One in three of UK’s top 100 restaurant groups are lossmaking – study

One in three of the UK’s top 100 restaurant groups are lossmaking, a rise of 75% in the past year as the casual dining crunch continues with little respite in sight, according to a study.

A combination of higher staff costs, rising business rates and falling consumer confidence have conspired to slash profit margins and force high street closures.

The accountancy group UHY Hacker Young, which conducted the study, said oversaturation in the market was also a significant factor.

The mid-market chains Jamie’s Italian, Prezzo and Strada are among the restaurants to have announced recent closures.

Peter Kubik, a partner at UHY Hacker Young, said: “More than a third of the biggest companies in the restaurant sector are losing money, and there is little respite on the horizon.

“Pressures on the restaurant sector have been building for years, and the last year has pushed a number of major groups to breaking point. With Brexit hanging over consumers like a dark cloud, restaurants can’t expect a bailout from a surge in discretionary spending.

“Consumers only have a finite amount of spending power when it comes to eating out, and the oversaturation of the market means that groups that fall foul of changing trends can very easily fail.

“The government has ratcheted up costs with a series of above-inflation rises in the minimum wage and we are just weeks away from another 4.4% rise in April. That will be tough for a lot of restaurants to absorb.”

Many mid-market chains face challenges. The Italian restaurant chain Prezzo last week announced plans to close about a third of its outlets – 94 restaurants including all 33 in its Tex-Mex chain Chimichanga – in an attempt to rescue the business. The chain, owned by the private equity firm TPG Capital, employs about 4,500 people.

Quick guide

What’s eating the restaurant trade?

Higher costs

Business rates and wages are up, as is the cost of imported food. Wages are up partly because of the rise in the legal minimum but also because finding workers is more tricky. High employment means there are less Brits available while the Brexit vote is putting off some EU workers who are already less keen because of the lower value of the pound.

The rise of delivery

Deliveroo, UberEats and Just Eat are driving a rise in demand for home delivery, cutting the number of customers eating out.

Over-expansion

Until 2015/16, dining out was growing strongly. Private equity firms helped mid-market chains expand, which increased competition just as the market was feeling the squeeze.

Spending shifts

Takeaway breakfasts and lunches are also diverting money away from sit-down restaurants.

Photograph: Kristin Lee/Tetra images RF

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Earlier this year the Jamie Oliver Restaurant Group announced it was shutting 12 of its 37 remaining Jamie’s Italian restaurants, affecting at least 200 jobs – after having closed six outlets the previous year. Oliver’s Barbecoa steakhouses went into administration last month.

Also in January, the burger chain Byron agreed a rescue plan that could lead to the closure of up to 20 restaurants, the Italian chain Strada announced plans to close 10 sites and Square Pie, the gourmet pie and mash chain, went into administration.

Rising food costs, exacerbated by a weaker pound following the EU referendum, and increased competition from supermarkets were also possible factors.

In a recent report, the business consultancy Deloitte said that although casual dining operators faced challenging times ahead, changes in consumer tastes and the way diners engaged with restaurants, particularly through technology, could provide opportunities for growth.

Key consumer trends included more healthy eating, informal and experiential dining and increased consumer focus on food provenance and sustainability, it said.

The casual dining crunch: why are Jamie’s Italian, Strada, Byron (and the rest) all struggling?

Read more

Customers wanted to dine on their terms, and it was essential restaurateurs optimised “location” and “occasion”, the report said. It noted home delivery in Britain was growing 10 times faster than the total eating-out market.

Stefan Chomka, editor of Restaurant magazine, said the huge growth in the casual dining market has led to too many restaurants at the same time as food costs, staff costs, rents and business rates have all gone up.

“If you’re operating 100 sites, your margins are being squeezed and squeezed. And times are tough,” he told the Guardian last month. “Even if they spend a little more when they do, people are eating out less often. So there are greater costs, more competition, fewer people and, consequently, the shit is hitting the fan.”

It is not just mid-market chains that are likely to be affected by the rise of the national living wage by 33p an hour to £7.83 from 1 April, and other factors. This week bosses at Heston Blumenthal’s celebrated Fat Duck, the three Michelin-starred eatery in Bray, Berkshire, where diners expect to pay upwards of £325 a head, acknowledged the potential impact on profit margins.

The restaurant’s director, Peter Moody, told the Mail on Sunday: “We are aware of the threat to the company’s future profitability that is posed by current global uncertainty, national living wage increases and supplier price inflation.”