A gloomy tipping point looms this weekend for the battered UK restaurant sector when quarterly commercial rents are due for thousands of businesses already facing “significant” financial distress.
The number of restaurants in serious financial difficulties jumped 8 per cent to 11,091 this month compared with 10,228 at the same stage of 2017, and ahead of “Quarter Day” on 25 March, warned yesterday’s latest Red Flag Alert report from business advisory group Begbies Traynor.
The report said the rent day was the culmination of a “perfect storm” hitting the £5.9 billion sector.
It follows several recent rescue deals being struck to save chains across the industry, with a number of high-profile company voluntary arrangements (CVAs) including celebrity chef Jamie Oliver’s Jamie’s Italian, upmarket burger bar Byron and another being voted on this week for Prezzo.
CVAs are often used by businesses to close unprofitable outlets, lay off staff and secure substantial rent reductions from landlords to avert the potential collapse of the firms.
Begbies Traynor warned that, with thousands of restaurants teetering on the brink from soaring costs and weak consumer spending in the past two years, the rent bills for the next three months due this weekend could tip them over into the red.
Julie Palmer, a partner at Begbies Traynor, said: “The UK restaurant sector is facing a perfect storm of pressures ahead of this week’s quarterly rent day, with growing labour costs from the National Living Wage, subdued consumer spending and fierce competition from established high street chains, coming together to cause a spike in financial distress across the industry.”
She added: “Unfortunately for those restaurateurs experiencing both declining sales and rising costs, the upcoming quarterly rents payment this weekend could be too big a financial hit for many to swallow.”
Palmer said that in a vicious circle consumers were being “increasingly cautious” in spending their disposable income, placing even more pressure on restaurants to offer price-saving promotions which squeezed their profit margins.
Begbies said latest data showed weakening sales at UK restaurants over the 18 months to December 2017, triggering “an over-dependence on promotional offers to drive footfall”.
City food analysts said a similar phenomenon had been seen in the supermarket industry, where the incursions of discounters Aldi and Lidl had seen a price-cutting war taking in the “big four” food retailers plus Waitrose and Marks & Spencer to preserve market share at the expense of margins.
Through algorithms, Red Flag Alert measures corporate distress signals, drawing on factual legal and financial data covering all business sectors, and analysing key financial ratios and indicators such as working capital.