflecting in a further downward trend in prices – thus letting the consumer benefit and allow for a more price-attractive high season.
The implications and the cost of such a move at such a time remain to be seen. At this stage however, industry operators should be ready to refrain from giving the finance minister flak when or if budget figures and projections go haywire this November. Such reassurance may further help him focus on the direct economic effect more than the quasi-obsession of meeting the numbers at the end of the year in order to limit the damage.
