Why is the restaurant business under such pressure?

It’s not just your local bistro that is feeling the squeeze either – the celebrity chefs are also under increasing pressure in their day jobs.
Heston Blumenthal’s company which owns his flagship restaurant The Fat Duck and his gastropub The Hind’s Head both in Bray, Berkshire as well as other ventures saw turnover reduced and post-tax losses increase to £1.7m.
A spokesman said: “Our results in the past couple of years have reflected the decline in profitability of some of our restaurants, but we believe that we are now through the bottom of that cycle and are starting to see the impact of our efficiencies.” Rising costs of ingredients, staff wages and the ubiquitous Brexit uncertainty were cited as expedient factors.
Jamie Oliver’s businesses saw a loss of nearly £20m last year and was hours from bankruptcy before the chef injected £13m of his own money as capital into the business. His “Jamie’s Italian” chain closed 12 of their 37 restaurants seeing 600 staff made redundant as a result. The restaurant was eventually rescued via a company voluntary arrangement (CVA) which allowed an orderly closure of the outlets and kept the remaining 25 restaurants and 1,600 staff in employment.
Even Gordon Ramsay is losing his golden touch. Despite managing some of the most prestigious restaurants in the country such as Petrus and The Savoy Grill, his company reported a pre-tax loss of £3.8m
Specialist research found that as well as an increase in the number of restaurants actually entering insolvency, a further 20% were at risk of going under.
Research author Jeremy Willmont said: “The restaurant sector is one of the most competitive for a business to survive in at the best of times and current market conditions make it even tougher.
“The increase in the number of insolvencies in the last year is indicative of how difficult the market conditions are now. Finances can be uncertain in the restaurant sector, but this is beyond the norm. In such a competitive market, restaurants need to be wary of building up losses and debt now in the hope of future profits, as the industry looks to be facing a prolonged period of tough trading conditions.”
There are always fluctuations in any business over the year as well as slow and busy periods so there is always the potential for rapid improvements to occur, especially if the business can restructure itself in a CVA.

Sous vide with hay and a CVA?

A CVA is an agreement between the restaurant and its creditors that allows the company to keep trading instead of closing and repaying debts according to an agreed payment plan. The alternatives would be administration or liquidation which would result in the business shutting down.
A CVA also lets a business restructure certain parts of it with creditor’s approval. The company has an opportunity to manage cash flow more efficiently, seek additional funding, re-negotiate payments and contractual terms with other creditors, such as rent. These methods will bring in revenue which will improve the chances of the business’ survival.
If the restaurant can become more efficient and profitable and stick to the terms of the CVA then there’s no reason why they can’t be profitable again.
One of the problems a lot of the chain restaurants ran into is that they were seen as a sound investment by hedge funds and other investors who supplied the money and allowed the chains such as Jamie’s Italian, Prezzo and Carluccios to scale up.
The strategy depends on opening a number of branches to build brand awareness and turnover as well as other advantages such as better buying and bargaining power that you get from economies of scale. Customers also prefer knowing exactly what dining experience they will get, which they will in a Pizza Express or Angus SteakHouse for example.  

What’s the endgame?

 Once the restaurant chain achieves a large enough profitability and profile then the aim is usually to sell it on for profit.
In the expansion phase, everything is generally fine but when trading conditions change – as has happened to all restaurants with increased costs and additionally for chains the markets becoming saturated with similar restaurants – then failures become inevitable.
If your restaurant or bar is having difficulty, don’t pull the shutters just yet.
Our experienced team of business recovery experts are on hand with a menu of choices  depending on your circumstances that could help save your bacon. Contact us today for a free initial chat and take the first steps to turning things around and keeping the kitchen open for orders.