Casual Dining
Unsurprisingly, the Casual Dining sector in the United Kingdom has been amongst the worst impacted by Covid-19 lockdowns and subsequent social distancing rules, with c.£220m of revenue lost every day from April 2020 to March 2021 in the UK. The impact has not been felt equally across the sector, with sub-sectors and geographies feeling the impacts differently.
- Those with attractive and well-developed takeaway/delivery options at the outset of the pandemic were able to pivot to a takeaway model more rapidly than their peers. However, takeaway sales only account for a fraction of sales and even operators who significantly grew their takeaway sales were unable to completely replace dine-in sales, while also paying substantial commission to food delivery platforms (e.g. Uber Eats and Just Eat).
- As lockdown measures ease and vaccine rollouts continues, operators have seen positive signs of recovery to trading performance as they re-open, however demand remains difficult to predict. Following social distancing measures easing, it is evident that consumers are eager to return to venues following a long period of closure and harsh restrictions, with increased capacity creating a positive boost for operators. It is yet to be seen whether this recovery is a result of pent up demand, or a return to “normal” sustainable trade which will allow businesses to address significant liabilities built up over the course of the pandemic.
- Despite pent up demand for consumers returning to venues, operators will need to continually reassure consumers of safety measures in place, as consumer demand following the pandemic remains fragile. Business will need to adapt to the new way of operating with increased hygiene standards to evolving technology (i.e. menus on apps / via QR codes, online booking systems etc.) to ensure future viability, which poses a significant operational and financial challenge for many operators.
- During a period of closures/significantly reduced demand, global supply chains reacted by winding down and have struggled to meet surging demand as economies reopen. As a result, there have been food shortages and price increases. Strong consumer demand during initial phases of reopening has meant operators have been able to pass on these price increases. It is unclear how long consumers will accept increases before seeking out better value offerings which would signal a return to competitive pre-pandemic pricing pressures.
- The sector continues to be impacted by staff shortages, with operators being forced to adjust opening hours or close all together. Staff shortages are also forcing wages up as operators seek staff in a competitive labour market, placing further pressure on a sector with traditionally thin margins.
- As the sector has slowly re-opened, city centre locations that are highly dependent on workers returning to offices or international tourists have experienced subdued demand, with residential areas and locations popular with domestic tourists seeing a faster return to pre-pandemic levels of trade.
- Operators with a mix of indoor and outdoor spaces have typically traded favourably as a result of government restrictions on indoor trade and some consumers continuing to be wary of non-essential social contact, especially in enclosed indoor settings.
- Despite the challenges to the sector, the pandemic has reminded consumers of the importance of supporting local venues and the positive impact that socialising has on mental health, providing hope for a recovery in the medium term.
Sector Expertise
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There are a number of challenges faced by the casual dining and wider hospitality industry in the UK, for operators and throughout the supply chain. In the short term, operators are being partially protected from many of these issues by Government support, although there are longer-term trends that will impact staffing and consumer behaviour. Increasing levels of distress are expected throughout the sector in 2022.
Tapering of Government support
Business rates
The 100% retail discount for business rates came to an end at the start of July 2021, with a 66% discount applying for the rest of the tax year. The reintroduction of rates, which form a significant proportion of the fixed cost base, will apply further pressure on businesses at a time where they are still trading below pre-pandemic levels.
Rent arrears and moratorium
The moratorium on statutory demands and winding up petitions ends on 25 March 2022 and the UK Government has introduced legislation to allow rent arrears to be subject to arbitration from 21 March 2020 to the last date restrictions ended, however there is still a great deal of uncertainty as to how this will be applied in practice.
VAT
After a reduction in the rate of VAT to 5% to aid businesses and stimulate demand, the VAT rate will increase to 12.5% in October 2021 and return to 20% from April 2022. While operators may face downward price pressure, this will likely be offset by surging consumer demand in the short term.
Staffing constraints
Lack of EU workers
The combination of Brexit and lockdowns has led to an exodus of EU workers from the UK, either to spend lockdowns with family or to leave the UK permanently. This is especially prevalent in London where the proportion of EU workers is higher.
Perceptions of the industry
There is a misconception amongst the UK population that working in hospitality equates to a low-paid and low-skilled job with few career development opportunities. This is leading to fewer school leavers entering the industry, choosing to remain in education instead.
Reassessing priorities
With lockdown leading many people to reassess their priorities, work-life balance and health, a number of workers are leaving the industry entirely due to increasing uncertainty of work and a desire to move away from what can be a faster-paced and stressful environment for relatively little compensation.
Furlough
Levels of furloughed staff remain relatively high despite the number of vacancies, with some workers reluctant to return to work for myriad reasons.
Longer-term trends
Additional impact of Brexit
The true impact of Brexit on the sector remains to be seen, with delays throughout the supply chain leading to increased costs for operators.
Changing consumer trends
Covid-19 has changed the way that consumers think about where they eat and what they eat, and operators will need to be aware of these dynamics when it comes to technology investment, delivery service offerings, menu planning and location planning.
Case Studies
SWDP and Solvency Review
Teneo was initially engaged to deliver a CVA and subsequent restructuring plan for Pizza Express, a £400m revenue restaurant chain, with 350 sites globally. With the business facing significant periods of heavily restricted income due to lockdown measures as a result of Covid-19, the new management team re-engaged Teneo to improve its end-to-end cash culture within the business.
We assessed the company’s existing business model, processes, data inventory and re-engineered the cash flow tool to automate processes and improve robustness. We identified a ‘cash tsar’ and provided coaching across the business to instill a cash culture. We mapped all sources of cash inflows/outflows, and for each developed a hypothesis to identify potential cash savings. We also provided financial and strategic communications advice throughout the restructuring.
Teneo worked side by side with management and instilled a long-lasting cash flow culture at the company. Our work directly identified £20m of cash flow savings.
Restructuring Support Project Acacia
We were initially engaged by the company to assess its restaurant portfolio and prepare a CVA feasibility and alternative options assessment following significant disruption to the business as a result of Covid-19. Following completion of the assessment, it was determined that a CVA was most appropriate for the company.
Subsequently we supported management in the preparation of a CVA proposal which right sized the estate and aided returning the business to financial viability to avoid an insolvent administration of the company. The CVA was approved by a majority of creditors on 1 September 2020.
Bank & EMI Wind Down
The business had suffered increasing losses driven by the wider pressures facing the casual dining sector. This was exacerbated by Covid-19, with restaurant closures during national and local lockdowns severely impacting liquidity.
We were initially engaged by the directors to complete an options review and were subsequently engaged to launch an Accelerated M&A (AMA) process to seek a buyer for the part of the business which operated the premium casual dining brands ‘Piccolino’ and ‘Restaurant Bar and Grill’, with 28 restaurants nationwide and c.1,300 employees.
The AMA concluded with a pre-pack sale of the relevant business and assets, which resulted in the continued operations of all the restaurants and all employees transferred to the purchaser under TUPE.
