Will casual diners retain appetite for chains?
The Restaurant Group’s Andy Hornby tells Daniel Woolfson that midmarket brands’ will stay on high street
The chief executive of Wagamama has said chain restaurants will never be as ubiquitous as they were pre-pandemic, but insisted they will not disappear from Britain’s high streets altogether.
Andy Hornby, chief executive of The Restaurant Group, which owns the Japanese chain, told The Sunday Telegraph: “I don’t think the [casual dining] industry will ever be quite as big as it was.”
However, he brushed off suggestions that mid-markets restaurants would disappear altogether because of the cost of living crisis. Hornby said people were still “prepared to spend money on good quality food and drink” as he argued that “good performing, well-run food-and-drink operators do have a good future in this country”.
The defence of chains comes as fears grow for the future of mid-market restaurants on Britain’s high streets.
Covid-19 lockdowns were a huge blow to the entire restaurant industry and operators are now facing soaring energy and staff costs.
At the same time, cheaper fast food rivals have mounted an assault on affordable tablecloth restaurants, spurred on as shoppers’ wallets feel the squeeze of the cost of living crisis.
The combination has pushed some chains into financial difficulties, with restaurants including Byron falling into administration. Many others have been shutting sites, with The Restaurant Group last week announcing it would close 35 lossmaking eateries, mainly Frankie & Benny’s.
Frankie & Benny’s has suffered disproportionately because of the kind of diners it attracts, Hornby said, telling The Telegraph this week its typical customers were “probably a family of four working incredibly hard that has been hit very hard by the cost of living crisis”.
However, Hornby said Wagamama was doing well. “What has actually happened is demand has held up better than people thought, but the cost inflation pressures have hurt people’s margins. It’s all cash flow issues, and those for many operators won’t go away.”
The retrenchment by chains follows years of expansion for restaurants, with names such as Pizza Express, Prezzo and Strada becoming ubiquitous across the country.
Hornby said: “I have got huge sympathy for a lot of very hardworking people who set up businesses [based on] one set of operating margins, and the inflationary pressures that have come through is just so different than what it was.”
He said there are signs inflation is beginning to ease, which could potentially restore some consumer confidence.
Hornby maintains The Restaurant Group is “in a reasonable position” amid the current economic turmoil.
“People have cut back on their spend, but not as far as you might [expect].”
“If you’re in a Wagamama and there’s six of you together, you might now choose to only share two or three starters. If you are in our pubs business, which is trading particularly well, you may have one less extra drink, or you might share a sweet dessert. It’s very subtle.” His comments come as Hornby faces growing pressure from an activist investor to change course and amid calls for The Restaurant Group to be broken up.
Hong Kong-headquartered Oasis Capital Management has bought a 6.5pc stake in the company and targeted Hornby personally, accusing him of overseeing a period of “strategic stagnation and the deterioration of standards in market communication”.
In an open letter in February, Oasis said: “TRG has one of the worst performing share prices of any UK leisure company; materially worse than its closest peers, and disproportionately worse than what the impact of the challenging sector backdrop would alone justify.”
Oasis is said to be lobbying for Hornby’s head unless the business improves rapidly. A second activist, US-based Irenic Capital, is also reportedly applying pressure.
The Restaurant Group, like many casual dining businesses, has been hammered by the pandemic and inflation crisis. Its share price has plunged by 75pc over the last five years. The company’s losses more than doubled to £86.8m last year amid the skyrocketing cost of food, energy and wages. Mounting losses came despite sales growing by more than £200m to £883m.
The Restaurant Group has so far rejected Oasis’ request for a board seat and kicked off an internal review designed to improve profitability and margins over the next three years.
“The board will judge me on my results,” Hornby said. “So that is priority number one. And number two I will continue to do what is right for the company.”
The 56-year-old has spent the week ringing shareholders to firm up their support for a turnaround plan designed to restore profitability.
Part of Hornby’s plan is a greater focus and more sites for Wagamama, which The Restaurant Group bought in a £559m deal in 2018.
Wagamama has done well because it appeals more to Millennials and Gen Z, who are less likely to have major expenses such as cars or mortgages, he said.
“What matters is, are we showing a plan to improve the performance of the business over the next three years which should feed through to value? Yes, yes of course.”
Hornby is best known in the City for running Halifax Bank of Scotland (HBOS) up until its collapse in 2008 and subsequent forced rescue by Lloyds. The acquirer subsequently needed a £20bn bailout from the Government after taking on the toxic assets.
An official report into HBOS published in 2015 concluded that Hornby and co-chief executive James Crosby had run the bank into trouble by pushing growth while failing to properly account for risk.
However, Hornby, who won’t comment on his involvement in the financial crisis, was relatively unaffected by the blow-up: he went on to lead Alliance Boots and betting company Ladbrokes Coral, before joining The Restaurant Group in 2019.
The pandemic plunged the hospitality industry into crisis shortly after he joined and The Restaurant Group was forced to close hundreds of sites. It has been a rough ride.
According to reports, the company is now considering selling off some of its brands, such as its Brunning & Price pubs in the North West as part of turnaround efforts.
Hornby wouldn’t comment on these specific plans but he brushed off suggestions from analysts that The Restaurant Group, which also owns Mexican chain Chiquito and Garfunkel’s, could be worth twice as much if it was broken up and sold for parts.
“I would point the other way and say that when times are very bad – for instance during Covid – if we hadn’t been a group, you would have seen some outstanding businesses possibly go to the wall, which would have been appalling,” he said.
However, he added: “I’m a public company CEO, I will never say that any assets are not for sale.”
Attention now rests on whether Hornby can turn around performance while keeping the activists at bay.
Some analysts are cautiously optimistic: Investec has suggested a “significant upside potential” for shares if Hornby’s plan plays out as planned.
“Are our customers still going out? And are they prepared to spend money on good quality food and drink? The answer is definitely yes. Good performing, well run food and drink operators do have a good future in this country,” he said.
‘What has happened is demand has held up better than people thought, but the cost inflation pressures have hurt people’s margins’