Licensed premises specialist Luke Cutler at Edward Symmons Hospitality & Leisure explains how to boost business and maximise value in the food and drink sectors.
The pub and restaurant sectors are extremely dynamic, with a constant flow of new start-ups. So what drives the high level of insolvency activity?
Poor location, lack of investment, statutory issues, increased competition, rising input costs and bad management are all factors affecting many troubled businesses. In addition, many are still affected by over-leveraging. Unfortunately, there is no one-size-fits-all solution and each situation needs to be reviewed individually.
Starting with location in general terms, there is a divide between London and the rest of the country. However, from an insolvency perspective, there are still plenty of failures within the capital for the reasons already outlined.
In terms of statutory issues, business rates in particular are a real killer for struggling firms, as the rateable value of all retail properties is based on their value on 1 April 2008, at the peak of the market.
The government’s decision to postpone the revaluation, which would have revalued pubs and restaurants based on their rental value this year, for a further two years, means that operators will have to continue to pay rates based on a historically high rental value through until 2017.
Had the revaluation taken place, the majority of rates bills, apart from London perhaps, would have dropped significantly.
Investing back into business is vitally important during challenging economic times. Unfortunately, this is impractical if we are talking about monetary investment such as refurbishment, as a struggling business will typically be working hand to mouth on very tight cash flows.
However, if we take a failing restaurant, for example, and we assume that the product is not at fault, then attracting additional bums on seats may be as easy as reassessing the online presence of the business. A survey last year by Live bookings revealed that many of the UK’s restaurants, are yet to take even this relatively simple step, with the study suggesting operators are missing out on about £30,000 of lost revenue.
There has always been competition in the market, and we know competition is healthy, but some types of competition can be devastating.
I was recently speaking to the CEO of a multiple bar and restaurant operator. In summary, one of his businesses located in a university town had been running along nicely with stabilised returns. Then a new venture opened following major refurbishment and the takings at his previously thriving business fell significantly.
What did he do? Luckily, this company had a war chest that allowed it to replace the old bar with a new concept at considerable cost, but the concept was well thought out and well planned – with the result being that his market share within the town returned to former levels.
Obviously, a failing business may just be unrecoverable and in that case, if the insolvency route is the only solution, it is important that any value within the business is protected. Freehold properties and land will always hold value, while leasehold properties usually will not, but may hold some value as a trading entity. Occasionally fixtures and fittings hold value, as do any licences attached to the premises. These are all potential assets that need to be investigated.
In the face of a challenging economy, tough times for the sector are likely to continue. Although optimism persists and we hear reports of improved trading levels, the bottom line is that customers still have less spending money in their pockets. While eating and drinking out are no longer such a discretionary spend, the average sales per head remain significantly down.
I expect the current level of insolvencies will continue in this sector for at least the next 12 months. There are, however, buyers in the market for assets of all types, from freehold pubs let to individual tenants, to leasehold trading outlets, particularly in London, and closed pubs. This year we have sold examples of each on behalf of the administrators of Antic, Farlane Property Group, Moorgate London and Calco Pubs.
For further information:
Contact Luke Cutler MRICS
Hospitality and Leisure
020 7955 8411 / 07979 541244