Restructuring in the casual dining sector: what does the future hold?
Restructuring in the casual dining sector
What issues are businesses in the sector facing?
What should firms be doing to prepare for the new economy?
2021 will be a reset year for the sector. As the economy re-starts, businesses will face the immediate challenge of meeting the working capital requirements of re-opening. The new government-backed Recovery Loan Scheme may provide a vital lifeline to help them trade back into profitability, however business’ ongoing success will be affected by how well the economy recovers from recession and levels of disposable income among would-be diners. If individuals have less money to spend, then eating out could slip down the priority list. While there is some optimism that trade will return, driven by the vaccine and pent-up demand, location will be important. Sites that have already closed or been sold are predominantly on secondary and tertiary high streets – locations that have also seen a number of businesses in the retail sector close. It is likely that this will, in turn, lead more people to shopping centres, which provide entertainment and dining experiences on top of retail options. Food courts could be a way forward for the sector, as multiple operators can share operating costs like cleaning and maintenance but retain their own proposition. During lockdown, a number of chains have successfully worked out the logistics of offering takeaways and meal kits from dark kitchens. Central kitchens are a good way to reduce costs, and could mean that businesses can reduce the overall kitchen space they need to build into new, future premises, allowing them to serve more covers. However, the question will be whether businesses can retain a dark kitchen and continue to achieve good margins for their business once lockdown ends. This will lead to new opportunities as landlords won’t want to see sites empty, and so may be open to striking deals with far more flexibility and tenant incentives. There will be a lot of sites coming onto the market that are already equipped for use as a restaurant, which will mean lower start-up costs and less risk, bringing down barriers to entry to the market. Pre-COVID, there was a rush of private equity in the sector with rapid expansion plans, which left high streets looking increasingly homogenised. However, this could change – there currently appears to be a consumer shift back to the independents or small chains as diners look for something different. What trends do we anticipate seeing across the sector over the next 12 months and beyond?
How is the supply chain for the sector impacted?What challenges are facing the supply chain? There was a lot of concern over the effect that Brexit would have on the sector’s labour supply. This remains a long-term issue, but so far, due to lockdown, the impact has been muted. Looking at wholesale suppliers, many have had issues with bad debt. They have moved to protect themselves and many larger chains have had to provide guarantees from their lenders or parent companies that their liabilities will be met. Many wholesalers will also have seen large falls in their sale volumes. However, the impact on main suppliers has not been as severe as might have been expected, with businesses able to pivot quickly to adapt. The biggest challenge is trying to predict when activity may resume. Recent announcements of a roadmap out of lockdown have been helpful, although there is a significant proviso attached to the timetable. Every time lockdown forces restaurants to close, all perishable dry and wet stock has to be replaced, resulting in substantial costs and creating further difficulty for the sector. Operators have had forfeiture protection from landlords, who haven’t been able to evict tenants, and some businesses will not have paid rent for more than a year. This has provided some relief. However, the ban on commercial evictions will end in June, which could result in restaurants scaling back to manage the resulting costs, if payment terms can be reached. The government is consulting on how they can support matters post- June, but have stated that no further automatic protection will be granted. Businesses could be in a better position to repay outstanding rent from 2020 if it was established that rent could be repaid gradually over the next two years – ultimately, if repayments are met, businesses won’t be at risk of any action.
Firms should act now to ensure that contingency plans are in place and ready to provide the flexibility necessary to cope with any future national or local lockdowns. If they haven’t already, business leaders should be aiming to reach an agreement with their landlords, so they have a basis on which to continue operations, when they are able to. There is a suite of options available, including a straight rent reduction, a move onto a turnover basis for a set period, or a hybrid of the two. Entrepreneurial landlords may well be happy to consider turnover-based rent, although this will very much depend on tenants’ projected income levels. Firms should also build as much flexibility into their cost base as they can. The ‘10pm curfew’ caused difficulty for a lot of operators as they were unable to serve two sittings. With this in mind, some have sought ‘curfew guarantees’ from their landlords which, in the event a curfew is imposed, would give them immediate rent relief. Even once the vaccine has been fully rolled out, it’s likely that an element of social distancing will persist for some time. Social distancing measures have led to restaurants offering a reduced menu, which has brought its own benefits, including less waste and better margins. With this in mind, careful menu planning will be key to ensure that businesses continue to benefit where they can.
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Percent of order total charged to restaurants by delivery companies 30 Jobs lost across the fine/casual dining industry in 2020 Billion pounds in annual fees paid by UK restaurants to takeaway platforms 30,000
During lockdown, a number of chains have successfully worked out the logistics of offering takeaways and meal kits from dark kitchens. Raj Mittal Restructuring Advisory
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