Blogs/Vlogs

Increased borrowing of restaurant groups grows debt pile by 19%

24 July 2018

UHY’s recent research has found that many restaurant chains are still increasing their borrowing in order to acquire and fit out new sites, even as high-profile competitors face insolvency. Borrowing of the UK’s Top 100 restaurant groups now amounts to 35% of their £5.6bn annual turnover.

While this level is not yet a great concern overall, there are businesses within the sector with much higher levels of leverage, which may face problems if new sites underperform.

To survive in the current environment, some restaurant chains can only reach break-even by scaling up rapidly to achieve economies of scale. This means going through long periods of increasing borrowing to acquire and fit out new sites.

Though trading conditions on the high street have become very challenging over the past year – just last week we saw that Gaucho and Cau have also gone into administration - these businesses often feel they have little choice but to continue with these expansion plans, which means taking a big gamble on the success of new sites.

Significant expansion for a restaurant group is a very expensive undertaking – rent deposits and fit-out costs for a group of new sites often require a substantial increase in borrowing.

However, if new sites don’t turn out to be profitable, restaurant groups can very quickly find themselves facing a CVA or closures. Unfortunately, the margins in the restaurant business are so thin that just one or two under-performing sites can send the whole chain into the red.

If you would like any advice about the topics covered in this article, please contact Martin Jones.

 

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