'Cost-cutting, failures, and eventually, recovery'

Once upon a time, in a world free of economically-crippling pandemics, the British casual dining sector was at a crossroads. 

Companies weren't hunky dory before the virus came along: Overexpansion, growing disregard for the customer experience in tandem with rising costs willingly passed on to diners, all contributed to the demise of Jamie's Italian, and saw Byron, Strada, Giraffe and Carluccio's calling in administrators.

But this year, it's been one CVA after the other: first it was Chilango (which, incidentally, called in administrators in July and was bought out of administration at the end of August), The Restaurant Group, Yo!, Pizza Express, Wasabi, and Itsu (pending approval). 

And despite best attempts to restructure, refinance and write off debts, many CVAs in the past five years have resulted in companies going into administration - meaning many are likely delaying the inevitable.

High Streets were suffering before Coronavirus, and now face the complete desolation of city centres and a radical shift in eating-out habits.

Which of the chains will see the crisis through, and which will defy the odds and prosper? What effect will this have on other hospitality businesses?

The problem with casual dining: VC money doesn't always cut it 

"The casual dining market - everybody rushed into it," explained David Read, former ops and purchasing director at Forte Hotels and founder supply chain consultancy firm Prestige Purchasing.

"After the financial crisis, there was quite a lot of private equity capital floating around and quite a lot of what you would call the 'core' casual dining guys who had between eight and 15 sites. So the PE guys said: 'well, you should have 100 sites, and we'll back you to grow to that scale.'" 

What ensued were what David describes as "a lot of poor property decisions," both in terms of location and rent paid.

"Which in times when the market wasn't booming," he continued, which it was throughout the 2010s, before flattening off in the past three to four years, "that left a lot of people in trouble." 

With or without Covid, Michael Gottlieb, industry pundit, Chairman Emeritus of the Restaurant Association of Great Britain, founder of Smollensky’s, Cafe Spice Namaste and current non-executive Chairman of various small restaurant groups, said that "there was bound to be a fallout" eventually, as the industry was oversupplied with restaurants.

How that was going to happen is harder to say. "It would have taken a recession to cause that kind of fallout," he said. 

Deploring the liberalisation of councils, allowing many premises to become restaurants, he explained, had investors smacking their lips. 

Under a certain size, he said, "you didn't even need planning permission or hygiene tests to open. It was a crazy, crazy time. 

"The casual sector - and by that I mean chains - they're built up by an entrepreneur, the entrepreneur gets a certain number of sites, and they either need to cash in or management help, then they go to venture capital, VC comes in. 

"As you can see with most of them, they're not operators, and consequently, their prime focus is exit. 

"To come into a business with exit in mind is great - but it doesn't always work," he said. 

Then, if things go slightly awry or amiss, one of two things happen: Expansion, volume, and scale, to gain traction for a sale, he explained, "and then they start cutting costs."

"Eventually, the consumer begins to notice. Yes, it's convenient, there's one by my house, there's one where I go to the office or when I go to the shop - and at some point they get annoyed with it."

"It just takes time for people to notice that they're being sold something that is not real," he added.

It is possible for casual dining to thrive?

Businesses like Côte, however, Michael explained, have managed to flourish in an identical environment, by taking a different approach: "They're the only one that do what they do consistently well and have not moved from the model they opened with.

Running such a tight ship isn't afforded to everyone, to do what founder Andy Bassadone does, "it takes a certain type of individual - and they are extremely rare." 

"Yeah there are a few shortcuts here and there, but to do that requires a huge amount of genius. 

Another example of a casual dining chain set to thrive was given to me by David - Loungers. 

Admitting that the company is a client of Prestige, he said he was unashamed to sing its praises. 

The fastest growing chain of "they call themselves pubs, but they're not really pubs" Loungers individually names and designs each of its outlets to suit. 

"Everybody thinks it's a local business," David explained. "It's actually a huge chain and a very successful chain," whose success is multi-faceted. 

"Right at the top of the pile is consistency of delivery. It's a basic threshold for casual dining restaurants to be successful." 

Another criteria, he explained, is what's known in the industry as 'net promoter score.' "They all measure it now," he said. "They know what customer satisfaction looks like." 

But what is ingenious about Loungers, he explained, "what makes them profitable is that they manage to sweat the asset better than anyone else in the market." 

"You've got a vacant space, you're trying to make the most out of it. If you could operate it 24/7 profitably you could make more money." 

"It's rare that you can have a restaurant that will open at 3am and make money," he continued, "but they're open for breakfast, lunch, dinner and "manage to pick up trade in between." 

Which businesses are in big trouble?

At the other end of the scale, he said, "there are quite a lot of companies now who are short of cash." 

"They were probably already short of cash pre-pandemic and the reality is that if you're short of cash, it's difficult to innovate, it's difficult to invest, and all of these things at a moment like this, are critical." 

"The people who will succeed are the people who've got enough money to refurbish sites, to remodel sites, to fit a delivery model without it impacting their internal space."

Businesses, he said, who have the capacity to do what Pizza Pilgrims and other establishments from fast-food all the way to fine dining did - that is to take on a production facility to put their pizza in the post without it needing to be done in restaurant kitchens.

"All those things require cash," he said.

"The people that are going to struggle are the people who have got weak balance sheets. You'll see them. You only have to whizz through the last six months."

Not pointing the finger at companies which have filed for CVAs, he continued: “It’s actually the operators that haven’t restructured in any way that I would be concerned about. Some will have enough cash to weather the storm, but others will be trying to trade out of the crisis with insufficient cash.”

What's to come for the casual dining sector? 

"More failure, I'm afraid," Michael said. 

"There'll be mass further closures of big groups. Retrenchment - they're not going to go away necessarily but they're be closing half their sites," adding that "it'll be a long time before we see the proliferation on the scale that we've seen before - with very few exceptions." 

"There are certain good things that are happening because of Covid - Itsu, Pret a Manger, those are suffering because of Covid. Many of them are going into voluntary administration, but they'll come back and those good operators will continue to operate. 

But whatever happens, Britons appetite for chains will ensure that the sector lives on. 

"The casual dining sector is always going to be there," Michael said. "They've got smart people running some of them and they will learn some lessons and it will get better for sure. It has to get better, no question."

Will any good come out of this?

Whatever happens to the casual dining sector, it is likely that we will be looking at a radically different hospitality sector a year from now.

Brightening my spirits, Michael told me that he believes one of the collateral effects of thousands of job losses, is "that you will have a whole bunch of industry people - chefs, particularly, who are dumped onto the street, effectively, without jobs, without much prospect. 

"There'll be those that are good who are going to say: 'well listen. I can now get in and get my own place, in a way that I was never able to afford before' and I think that there's going to be a tremendous rise of independents. That's what I'm hoping for.

"Everybody says forest fires are terrible and usually they are; they kill wildlife and so on. But they grow back and they grow back stronger. And I'm hoping that's what's going to happen with our industry."