Red’s True Barbecue has entered refinancing talks after breaching its banking facility.
The eight-strong company, which saw turnover climb 58% to £11.3m in the year to 31 March 2016, said it was in talks with its banking partner Santander after breaching a banking facility since the year-end.
It said that Santander had issued a letter of support indicating it intended to “continue to make funding available”.
It said it had initiated discussions to restructure its banking facility, which it said to have been met with a favourable response although “confirmation of this restructuring will be dependent upon the business continuing to be cash generative”.
The company stated: “To continue the stated roll-out plans for the business, the directors believe additional equity funding will be required and a new debt facility will also be required. The directors believe that, as long as the forecast levels of trade are achieved, the business will be able to access this debt and equity funding. In the absence of such funding the business will need to renegotiate current debt facilities to ensure the repayment profile for the current borrowings match the future cash generation of the business. The directors have initiated discussions with their bank with a view to restructuring their current debt facility. These initial discussions have met with favourable response from the bank, although confirmation of this restructuring will be dependent on the business continuing to be cash generative.”
For the full year to the end of March, EBITDA fell to £562k compared with £610.2k the year before, while pre-tax losses widened to £659.8k, compared with a loss of £183k in 2015.
Comment by MCA editor Mark Wingett - Red’s flagged
“The Red’s boys have been quiet” has been a regular refrain over the last six months at industry gatherings. With the publication of Red’s True Barbecue’s accounts and confirmation of the speculation that the group had breached its banking facility, you can understand why, but is this teething problems for a concept that has burned brighter than most or a long-term issue?
The old cliché goes that the higher they rise, the harder they fall. Red’s True Barbecue’s rise since its inception in Leeds in 2012, had been meteoric. Any fall, or bump in the road was going to be jumped on. Indeed, I’m pretty sure there are some less charitable in the industry, and with shorter memories of their own struggles starting out, who are whispering “I told you so” this morning on news of the company’s current issues.
Whispers, rumours and conjecture have been circulating around the performance of Red’s True Barbecue for over six months. Loud, raucous and out for a good time, the industry, still coming out of the previous downturn, clung to founders Scott Munro and James Douglas and joined them on their journey. We liked them because they were a breath of fresh air, looking out of place among the suits in a board meeting but in their fire-and-flame smokehouses as at home as the hundreds of hungry customers that packed out their venues on a daily basis.
And, as Douglas has freely admitted, they had “a fucking crazy few years”. Lauded by the industry, consumers and even those outside the sector, for kick starting the US smokehouse category. The group played the marketing game brilliantly, picking up thousands of “believers” in the process. A cookbook, pilgrimages to the US, and listings of their sauces in national supermarket chains followed, as did numerous awards. Both Douglas and Munro were also seen as a key invite for any industry event, their irreverent take on presenting highlighting many a dull conference. It was almost like being on tour with a rock band.
In 2015, the company secured £5m of new investment from a group of leading industry players and retail entrepreneurs as it looked to accelerate its growth plans.
The equity investment deal for the then four-strong brand featured a consortium comprising industry veteran and former chief executive and chairman at Wagamama Ian Neill; Jamie Barber, the founder of Cabana; Stephen Wall, the co-founder of Pho; Brandon Stephens, the founder of Tortilla; Maurice Abboudi, the founder of K10; Dom Lake, the founder of Canteen; and retail entrepreneurs Aarish Patel and Sunny Gill. Debt funding was provided by Santander UK. The new investment group, the experience it brought and standing it had in the industry, underlined the businesses credibility and its stellar performance to that point.
The new funding would be used to support the brand’s 2015 opening plans, including its opening in Shoreditch in July of that same year. And maybe it is this opening where the first signs that the business was sailing into choppier waters became apparent. With Shoreditch, Douglas and Munro moved into southern territory a lot quicker than many other northern-based operators have done in the past, choosing to chance their arm in the Big Smoke rather than build a greater presence in the north first. Douglas acknowledged at the time that this opening would be different than their others. He said: “In the past, we’ve pushed the operation to the limit and made it really hard to do those volumes early on. With Shoreditch, we’ve opened a bit slower and smarter, and grown week on week. In July and August, people were away on holiday so we knew were going to have a slow start. It’s been manageable, but we are growing.”
With Shoreditch, Red’s paid its first premium – it also forked out £1m on the fit out. As Douglas said: “That leaves no margin for error or flat periods. We’re not owned by private equity, so we can’t afford to have a site that doesn’t perform well. We have to be really careful.” In the current climate that margin for error became even smaller. It is thought that group experiences, like Jamie’s Italian does, significant honeymoon periods when it opens a new site, especially in the regions. These sites need significant fit out costs. When those honeymoon periods end they still trade at respectable levels, indeed levels that many other operators would be very happy with. Let’s not forgot that the company broke the £11m-turnover mark in its last financial year, this remains a very cash generative business.
“We want to prove we have a concept that can run over a number of different platforms,” said Munro in 2015. “We can show potential buyers that it works in shopping centres, suburban areas, city centres and, possibly, even overseas. We are trying to build as much collateral in the business as possible, to push the value up and turn it into a really desirable business.”
Any new business will have challenging times, you expect these are the first Red’s have come up against. The fact that they breached their banking covenants highlights the size of the challenge, but they are not the only ones facing these issues. I know of at least two other companies, larger and much more established than Red’s, who have quietly broken their covenants over the last six months, but continue to have the support of their banking partners. There will be others as the year progresses.
The problem for Red’s is that they did all there growing up in the full glare of the industry spotlight and everyone enjoyed that ride/party whilst it was in full flow. Now they have to contend with the subsequent, and many would say, predictable lull and “tricky second album” with that spotlight still on them. Like a rock band you wonder if all that early success and adulation meant Douglas and Munro took their eye off the ball and allowed standards to slip and it has taken them time to fully re-engage.
Their egos would have been bruised, but now will be the test of whether they can roll up their sleeves and regain the momentum the business had. For all the brashness, Munro and Douglas are a couple of smart operators, and with the investment group they have behind them/or brains trust, you would believe that a route to sustainable growth will be found, especially as the concept’s core offer remains of a high quality. Some tough decsions will need to be made/have been made and some listening to that brains trust and the experience it provides will be crucial, but I remain a believer for now.
