By Rachel Hotham, Insolvency Partner at Milsted Langdon
In the last 10 years, the UK’s chain restaurant sector has been on a rollercoaster of highs and lows with much press coverage about the recent closures of well-known high street chains, which few could have predicted after the success the sector had once achieved.
Milsted Langdon has been instructed to act for five separate restaurant groups who have found themselves in financial distress, which has equated to 17 restaurant sites in total. However, we are not alone.
The latest figures suggest that the number of restaurants in the UK has fallen by 3.4 per cent in the year to the end of June, with a net total of 18 closures per week.
Amongst these figures are big names such as Jamie’s Italian, but even these figures don’t give a clear indication of the scale of the problem, especially when you consider the less publicised company voluntary arrangements (CVAs) of Byron Burger, Carluccio’s and Prezzo, which have allowed these firms to restructure themselves and offload less profitable sites.
More recently there has been considerable coverage of the plight of Pizza Express, which seems likely to restructure its debt in the coming months.
The chain’s lenders are demanding a cash injection of at least £100 million from the company’s Chinese owner, who is already buying back tens of millions of pounds of debt. A surprise bond auction announced at the start of the month failed to satisfy investors and hedge funds, which are owed more than £650 million.
The reasons for this high rate of failure are well publicised and include over-geared expansion, rising employment costs as a result of increases to the national minimum wage and national living wage, which more and more employers are being encouraged to pay, an increase in workplace pensions, the costs of business rates and high rents as well as general cost inflation – most recently as a result of uncertainty about the global economy and, to some degree, Brexit.
Another key issue, especially in the mid-market dining sector, is the oversupply of dining options and changing tastes.
Data put together by research and consulting firms CGA and AlixPartners, show a significant rise in vegetarian restaurants (up 69 per cent), while Turkish and Middle Eastern restaurants enjoyed surges of more than 60 per cent growth.
Of course, these newer styles of cuisine are massively outnumbered by the more established Indian, Italian and Chinese, which continue to dominate the chain restaurant sector.
It is, however, in these particular sectors where the most significant decline is occurring. As an example, the number of Italian restaurants in the UK fell by 4.7 per cent to 2,815, while Chinese restaurants saw a decline of 7.3 per cent to 2,074.
As well as changing tastes, consumers are also changing how they purchase their food, with many choosing to eat at home using online on-demand services such as Just Eat and Deliveroo.
To accommodate this, many chain restaurants now allow for pick-up and delivery. Although they can still make money via these services, there are often fees and additional costs that are involved that can eat into a business’s profits.
Many restaurants are also facing tougher competition from independent restaurants, which are seeing a resurgence in popularity as consumers seek out ‘experience dining’, where a fair greater emphasis is placed on the entire process of eating out.
The sector’s saviour
Thankfully, there are options and opportunities out there that can turn these failing businesses around
We have been able to provide a number of solutions to those in the sector during the last year, including selling on all sites to a third-party in order to take the proposition forward with a lower gearing and greater investment, selling on viable sites from an administration process and assisting with the orderly wind-down of companies.
Whatever option owners decide to go with, the most common trend when it comes to recovery is the need to split well-performing sites from the rest of the company in order to leave a business which is sustainable in the long term.
This seems to indicate that the sector may be oversubscribed and that many chains may have expanded too quickly.
Restaurateurs shouldn’t see the current situation as all doom and gloom. There are still plenty of successful chains out there and there continues to be interest in strong propositions, but we have probably seen the end (for now) of the gold-rush of mid-market dining expansion.
What is most important for those who remain in the industry is that they take time now to review their sites and operations and to recognise where any underlying problems lie. With rents and business rates on the high street continuing to rise and the potential for higher costs for fresh produce post-Brexit, it is important that owners do this sooner, rather than later to ensure that the chain as a whole can enjoy a brighter future.