The UK industry's growth happened too quickly, but it was still a hotbed of creativity at the mid-scale level, with ambitious chains investing in quality ingredients, innovative menus, and smart technology. We hope that doesn't come to an end.
— Jason Clampet
So far there’s been a sliver of U.K. restaurant closures. It’s about to become a much more generous helping.
Years of overexpansion, particularly in the mid-market casual dining area, stagnant consumer demand and rising costs are causing pain for many food and beverage businesses.
Growth in the number of restaurants has almost ground to a halt over the past six months, as new openings shrank and closures stepped up, according to the Local Data Company, which tracks the number of retail and leisure outlets across the U.K. On a net basis, the number of restaurants rose just 0.5 percent from September to March.
This is the fallout from the squeeze on spending power. Inflation has been running ahead of pay growth for more than a year, prompting Britons to cut back on meals out. Like-for-like restaurant sales actually fell an annual 1.5 percent in February, while pubs sales rose 1.3 percent, leaving the overall market broadly flat, according to the Coffer Peach Business Tracker.
And there are likely to be big variations across restaurants. Wagamama, owned by Duke Street, and Nando’s are among those doing well, thanks to distinctive offerings and plenty of innovation. Zizzi, a part of Bridgepoint-owned Azzurri Group, is benefiting from a refresh of its menus and investment in its restaurants. However, chains that have been less proactive are likely to be suffering more than the industry average.
Things could worsen from here.
For a start, the Local Data Company’s figures are up to March 1, and don’t include the majority of closures from Company Voluntary Arrangements announced in 2018. Financially distressed companies use CVAs to gain relief from their financial obligations, and in the restaurant industry can help chains exit some locations and negotiate cheaper rents on others. But there can be lags between the signing of a CVA and the store closures.
Creditors of Prezzo, owned by private equity group TPG, will vote on its CVA proposal on Friday. This could lead to the closure of up to 94 restaurants in April and May if the outcome is in favor of restructuring. Creditors of Jamie Oliver’s Jamie’s Italian and Byron Hamburgers have already agreed to CVAs.
The recent blast of arctic weather has sent a further chill across the market.
Restaurant cancellations prompted by the so-called “Beast from the East” and the “mini-Beast” a few weeks later will have come at what is typically a tough time anyway, as Britons tighten their belts after Christmas. At the start of the year chains have some big expenses to pay, including bills from suppliers for orders for the festive season, and quarterly rental payments at the end of March.
The hit from the weather could prompt more CVAs. It’s all the easier to do so now — the operators that have already agreed them have paved the way for others to follow.
Paul Newman, head of leisure and hospitality at professional services firm RSM, says smart operators may be able to use the rise in CVAs to their advantage. Managers of better-performing chains can point to the help received by their more-distressed rivals — such as exiting sites and cutting rents — and demand the same treatment. That could lead to closures outside of formal CVA processes.
Eventually the shutterings should bring supply and demand more into balance. As Gadfly has argued, consumers may be approaching their lowest point, given prospects for spending power to return. That could bring some relief to the food and beverage sector, particularly if it is accompanied by a good dose of sunny weather.
It will take time for those benefits to come through. In the meantime, there will be a lot indigestion as restaurant groups deal with their overindulgences of the past.
—Gadfly’s Elaine He contributed charts
Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.
©2018 Bloomberg L.P.