Last week, I came across an article reporting shrinking profits within Malta’s restaurants and catering industry for the first half of 2025 compared to the second half of 2024. The decline in revenues and profits has several causes, such as compliance with labour costs, commissions to third‑party food platforms, and costs driven by waste separation and the BCRS system. However, the central issue is that rising costs – not sectoral competition – undermine business viability. As an economist, I see monopolistic competition as the standard for this sector, so competition density should not be blamed for profit decline.
When studying economics at an advanced level, part of the syllabus is Microeconomics, including the Theory of the Firm and Market structures. Market structures are split into Perfect Competition, Monopoly, Oligopoly and Monopolistic Competition. The restaurants and catering sector falls, within the latter, whereby many operators offer similar but slightly differentiated products, and consumers choose a specific operator based on the differentiated product. On the other hand, in perfect competition, operators sell the same products while having no power to alter prices. They operate at the lowest trough of the average cost curve, meaning no additional productive efficiency and no excess capacity. There is no point in advertising the product, and long‑run profits are termed normal because they are aligned with revenues due to free entry and exit. Those stating that there are many restaurants and this is the reason why they face shrinking profits are contradicting microeconomic theory.
In monopolistic competition, operators differentiate their products through packaging, service, and marketing. This is why they stand out. Unlike perfect competition, their products and services are not homogeneous. Therefore, average costs are higher, leading to excess capacity, because operators do not produce at the minimum efficient scale. Notwithstanding that, in monopolistic competition, operators can still earn only normal profits in the long run; the cost structure is entirely higher relative to perfect competition, thereby outlining the trade‑off between efficiency and consumer choice. Advice to those in this industry is to also review the cost structure to maximise profits. Besides the VAT reduction proposal, which I will expand on, I suggest engaging with authorities to reduce costs in labour and HR, as well as waste separation and BCRS expenses. In the past, such costs were not exorbitant because the labour market was more structured and certain jobs were performed by local employees, either full‑time or part‑time, with longer tenure in the industry, while BCRS did not exist. Labour and human resources compliance costs are now the most pressing due to higher turnover, training requirements, and training costs. When speaking to the industry, I was told that the cost to train personnel can reach €600 if they are engaged from another employer.
Previously, such costs were absorbed by the state in the form of training personnel, either through the Institute of Tourism Studies or other ancillary in‑house courses. This is no longer the case, and training costs must be borne by operators. In economic theory, this increases the long‑run average cost curve because operators within this industry operate below the minimum efficient scale due to constant staff turnover, training and retraining. My forecast is that these costs will increase with the new Labour Migration Policy, even though it was urgently needed, and I lobbied for it, albeit for other matters. However, cost increases relating to onboarding and compliance must be reviewed by the government. They must be extended to all industries, not just those in the catering sector designated by its statistical code NACE I56.1.
Another cost which must be reviewed is the waste separation and recycling logistics known as BCRS. This cost was not present back in 2022, started in 2023 during a time of high inflation, required time to adjust, and many are still adjusting. Indeed, the study commissioned by the Association of Catering Establishments ranked these costs as a mid‑tier challenge. However, the costs are high. For waste separation, each operator must be registered with a private contractor for waste collection, which then feeds into the Malta Tourism Authority system, with the cost incurred on a monthly basis of around €350. Such waste‑related costs entail the collection of waste mandated by law for organic, paper and cardboard, other glass, other plastic and oils. From an environmental standpoint, it makes sense. However, the costs are what they are. Besides, the BCRS glass and plastic beverage containers are separate from waste collection. Operators within this industry are given 25 free waste bags irrespective of seating capacity, and over and above the 25 free bags, they must incur an additional cost.
Economists regard these costs as fixed overheads scaled up with volume, which add to long‑run costs without generating revenue. For smaller outlets such as kiosks and snack bars, it is even worse, as they lack economies of scale, even though for the latter, the costs are lower as customers are not seated in the majority. And when restaurants charge a €0.10 BCRS deposit on seated customers to subsequently recover it, in practice, they never truly recover the costs because a percentage of the beverage containers is lost through the system. Hence, such costs must be recovered through other means and explored with the authorities. Frankly, the deposit scheme became a net cost centre for the operator rather than a pass‑through, additionally shrinking margins in a sector already under pressure from labour, rent, and regulatory burdens. Therefore, the Maltese catering industry’s Long Run Average Cost (LRAC) is driven by costs that were not present in the past.
The Association of Catering Establishments (ACE) suggested a reduction in VAT from 18% to 7% in a study commissioned in September 2024. Such a proposal would not be unique to Malta, as nineteen EU Member States already apply reduced VAT rates on catering services, including Cyprus, Portugal, Italy, and Spain, all of which are direct competitors in the tourism sector. The net effect, as outlined in the ACE study, is that while government revenue from VAT would decline, this shortfall would be offset by higher compliance, increased turnover, and greater income tax contributions. The government’s choice is to either assist ACE in alleviating the other non‑VAT cost burdens, if they insist on maintaining the 18% VAT rate, or else reduce VAT and allow operators to fend for themselves. Whatever the policy choice, these costs will remain present, and they do not guarantee the long‑term sustainability of the catering sector. Nobody can deny the economic growth numbers, including those of tourists. However, there is a missing link, not because of a lack of growth, but because of an increase in costs. This VAT reduction, if considered, must therefore be implemented once Malta exits the excessive deficit procedure, expected after next year.
While a VAT reduction from 18% to 7% would temporarily increase retained revenue and ease price sensitivity, operators must prioritise resolving inefficiencies through training, the Skills Pass, and better waste management, including the BCRS scheme. Addressing these core issues, rather than just visible symptoms, is crucial for achieving long-term efficiency and sustainability. This approach can also strengthen the sector’s financial position in facing demographic and labour cost challenges.