Restaurant closures: Bad luck or bad management?

Chains blame hikes in business rates and the minimum wage.

by Stephen Jones
Last Updated: 12 Mar 2018

If we are to believe the headlines, restaurants are dying.

The Casual Dining Group (owners of the Café Rouge, Bella Italia and Strada brands) have posted a £60 million loss across 2017 and in the space of a few weeks, Byron, Prezzo and Jamie’s Italian have announced store closures; the latter two as part of  compulsory voluntary agreements. The Association of Licensed Multiple Retailers (ALMR) estimates that 200 restaurants and 6,000 jobs have been lost this year alone.

The introduction of the National Living Wage in 2016, hikes in business rates and devaluation of the pound following the Brexit referendum have combined to wipe out profit margins sectorwide. Throw this on a plate with changing consumer trends and you've quite literally got a recipe for disaster.

‘Operators have had their business plans turned on their head over the last 18 months through changes introduced by government with very little notice’ says Kate Nicholls, chief executive of the ALMR.

Leon's John Vincent wasn't so diplomatic, he told MT that the increased costs have halved the average restaurant's profit margain to 10%. Once overheads are removed this essentially leaves them with nothing.

'The government has killed the restaurant industry... they haven't got a clue' he says.

An unhealthy appetite for expansion

But surely bosses should have been prepared to adapt to changes such as these? After all, conditions do change, and forward planning and risk management are crucials part of running and growing a business. 

'Undoubtedly some operators will have been better placed than others to have the head room to manage the squeeze on margins, but some have been overstretched,' explains Nicholls.

Over the past couple of years many branded chains have invested heavily into retail parks and shopping centres, many of which turned out to be in poor locations. The landlords in turn have seen casual dining as a replacement to the retailers that are retreating to digital platforms.

This has led to overcapacity, with many of the bigger chains now paying rents that they can't afford, on restaurants in overcrowded locations.

Usually there would be an element of market correction - indeed overcapacity is nothing new, especially in the restaurant industry. The problem here has been the fact that the rapid overexpansion has coincided with the rapid rise in costs coming from regulatory changes. 

‘This is exposing the business models basically’ says Peter Backman, a food service analyst and industry commentator.

Can the industry stomach it?

It's not all doom and gloom. Challenging conditions don’t mean that everyone is suffering and where some are falling, others are growing.

The Azzurri Group, the owners of the Ask Italian and Zizzi brands, is continuing to expand its portfolio. Wagamama is soaring and Nando’s simple offering of cheeky chicken has allowed it to thrive. 

‘Customers are still spending’ says Ross Kirton, head of UK leisure and agency at Colliers International ‘but fast casual dining is what they want. The brands that are succeeding offer the customer something different.’

If anything, the toxic cocktail of market changes and growing costs has helped to wash the grit from the salad, as it were. In this competitive industry, it's survival of the fittest. Those that fail to adapt will starve.

Image credit: Ppictures/Shutterstock


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