Restaurants in Distress

The restaurant sector has always been a brim with innovation, with new concepts constantly setting and following consumer trends. With any trend setting business comes risk, and restaurant failures and closures are an inevitable consequence of what has been a rapidly changing sector. However, from 2003 until 2017 more restaurants were opened than closed, with Hardens Guide reporting that in London, at its peak in 2015, for every one closure three restaurants opened. Nationally in just a four year period between 2013-2017 4,000 new restaurants were opened, many following brand acquisition by private equity houses and a rapid expansion into sites such as shopping centres, retail parks and new residential developments where hospitality was seen as a key offering to drive unit sales.

In 2018 the situation is significantly different. For the first time since 2003 we are seeing more closures than openings. Many headlines have been generated by the use of Company Voluntary Arrangements to restructure restaurant property portfolios (and in reality close a significant number of sites) by the likes of Byron's, Carluccio's and Jamie's Italian. Closures by other branded restaurants have also risen both inside and outside of insolvency processes, such as the recent administration of the Gaucho Group and the closure of the Cau Brand. The feeling that the sector is under siege is borne out by the fact that 37 of the top 100 restaurants groups are currently making a loss and an average of two restaurant businesses are falling into insolvency each week.

It was observed that in the accompanying commentary explaining their closures programmes, restaurant groups have fairly universally pointed to rising staff costs, the Brexit effect of staff shortages and imported food cost rises, business rates and unrealistic rent as being the reasons for their business woes. However it was certainly felt by our contributors that a more toxic blend of changing consumer spending patterns has coincided with the failure of many chains to adapt; their problems exasperated by earlier poor decision making and rapid over expansion meaning they lack available capital to fundamentally restructure their offering.

Changing consumer trends mean that restaurateurs need to provide a more immersive experience, one which can be shared on social media as being unique and 'snap worthy'. This requires restaurant businesses to be seen as unique, original and with great connectivity to its clientele. As a result it was felt that we would see a continued rise of pop-ups, street food and 'grab and go' options. Against this changing background it cannot be ignored that there has been a ten-fold increase in delivery, as opposed to other eat out options, and this marks both a threat and opportunity for the restaurant sector.

With such changes to the sector and potentially brand fatigue, distressed restaurant groups will need to look for investment to fund their turnaround. It was noted however that the opportunities for the distressed investor community to get involved in the sector are limited. The reason for this is that the ability to turn around and operate at better margin is limited, as the vast majority of costs are fixed, margins are already tight and overall success and profitability is susceptible to consumer fickleness. It therefore does not offer a very attractive option to the distressed investor, as restaurant businesses typically have limited fixed assets, which can provide security to underpin any new investment.

As a result it was felt that investment and growth in this sector will come from the entrepreneur, the chef proprietor and the small scale family/lifestyle type businesses. We may therefore see many more local, independent openings in the years to come, replacing the national brands that are currently seen on every high street. For the brands, franchising will become a popular option, as with tight control on the franchisees operators' models, brands can be developed while avoiding the operating cost nightmare that has befallen so many restaurant groups.

In the meantime the sector will continue to provide significant opportunities to the insolvency industry, with more liquidations and administrations likely, although it was felt that the trend for CVAs has now peaked. For the turnaround and distressed investment industry however, the sector is one whose current modelling does not appear attractive. As a result we may see a continued net closure of restaurants for some time to come.