by GK Strategy 29th January, 2019
3 min read

Casual Dining and Private Equity Investment

According to a recent report published by the Centre for Retail Research, a staggering 10,000 workers in Britain’s casual dining market lost their jobs during 2018. This shocking statistic comes even though, since 2010, the casual dining market has experienced huge growth, with a 16% increase in the number of restaurants, according to real estate adviser Altus.

In more recent years, private equity has taken advantage of this growth. Cinven is a key example. The private equity firm has sold restaurants including Pizza Express, Zizzi, and Byron Hamburgers  to other private equity firms for £1.3bn collectively – a total return of 2.4x their original investment

However, despite some success for private equity within the casual dining market, overall the sector is struggling, as evidenced by the steep job losses. The causes behind these job losses include stagnating sales and rising costs, such as an increase in the minimum wage and higher food costs. These issues have been exacerbated by a weaker pound following the vote to leave the EU. Brexit also causes worries regarding the recruitment of staff, as many chain restaurants currently have a high proportion of EU nationals as employees.

There has also been an increase in property taxes for restaurants paid via business rates in England and Wales rising by 23% since 2017 to £564.7m for the 2018 financial year, as reported by Altus. Since these higher charges came into force, there have been a string of well-known high street chains entering administration or credit agreements, including Jamie’s Italian, Carluccio’s, Gaucho and Gourmet Burger Kitchen. A report from the Government’s own Insolvency Service found that a total of 984 restaurants across the UK fell into administration in 2017, an increase of 20% on the previous year’s numbers.

The gloomy outlook has been reflected not only in a lack of growth for private equity-backed restaurant chains, but also in the appetite (or apparent lack of) for private equity to invest further in the casual dining market. Byron, one of the investments successfully exited by Cinven, is one of the highest-profile examples of this; the company’s current backer, Hutton Collins, has reportedly struggled to find a new buyer in recent months.

The Government have attempted to ease pressure for the market, announcing in the Autumn Budget 2018 that, from April 2019, restaurants with a rateable value of less than £51,000 will have their business rates cut by a third over the next two years. Despite this, the Centre for Retail Research has forecast that a further 10, 950 jobs will be lost across the casual dining market in 2019, with independents, rather than chains, now being hit the hardest. The Centre’s director Professor Joshua Bamfield explained that ‘Many of the large chains have already made cuts and, in 2019, we expect the smaller and independent restaurants to bear the weight of the losses’.

For private equity invested in the casual dining market, the preferred approach now may be to batten down the hatches – it is improbable that many would be willing to take on the current challenge of the UK’s stagnating high street chains.

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