Restaurant Group CVA is ‘reshaping the face of casual dining’

The Restaurant Group’s announcement yesterday that it is proposing a CVA for it’s long-troubled leisure division was a major, if not entirely unsurprising development, in a coronavirus-dominated news cycle.

Under the proposals, the company voluntary arrangement will allow for a restructure of the estate, which will see it exit 125 inviable sites, and seek improved rental terms on a portion of the remaining estate.

This will leave around 160 sites trading in the division, while 25 previously closed sites will be exited, reducing the onerous leases from the balance sheet. The Wagamama, concessions and pubs divisions are unaffected by the announcement.

While the publicly listed TRG is the largest operator yet to resort to a CVA, the writing has been on the wall for some time at this particularly challenged division, which is dominated by Frankie & Benny’s, but also includes Garfunkel’s, Coast to Coast and Firejacks.

As long ago as 2016, Frankie & Benny’s was described in an MCA Insight analysis as “a parasitic brand that has several problems, and they are fundamental”.

CEO Andy Hornby used his debut trading update to the market last year to identify some 118 “structurally unattractive” sites earmarked for closure, with the proviso this did not mean a commitment to close all sites, “and certainly not with any immediacy”.

This strategy of downsizing this expensive, often unprofitable leisure division, in favour of rebalancing the group towards Wagamama, pubs and airport concessions, goes back further still to Hornby’s predecessor Andy McCue, whose work was left unfinished after he resigned for personal reasons.

The coronavirus crisis, as in various other areas of society, has accelerated this strategy, and forced TRG to get shot of the onerous leases of these sites, which are blighted by retail decline and over supply.

“Everyone has said that covid is accelerating trends, and one of these trends we’re seeing is the rationalisation of the casual dining market,” says MCA contributing editor Peter Martin.

“We’ve already seen it happening over the last year or so, it’s been building and building, and now obviously with covid it’s been crunch time. What they doing is speeding up the inevitable.”

The difference here is that while the gradual closures of around 10-15 sites a year allowed many staff to be redeployed in other areas of the company, under these proposals the job losses will be much more severe, with 3,000 expected to go.

Martin said while the job losses were lamentable, they would be the unfortunate reality across the sector, as an already over saturated market tries to claw back custom post-virus.

“They’re not alone in this, and it gives them the opportunity to rationalise the business,” he says.

“Ten years ago Frankie & Benny’s was one of the great favourites, but it’s now slipped down the popularity tables.

“There is more choice, particularly in that family market where it’s built its reputation, and people’s tastes have changed.

“It’s not necessarily covid giving them an excuse, it’s more the fact that covid is forcing their hand to get their business in order.”

Another noteworthy element of the announcement is the property angle, with TRG reporting the CVA would not seek to compromise claims of any creditors “other than certain landlords”.

The British Property Federation was consulted by TRG and AlixPartners ahead of the announcement, allowing it to put forward property owners interests.

Melanie Leech, CEO of the association, is quoted advising property owners to consider the impact on investors and pensions as they vote on any CVA proposal.

“Ultimately it will be for individual property owners to decide how they will vote on the CVA,” she says.

Appearing to acknowledge the potential controversy of the proposals, the engagement of the BPF will be seen as a way of maximising TRG’s chances of getting the plan approved.

The difficulty of agreeing such a contentious measure, in an area made even more tense by lockdown, was summarised Hospitality Union’s Jonathan Downey, who says: “Good luck getting it passed”.

He adds that “on the face of it, this may seem unfair, that only landlords are taking the hit with leases ditched and reduced rents forced through, but it’s ever-rising, ridiculous rents and the dysfunctional and abusive landlord-tenant relationship that have slowly been squeezing the life out of our industry. We have an opportunity now to change that.”

With property owners expecting rent where operators have the resources to pay, it almost comes down to a “who blinks first” mentality in the landlord vs tenant dynamic.

Martin added: “TRG have taken the approach that it is better to engage with their landlords than not engage, with the prospect of coming out as a stronger big company

“At the end of the day, there’s got to be a compromise.”

From a financial and investment perspective, the proposals have been welcomed by analysts for right-sizing the group, with legacy brand Chiquito already placed into administration.

Paul Ruddy of Goodbody said the CVA news should come as no great surprise given the under-performance had been flagged up numerous times.

He said: “If successful, the CVA process will allow the group to broadly halve its leisure estate (including the Chiquito administration) without any additional ongoing lease provisions for these sites, which is a good positive.

“More favourable lease and rental terms on part of the F&B estate that remains open would also be most welcome.

“We believe the prospects are attractive for Wagamama, airport concession or pubs, and a smaller more focused Frankie & Benny’s estate should also contribute good EBITDA, albeit we would not expect any growth.”

Meanwhile J.P. Morgan’s Ted Nylan greeted the news with “cautious optimism”, saying it would leave the remaining estate in much stronger shape.

“In our view, Wagamama provides RTN with a significant long-term avenue for expansion through the rollout of further sites, the growth of a national delivery capability, and increased penetration of the airport concessions space.

“There may also be optionality around international expansion for both concessions and Wagamama. The aggressive restructuring of Leisure is removing this division as a headwind and diminishing its drag on LFL growth and profitability.”

Regardless of the outcome, as a big beat of casual dining, there will be plenty of attention in the sector on how TRG navigates through this crisis.

“They are the major player, so what they do is going to be important for that for that mid-market,” Martin added. ”What they’re doing is arguably reshaping the face of casual dining.”