What owners and directors need to know

In 2018, restaurant administration and insolvencies jumped by 20%, from 825 in 2017 to 984 in the first 6 months. Today, as many as 1 in five restaurants are exhibiting signs of financial crisis. In the last year alone, the restaurant industry has accounted for the fourth highest number of companies entering insolvency procedures, and the latest news suggest there’s no rescue on the horizon.

The latest 2018 insolvency reports tell a similar story. While the underlying number of insolvencies as a whole may have decreased from QI in 2018, they are still on the up from Q2 in 2017. So, what’s happening in the industry to mark this downturn in trade?

Restaurants in crisis

2018 has proved a bad year for many UK companies, with the likes of Carillion and Toys R Us seeking insolvency advice and closing their doors. The retail and construction industries may be most in need of business recovery, but the restaurant trade is also showing some negative effects.

The damage started as soon as January, with Jamie Oliver’s, Jamie’s Italian announcing that it was to close 12 sites with the loss of 450 jobs. Byron Burger, once favoured by many celebrities, followed suit in January when it entered into a company voluntary arrangement (CVA).

The dining chain closed 19 restaurants and successfully slashed the rent on five underperforming outlets. They also obtained £34.5 million in new investment, with £25 million used to pay debts. However, the CVA hasn’t proved fruitful, with profits continuing to fall and its future in jeopardy.

Italian eatery chain, Prezzo, took insolvency advice and successfully negotiated a company voluntary arrangement in early March, with the aim to shut down their most unprofitable stores. Over 100 stores will close in what is said to be a very bleak time for the high street.

Carluccio’s are also recent victims of the restaurant trade, outlining their costs for the CVA in their 2017 accounts before it was approved in May 2018. The cost of the CVA added a staggering £22.3 million, pushing the chain to a pre-tax loss of £27.7 million. The brand is now in the process of closing their unprofitable stores while attempting to turn the business around.

Other casualties include Gaucho, which entered administration in July 2018 putting 1,500 jobs at risk. Similarly, in the last 12 months, Handmade Burger Co. closed nine of its 20 sites as they fell into company administration. Overall, some have described the closure rates over the past several years as worse than that during the recession.

What is eating the restaurant trade?

The restaurant administrations and liquidations can be attributed to a number of factors. Jamie Oliver, owner of Jamie’s Italian, suggested higher employment costs caused many problems for his business.

In April 2018, the national minimum wage rose to £7.83, up from £7.50, for staff aged 25 and over. In addition to the increase in living wage, the price of food has gone up in many cases. When paired with consumers spending more cautiously, it’s a recipe for disaster.

Is it Brexit’s fault?

Uncertainty surrounding the Brexit deal is certainly cause for concern in the industry. The fall in value of the pound and the rising costs of ingredients has only caused trouble for the sector.

For instance, Jamie Oliver also stated that the rising price of his ingredients – imported from Italy – contributed to the company cash flow issues. Likewise, EU citizens make up for a quarter of the three million workers in the hospitality industry. Restaurants are now struggling to find staff because of Brexit, which could be contributing to a crisis for the fourth-biggest employer in Britain.

To add to the Brexit woes, consumer confidence has steadily fallen since 2017, and many people are no longer loyal to restaurants. Similarly, the likes of Just Eat and Deliveroo have proved a double-edged sword for the sector as a whole. They have been successful in that they have expanded the customer base for many eateries. However, deliveries also puts pressure on the restaurants to employ enough staff to cover all orders.

How can a restaurant survive?

It may not be the end of the traditional restaurant just yet, as long as eateries begin to adapt to changes in the marketplace. Restaurants need a strong online presence in the digital era, in an attempt to appeal to customers.

Another option for business development is to work on and  adapt the experience you create for your customers. Consumer habits are changing and, to avoid company insolvency, restaurants must be able to provide memorable experiences. For instance, people may want to dine out and enjoy live music as the same time.

If your brand can keep the finger on the pulse of changing consumer habits and what the customer truly wants, it’ll likely thrive.

If however, you are suffering cash flow issues and are looking for help and suggestions regarding business recovery, our BusinessRescueExperts will be pleased to discuss your individual requirements to find the best solution moving forward for your company.