Restaurant chains continue to suffer
Not so lovely jubbly
Restaurant chains continue to suffer in today’s economic climate-a sector that often leads the way in a full blown recession.
Jamie Oliver’s Italian restaurant chain has recently had to report that it is suffering cash-flow problems. In the last 12 months it is understood that the 60 strong chain lost £9.9m and has been propped up by a short term loan from its parent company. That loss equates to each trading unit losing over £3,000 per week, every week of the year. Well Jamie has called in the beancounters to devise a “cashflow management plan” which will no doubt see a number of closures and potential job losses. At the beginning of this year, the chain closed 6 outlets, but the 120 staff that were affected were offered jobs with the rest of the group. At the time, the then Chief Executive [recently departed for challenges new] stated “….this is a tough market and post-Brexit the pressures and unknowns have made it even harder”. Really? All those diners going into [or not going into] the restaurants unable to eat due to the internal angst and depression caused by the UK voting to leave the EU in June 2016? As one commentator rather cruelly put it “Banality not Brexit” was to blame for the closures of the restaurants.
Well, Brexit may well have a part to play, particularly as we get closer to March 2019, but in reality, there are many factors at play when considering why the restaurant sector is experiencing problems and Brexit will be just one element amongst many.
So what challenges does the sector face? The following list is not exhaustive:
Wages – restaurants are a labour intensive business and wages should account for between 25-35% of turnover in the ones that are making a profit. The national minimum wage for over 25s is now at £7.50 per hour and the national hourly living wage which is paid voluntarily by more than 3,600 employers is £10.20 in London and £8.75 in the rest of the UK. Wages account for between 25-35% of revenue and given the current inflation rate, wage pressure will remain strong
Ingredients – food and drink often makes up a third of total costs and clearly sterling’s weakness and reliance upon imports from the EU to add authenticity to your Italian or French themed chain is certainly going to affect the bottom line
Rent/Rates – occupancy costs should not really exceed 10% of turnover, but recent rates’ revaluations are hitting restaurants hard in London [average rate rise over 14% per annum] and in large towns in the South East where restaurants in some towns are seeing average rate rises of over 20% per annum
Competition/Overexpansion – there are just too many of the damn things! Bookies, Coffee Shops, Restaurant Chains, Phone Shops- is your High Street inundated with them? The prevailing wisdom seems to be “grow quickly, grow big, stifle the competition” and he with the deepest pockets will prevail in the long-term. Once the chains have consumed the independents, they then need to feed upon themselves
Changing consumer habits – why go out to eat, when you might have to turn your smartphone off? Keep your smartphone on and order on-line with delivery to your front door. Better still, there is no need to change out of your onesie. Add to the modern day mix the fact that alcohol is so much cheaper when purchased from your supermarket [in 2016, for the first time, supermarkets sold more booze than pubs] and you can appreciate why restaurants and public houses are finding things tough
According to Jamie’s former Chief Executive, each of the restaurants required “……an average of 3,000 covers every week to be sustainable”. I suspect that most of the other chains require a similar number of covers to be profitable. Achievable numbers, outside of London or the other major cities? I suggest you keep an eye on your local High Street over the coming months-I doubt you will see many new restaurants-I rather believe that you will see some old favourites pulling down the shutters for the last time.
Now, where can I get myself some pukka tukka?