This week we’re taking a closer look at the UK casual dining sector. It’s been reported for a while that the sector is experiencing a huge rise in insolvencies. With big names like Prezzo, Bryon, Jamie’s Italian, Hummus Bros and Cau all taking drastic action to remain open, and thousands of creditors affected by the downturn, we to take a closer look at what has happened to the industry and review a couple of the troubled businesses: Byron and Jamie’s Italian.
The Troubled Casual Dining Chains
There are sector-wide issues affecting many restaurant chains. The sector has been red hot over the last few years – the number of restaurants increased by 16% as demand soared since 2010. However, the climate has become considerably more difficult, and many chains that have grown extremely fast are not sustainable.
Government policies have hurt the sector – rate increases and the introduction of the National Living Wage are two critical factors that have significantly increased restaurant cost bases.
Quantitative easing might have succeeded in staving off economic disaster, but a decade of cheap money has inflated asset prices and driven down yields; in the search for yield, a lot of private equity capital has been invested into restaurants in the growing casual dining sector.
Private equity firms deployed capital into the sector and then used debt finance to grow at a very quick rate. Debt-fuelled expansion has led to many chains growing too fast – the pressure to grow has led to poor site selection and expensive lease agreements.
As restaurant chains grew rapidly, competition intensified and this, coupled with other external factors and the impact of Brexit, has led to this spate of administrations, store closures and job losses.
If you provide credit to the sector, now is the time to start considering your company credit check policies and credit terms.
When you look into the financial status of these restaurant chains you start to notice some worrying trends:
- 22% in the north are in financial distress
- 20%+ have a negative net worth.
- When intangible assets are removed, this becomes 35%+.
- 60%+ would qualify as undercapitalised.
- A large proportion of businesses are funded by private equity.
- Private equity funding is often contingent on fast expansion to realise returns.
This is a huge sector with tens of billions in sales, hundreds of thousands of employees and many businesses that rely on the sector to survive – think food and drink suppliers, construction, marketing businesses and many more.
To highlight some of the issues in the sector, let’s take a closer look at two big name chains: Jamie’s Italian and Byron.
According to an interview in the Financial Times in autumn 2017, Jamie Oliver had to inject £12.7m of his savings to keep the restaurant chain alive. This prompted a CVA, the closure of 12 restaurants and hundreds of redundancies – debts were at a staggering £71.5m. Oliver cites that overexpansion and trying to rush out the model were both key mistakes.
Jamie’s Italian grew fast: in 2003 they had sales of £3m and by 2012 sales had risen to £93m. Profits were £7.7m in 2013, and then performance started to decline – by 2017 profits had nosedived to -£29.2m.
In 2017 six stores were closed; the company was placed into a CVA in February 2018 and closed 12 more stores. Net worth in the latest set of accounts was -£12.5m.
The business is trading insolvent, and unless it is able to turn things around very quickly in a tough market, the future doesn’t look positive. Red Flag Alert currently rates Jamie’s Italian as three red flags – the most precarious financial health rating.
Byron was founded in 2007 by Tom Byng and then sold to private equity firm Hutton Collins Partners in 2013 for a cool £100m. Between 2013 and 2017 the company experienced an aggressive growth in sales from £41m in 2013 to £88m in 2017. This required a large increase in restaurants in prime locations and the business acquired expensive leases for large sites.
In 2018 the chain went through a CVA, which ultimately saw the 19 restaurants closed and five reduced. The latest profits were at -£54m and fixed assets went from £74m to £25m, leaving a net worth of -£41m.
The buyer of part of the Byron CVA was Three Hills Capital Partners; they acquired a majority stake in the hope they can use the strong Byron brand to turn the business around. Red Flag Alert currently lists the business as having one red flag.
What Does the Future Hold?
The casual dining market is looking precarious, and the situations at Jamie’s Italian and Byron aren’t unique – with macro trends like Brexit, higher interest rates and government policies creating a headwind, the restaurants that succeed will need to focus on their value proposition and delivering an exceptional experience to the consumer.
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Red Flag Alert Will Guide You Through Troubled Waters
If you supply a business in the restaurant sector, then using Red Flag Alert will give you a quick and accurate insight into the financial health of the business. Although the sector may be struggling, the financial health of different businesses varies considerably.
If you’re one of the many businesses affected by the performance of the restaurant sector then Red Flag Alert can be a key monitoring tool. We help businesses:
- Make decisions on what credit terms they should offer to different restaurants based on their financial health rating in Red Flag Alert.
- Monitor restaurants and get an early warning if the business is experiencing financial distress.
- Make decisions on which restaurants to approach as part of a new business drive by highlighting those that are the most financially secure.
Red Flag Alert provides detailed information on every restaurant in the UK and gives each one a health rating that is based on the most up-to-date information.
These financial health ratings are derived from detailed algorithms that have been developed over 15 years and are specific to the industry. To add even more depth, credit analysts constantly review our company credit checks and ratings to add additional analysis.
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