Needs must

We get told a lot that the sector is facing operating in the “new norm”. That operators should somehow have got used to a market that continues to throw up an almost weekly new challenge. Costs continue to rise and uncertainty, whether that be political or consumer, grows.

According to the 2018 UKHospitality Christie & Co Benchmarking Report, controllable costs have risen to an average of 52.5% of turnover, the highest in the twelve-year history of the report. Payroll costs, the single largest cost for eating and drinking-out businesses, now stand at 29.4% of turnover, an increase of 1.5 percentage points in 12 months. The report also shows a real term shrinking of like-for-like sales that have risen 1.1%, below inflation. Margins for food sales remain flat while margins for drinks sales have declined since last year. Sobering reading for eating and drinking-out businesses.

This new norm also includes the ever-present shadow now of the business restructure, the “considering our strategic options”, and of course the Company Voluntary Arrangement (CVA). I have written before about how worrying these phrases can be when attached to a business, almost becoming a self-fulfilling prophecy. EAT found itself in this situation at the end of last year, with reports writing the business off, before the Andrew Walker-led company had been able to get its restructuring plans in place. In the end, and after constant dialogue, the business was able to come to an agreement with its landlords and backers to place it on a firmer footing. Yes, there were some closures - 10% of its then c105-strong estate - but not the swathe of shuttered sites envisaged. It was proactive.

The Steve Richards-led CDG is following suit. It has previous on being proactive in the face of changing market place, being the first in the sector to undergo a CVA process back in 2014. Over the past two years it has closed some restaurants and converted others, whilst refocusing on expanding its concessions and franchise arm. Earlier this year, it arranged a debt-for-equity swap with its lenders, KKR and Pemberton Asset Management, in an attempt to slash its interest bill. The lenders injected £30m. The group is understood to have had a strong last trading quarter, coming off a year when like-for-like sale were up 2.2%, but with the punches (costs) still coming, it has recognised the need to not standstill and where more work is needed.

A spokesperson for the c300-strong business said: “Like many other businesses we are facing a tough operating environment, and are focused on reducing costs where possible. A small number of our sites are loss-making due to high rents and rates, and we are taking action to ensure the core business is in good shape for future growth. Talking to landlords is commonplace and good business practice.”

In this regard, it is being proactive with one of the key headaches of its business – high or outsized rents, in order to protect its core business. Of course, the mere mention of advisers being appointed, in this case Alvarez & Marsal, immediately pricks up ears of rivals and journalists, sniffing something more juicy.

In this case, however, I get the feeling it is case of CDG knowing how serious and complex an issue it is addressing and wanting to show that to its landlords. Is it the first company to have taken this approach? No, I think others have quietly taken or are taking a similar approach. Well it be the last? Again, no, the sector is operating on constantly shifting sands, some would darkly joke quick sand. If there is any way to protect the core of your company and the staff that make that business what it is, who wouldn’t want to do things properly and be taken seriously?

Sushi surprise

In February this year, Wasabi, the sushi and bento chain, took its own proactive approach to its estate issues, writing to landlords to request amending its rent payment agreements. The company, which was founded in 2003 by former Camden Market trader Dong Hyun Kim, and has 51 UK sites, including 43 in London, asked its landlords if it could switch to monthly rents rather than quarterly in advance as is standard, a move that helps retailers and restaurateurs with cashflow issues.

A spokesman for the company said at the time: “Wasabi has an ambitious expansion programme planned for 2018 and 2019 and has asked landlords for a change in rent payment agreements, in line with many other UK retailers, in order to allow the company to manage its funds more efficiently.”

A month later, the company secured a £30m revolving credit facility from HSBC to again support its “ambitious 2018/19 expansion plans”. Part of the funding from HSBC was to help with the rollout of new Wasabi restaurants across London, the first of which opened in Russell Square this spring. Additionally, the funding was to be used to help expand Wasabi’s Japanese and Korean bakery chain, Soboro, which it also planned to bring to the capital in 2018.

Furthermore, significant investment was to be allocated to Wasabi’s Central Processing Unit (CPU) in Park Royal, west London, where the company consolidated its warehouse and kitchen operations in 2016. Wasabi said HSBC’s support meant it could improve operational productivity and efficiencies across the business, while striving for product consistency. It said that at 65,000sq ft, the CPU provided plenty of room for expansion, which the new funding is also expected to facilitate in the future.

Yet since that announcement in March, the group has only opened the aforementioned Russell Square site, and now has engaged PwC to run a competitive process to find a minority equity partner for the business.

The group is looking for an injection of capital to support its next phase of growth which includes the expansion of its “successful UK portfolio, a refurbishment programme of existing stores, further expansion of its US presence in New York, and development of other commercial opportunities for the brand”.

I understand that the tone of the Information Memorandum (IM) that PwC has produced for this process is a positive one, but that the figures currently attached to the business paint a more realistic picture. Indeed many will be asking why seven months after securing a £30m bank facility and further cash injection is now sought?

In its most recent published set of accounts, for the year to the end of 2016, the company saw its EBITDA climb 7% to £5.1m, with turnover up 21.4% to £88.2m. It is thought that EBITDA is closer to c£2m on flat sales and that the company is still struggling with a number of highly-rented sites, especially in central London. Therefore, this has led to some speculation that the company is looking to find a partner to allow it go and talk to its banking partner, regarding paying down some of its debt.

The fact that there is an IM out on the business, will also I’m sure allow suitors, including trade buyers, to have a look over the company, especially those such as YO! Sushi and Wagamama, who have recently intimated that they would like to enter and build market share in the UK’s food-to-go segment. As it stands, a new minority equity partner is being sought, but as we are learning nothing should be seen as normal anymore.