HAVE CHAINS HAD THEIR CHIPS?
Stricken sector has restructuring experts working overtime, but some buyout firms are still hungry for a juicy bargain, writes Hannah Uttley
Restaurants reopening their doors last weekend did so against a grim backdrop given that “Super Saturday” came just days after the owner of Bella Italia and Cafe Rouge laid off 1,900 workers as it collapsed into administration and closed 91 sites.
Casual Dining Group, which also owns Las Iguanas, is one in a long line of casual dining operators that have been forced to call in restructuring experts in recent weeks as the pandemic delivers a knockout blow to the already troubled sector.
Burger chain Byron, Prezzo and the Azzurri Group, which owns Ask and Zizzi, are among the restaurants which have either put themselves up for sale or are exploring a major overhaul of their estates.
Carluccio’s and Chiquito, owned by The Restaurant Group, have already fallen into administration, with the former snapped up for £3.4m by
Giraffe owner Boparan in May, resulting in the loss of 1,000 jobs.
“It’s a new paradigm in terms of the level of restaurant work available for restructuring practitioners,” says Will Wright, a partner at KPMG and head of its regional restructuring team. “I’m not sure there are many chains out there that have not got people like us around them at the moment.”
The struggles experienced by the casual dining sector during the pandemic are by no means a new phenomenon.
Just over 1,400 restaurants collapsed into insolvency in the 2018-19 financial year, according to accountants UHY Hacker Young, a quarter more than the previous 12 months. Chains such as Jamie’s Italian were among those that disappeared from Britain’s high streets last year as a combination of steep rents, crippling business rates bills and higher staffing costs made it impossible to keep trading profitably. Meanwhile, overambitious expansion in recent decades has seen supply far outstrip demand, while years of ownership under private equity have left many firms laden with debt.
Insolvencies have slowed in recent months due to the Government’s moratorium on winding-up petitions until Sept 30 and a temporary ban on business evictions.
There were 49 restaurant insolvencies in May compared with 119 in the same month a year earlier, according to official data. UHY Hacker
Young expects this number to increase as government support, such as the furlough scheme for staff, begins to taper off.
Christian Mole, EY’s head of hospitality for the UK and Ireland, says the pandemic has forced many distressed firms into making difficult decisions they may have previously put off.
“The thing to say about the casual dining sector is that unlike a lot of hospitality, it was a sector that was struggling way before Covid anyway,” he says. “In a similar way that you could argue that the pandemic has accelerated a move within retail from bricks and mortar to the internet – it’s accelerating the fallout that was always likely to happen in the casual dining sector.
“I think the mood has moved to one of pragmatism. People are now quite focused on working out what they need to do.”
The mass closure of outlets is one of the inevitable outcomes of Covid-19’s impact on the restaurant industry.
Experts predict the sector will lose up to a quarter of its capacity over the next 12 to 18 months.
Negotiations over rental deals with landlords will be vital in helping many companies stay afloat over the coming months.
Christine Zhou, a leisure analyst at RBC Capital Markets, says there could be a shift towards turnover-based rents that would ultimately tip the balance in favour of tenants.
“What we’re hearing from some of the companies hoping to get through the crisis is that the whole relationship between tenants and landlords is going to have to be rethought as a result of this,” she says.
“Coming out of this crisis, for those that do remain, this could be seen as an opportunity, particularly given that we could get a big supply clearout on the high street and landlords will be looking for tenants to fill those sites.”
Ralph Findlay, chief executive of pub chain Marston’s, which makes 40pc of its sales from food, says pubs could be among those to pick up any of the demand left from the closure of casual dining sites.
“The last few years have been characterised by excess supply coming into the UK eating out and drinking out market and that has mainly come from casual dining operations. It’s been an unprecedented period of growth in outlets and you are certainly seeing that unwind at a pace,” Findlay says.
“That will not be good at all for the people who work in those businesses, but if you take the health of the sector
‘The mood has moved to one of pragmatism. People are now focused on working out what they need to do’
‘If there is a wave of restructurings in the sector, it could allow it to recover for the medium term’
and those that are still operating then it probably is a positive for those businesses.”
KPMG’s Wright agrees: “There is a sort of Darwinian aspect to this which may mean if there’s a wave of restructurings in the sector, it could ultimately allow it to recover for the medium term.”
Trends related to the use of technology are also expected to accelerate, while menus will be pared back at least in the short term to simplify operations and cut down on cost and food wastage.
“Even before Covid, you were seeing certain chains experimenting with apps where you can order and pay at the table. That will become an inherent feature of the sector,” Mole highlights.
“That will allow restaurants to operate a more flexible labour model and keep costs down a bit.”
Experts disagree that coronavirus will mark the death knell for the casual dining model, with a number of private equity suitors waiting in the wings with an appetite to feast out on the sector.
US hedge fund Elliott is said to be among those considering a swoop for Casual Dining Group, while others are mulling bids for parts of the business.
“There is still a latent demand and ultimately the sector will take a different form,” Wright adds. “The chain restaurant is not dead, we will just see fewer investors in it.”
6,600 Number of casual dining outlets currently in the UK 25pc Sites expected to close over next 12 to 18 months 1,900 Jobs lost at Bella Italia owner Casual Dining Group this month £3.4m Sum paid by Boparan to acquire Carluccio’s out of administration £73.4bn Predicted cost of coronavirus to the hospitality sector in 2020 A closed Byron Burger restaurant in Charing Cross Road, London. The chain is among the casual dining companies that have been forced to explore a major overhaul