There are currently 851 nightclubs in the UK, down from 3,144 in 2005. According to the Night Time Industries Association (NTIA), 396 nightclubs across the UK closed between March 2020 and December 2023, nearly 10 per month, representing 31% of total business.
Nightclub operators weathered the pandemic and then had to contend with reduced consumer spend due to the cost-of-living crisis as well as longer term changes in consumer behaviour. Combined with a dramatic increase in the cost of doing business, including the repayment of debt and rent liabilities accrued during the pandemic, nightclubs are under pressure.
A recent survey conducted by the NTIA revealed that seven out of 10 businesses are barely breaking even or operating at a loss. Nearly half expressed doubts about their survival in the next 12 months.
Consumer demand has been impacted by a clear shift in peoples spending habits due to the increased cost-of-living. Young people are going out less as they prioritise their cash for rent or general living expenses. The latest Rekom Night index from December 2023 shows that 58% of respondents go out at least once a week, down 8.9% from July 2023. When people do go out, they are spending less and buying soft drinks instead of alcohol to save money. 45.9% of respondents now regularly go on a late night out without drinking alcohol. This figure rises to 54.3% among 25-34 year olds.
Students – once the driver of mid-week business – have particularly changed their habits. For over two thirds of students, Saturday is now the most popular night of the week to go out, aligning them with the majority market trend. For nightclubs that need to be full more than one night a week to be profitable, these changing patterns of socialising are having a significant impact.
Technology is increasingly challenging the need for a night out. Sophisticated in-home entertainment has given young people alternative options for socialising – from the growth of music and TV streaming services to food deliveries and online dating apps. According to Jo Cox-Brown, CEO of Night Time Economy Solutions, there's a palpable shift towards people wanting more pop-up spaces and festivals rather than the traditional nightclub. The success of the Warehouse Project - a series of club nights that has a limited seasonal approach rather than operating all year - illustrates this. Late bars with DJs and wellness trends are also impacting consumer demand.
Nightclubs have also been negatively impacted by an unreliable transport infrastructure. The industrial action by rail unions in 2023 cost the night time economy an estimated £4 billion. Outside London, where there are fewer formal transport options, nightclubs are hampered by a lack of taxi drivers – many of which left the industry during the pandemic. Consumers that lack confidence they can safely get home late at night are increasingly choosing to not go out.
One of the biggest challenges for nightclubs is the dramatic increase in the cost of doing business. Nightclubs have been hit hard by inflationary pressures on multiple fronts. According to Michael Kill, CEO of NTIA, operating costs have increased by around 30-40% and are placing many businesses in an untenable position.
The inflation level for alcohol has remained stubbornly high, impacted by a 10.1% duty increase in August 2023. As of January 2024, inflation for spirits was 8.9%, wine 7.5%, and fortified wine 18.7%. While food price inflation is currently the lowest since April 2022, the overall price of food and non-alcoholic beverages has still risen 25% since January 2022.
The cost of labour is also increasing. The sector has historically relied on a high proportion of international workers, which has been impacted by Brexit, as well as workers moving to other industries during the pandemic. Businesses are struggling to fill positions in all areas, from security to chefs and bar staff, and need to increase wages to attract talent. The rise in the national living wage by nearly 10% (from £10.42 to £11.44) in April 2024 has placed further pressure on firms.
As rents typically increase with RPI, firms have seen a significant increase in rent payments at the same time as businesses face difficult trading conditions. Nightclub operators often lack bargaining power with their landlords. Given the residential shortage, many landlords aren't willing to offer operators flexibility but are motivated to consider residential developments instead.
People will always want to come together to have fun and socialise. There are success stories in the sector, especially for venues that can offer experiential concepts as consumers look for more immersive experiences. Linking activities such as darts, golf and bowling alongside socialising and bar spaces has proven to be popular. Bars that focus on the quality and theatre of mixology are also performing well.
With inflation falling and a rise in the national living wage, there is also hope that young people will have more disposable income helping them return to nights out. Venues that can adapt to consumer demand, and provide multifunctional spaces (eg areas for dining, drinks and dancing) will also be able to accommodate a broader demographic.
We've recently acted as administrators for UK subsidiaries of the Rekom Group and are in the process of winding down 17 sites around the UK. However, some of the group’s venues (including Birmingham, Cardiff, and Swansea) were performing well and we secured the sale of 11 sites, preserving around 500 jobs.
A downwards pressure on topline revenue combined with rising cost-base is putting many businesses under financial pressure. Managers need to critically evaluate each of the sites within their portfolio to understand the underlying trends that are impacting their businesses and what 'hooks' can be used to attract customers. Understanding the demographic they serve and how that is linked to the offering at each venue is obviously critical, which can be very different in towns compared to city centre locations.
We recommend nightclub operators conduct a detailed scenario analysis, including site by site profitability and cash flow modelling to allow management to understand site performance which can be used to inform financial and operational strategy.
One of the key outcomes could be considering divesting locations which show a declining trend in business, even if they currently remain profitable.
Management should forecast what their covenant compliance will be over the next two years, and plan for any debt facilities due to mature in the short to medium term. It's important to have a plan B if an incumbent lender is unable or unwilling to provide finance on terms that are acceptable.
Should any restructuring of the business be required, early consideration of options alongside independent advice that supports management decision making should form part of good corporate governance and strategic planning.
For more insight and guidance, contact Jon Roden.
