Business Insolvency Advice and Restaurants

Insolvencies are Growing in the Restaurant Sector

In recent news articles, we have commented on the difficulties that traditional retailers are facing on the high street. This was following the placing of Jaeger into administration in March 2017. We noted that these difficulties were being felt more strongly in Women’s fashion and department stores. Other areas such as jewellers and coffee shops were faring much better. On the face of it, the reasons behind the different experiences of different sectors would seem to be reasonably obvious.

You can’t go to a coffee shop on-line but you can buy clothes on-line. So wouldn’t it be the case, therefore, that the restaurant sector is also doing well? Recent events suggest otherwise, especially in the ‘faster’ end of the restaurant market. After many years of strong growth, the restaurant sector is another one that is facing challenging conditions. This is due to greater competition, rising costs and changing consumer habits. This article looks in a little more detail at the sector and concludes that Business Insolvency Advice taken at an early stage could help.

Some Statistics from the Restaurant Sector

In the last year a number of high profile restaurant chains have struggled. This has kept insolvency practitioners busy with administrations, pre-pack sales and restructurings to save as many jobs as possible. Those under the spotlight have included Ed’s Easy Diner, Garfunkels, Chiquito and Frankie and Benny’s.

These are all well known national names, all with a past record of consistent growth. More local to our Central Birmingham B3 location, was the closure of 3 Jimmy Spices Restaurants in the West Midlands. This happened in mid 2016, with the loss of 100 jobs. The reasons for this closure were: high and increasing overheads and increased competition from ‘cheaper’ competitors.

It is a sobering thought that there might be more to come, with one report suggesting that more than 5,000 restaurant businesses across the country have a 30% or greater chance of insolvency over the next 3 years. So what is causing the problem? Have we fallen out of love with eating out?

Is it the Online Factor?

Yes and no is the answer to this question. In this instance, people are eating at home more, but they are not cooking more. The advance of technology has seen the growth of home delivery, from the likes of Deliveroo. Those restaurants that have not caught up with this trend are missing out. At the same time, the home delivery experience often doesn’t involve the starter, pudding or coffee (normally higher margin items). These are normally only ordered in a restaurant, so this is another area of squeeze. As is often the case, changing consumer behaviour is at the forefront here.

What About Economic Factors?

There are several economic factors that are affecting restaurants:

Firstly, increased competition. More and more restaurants are opening, which often ends up with oversupply, with the inevitable result that more restaurant businesses close. In London, over the past year for example, more than 200 new restaurants opened, with 76 closing already.

Secondly the fall of sterling in recent months has meant that where food and drink is imported, it has become more expensive to do so, pushing up costs. In price sensitive sectors where increased costs cannot be pushed out to consumers, the result works its way through to the bottom line. Reduced profits is the first sign of problems that can lead to cash flow difficulties, creditor pressure and the spectre of insolvency.

Thirdly the National Living Wage. This is the minimum that must be paid to those aged 25 or over, and it increased to £7.50 per hour in April 2017. Restaurants have had to absorb these increased staff costs.

Fourthly, rising rents and business rates. This is particularly an issue in London and the South East, where business rates are likely to increase by 20% or more. In the West Midlands, the seemingly good news that rent increases slowed to 1.9% across 2016, is thought to be more down to a ceiling of affordability being reached, with more businesses simply not being able to cope with the increases.

Inevitably, this cocktail of rising costs and new legislation will lead to more restaurant businesses getting into financial difficulties, needing business insolvency advice.

Our Business Insolvency Advice Can Help

There is no doubt that the pressures noted here will contribute to a growth in financial distress. This will lead to more insolvencies in the restaurant sector. If Insolvency Practitioners, such as us here at Poppleton and Appleby, are called in early enough, we can advise on restructuring to help turn the business around, or propose a CVA to return the business to profitable growth over a 5 year period. In other words, the right kind of Business Insolvency Advice, early enough, could make all the difference.

However, if restructuring or a CVA is not possible, then our aim is to preserve as much of a business – and therefore jobs – as possible. In the case of Ed’s Easy Diner, the administrators were saved the jobs of over 60% of the workforce. This was as a result of a pre-pack sale of more than half of the outlets.

In our experience, the sooner an insolvency expert is approached for Business InsolvencyAdvice (even at the first sign of financial distress), then the more we can do to help. Contact us at our Birmingham B3 headquarters or call us on 0121 200 2962 for a free initial discussion.