Dinning Dilemma

The love affair between the City and the dining sector is on the rocks as restaurateurs count the cost of listing their businesses on the stock market. Joanne Hart reports

THERE WAS a time, just a couple of years ago, when it seemed as if every restaurateur in the UK wanted to join the stock market. Quoted restaurant companies were soaring in value and private concerns up and down the country wanted to join in the party.

They were encouraged to do so too by investment bankers who knew they would receive hefty fees for helping these budding entrepreneurs to turn their businesses into listed concerns.

 Many restaurant owners were seduced by the notion of making millions from the stock market and attracting shareholders who could help transform their mini-empires into mighty chains.

At its height, the quoted restaurant sector was worth well in excess of £1 billion. It included mid-market chains such as Pizza Express; value operators such as Garfunkel’s owner City Centre Restaurants, and relatively upmarket concerns such as Fish.

Even The Ivy sold out, allowing itself to be bought by Signature Restaurants, the company that also owned the popular mussels and chips chain, Belgo.  The City loved the restaurant sector.

The characters were colourful, the companies were ambitious and it seemed as if directors and shareholders alike were on a money-making roll.  Unfortunately for both parties, the good times were all too brief.

The quoted sector is now a shadow of its former self.  Some companies have completely collapsed, some have quit the stock market for good, some have been bought up by venture capitalists and some are simply worth a lot less than they used to be.

The restaurant industry has learned the hard way that the City can be an extremely unforgiving place.  Companies such as Fish! or Chez Gerard saw their share prices savaged as they were forced to admit the Midas touch had deserted them.

They have since deserted the market and all the listed restaurant companies put together are currently worth little more than £250 million.  "The problem with the quoted sector is that supply growth exceeded demand growth," says Greg Feehely of investment bank boutique Altium Capital.

This may sound simplistic but it encapsulates one of the principal challenges facing the restaurant industry – expansion.  "The trouble with the restaurant business is that it is hard to find something that is really scaleable," says a spokesman at the venture capital firm Bridgepoint.

In other words, restaurateurs believe that if they have one or two good sites, they can open seven or eight. If these work, they then start to think about nationwide roll-outs. Occasionally, such businesses prosper. All too often, they fall by the wayside.

"In excess of 60% of restaurant businesses are likely to fail in  their first three years," says Bob Silk of Barclays.  For years, Pizza Express was a model to which many aspired.

The business expanded rapidly, the share price soared and for a while the management could do no wrong.  Last year, however, performance faltered, the management came under attack and now the company is going back into private hands.

"It worked so well that people started to copy it. Rivals such as ASK have come in and reworked the formula in a fresher way," says the Bridgepoint spokesman.

In fact, ASK is one of the few restaurant companies to have retained the respect of City brokers and bankers.  Described as "crackingly well-run" by Greg Feehely, the business began 10 years ago with one restaurant in north-west London.

It now incorporates 145 ASK, Zizzi and It’s fascias and the company works hard to keep both venues and menus up to date.  "The restaurant business is extremely tough and extremely competitive.

 You have to keep evolving the brand, looking at your menus, keeping the offer fresh and making sure staff are properly incentivised. ASK has done this," says Doug Jack of stockbroking firm WestLB Panmure.

Even this group, however, saw its share price come under pressure earlier this year, amid widespread concern about the industry.  The stock has now recovered but at around 140p, it is still well below last year’s 190p trading level.

Another quoted concern to have maintained a reasonable City profile is City Centre Restaurants. Like ASK, this focuses on the £12 to £15 a head sector of the market and incorporates such brands as Caffe Uno, Est Est Est and Garfunkel’s.

The business did go through a bad patch two years ago, when it overexpanded and slipped into loss, but it is now under new management. The shares have surged by around 40% in the past 12 months, reflecting City analysts’ views that this is a recovery stock. "It had too many brands and the concept backfired.  But now it is back on track," says one. 

City financiers all agree, however, that the restaurant business is uniquely challenging.  This stems partly from the environment in which it operates and partly from the fact that almost anyone can open a restaurant and so many people do.

"There is a very low barrier to entry. Everyone thinks they would like to own a restaurant and they forget that there is loads of red tape, consumer confidence is fragile and competition is cut-throat.

 Also the uniform business rate is rising, the minimum wage is rising, general business insurance is rising and most people take on leasehold properties where they are subject to upward-only rent reviews," says Feehely.

Even seasoned entrepreneurs such as Signature Restaurants chairman Luke Johnson or Chez Gerard chairman Neville Abrahams come unstuck. Last year Chez Gerard, owner of Livebait, Bertorellis and the eponymous steak and chips chain, turned in a £3.5 million loss and axed its dividend.

At the time Abrahams said there were "too many restaurants in London chasing fewer customers".  Signature, meanwhile, owners of not just The Ivy and Belgo but also Le Caprice and J. Sheekey’s, saw operating profits tumble by a third to £3.16 million. Now Chez Gerard has been sold and Luke Johnson has taken Signature private with the aid of Barclays bank and the owners of top London restaurants L’Oranger and Aubergine.

"Over-expansion is a killer, particularly now when banks are cautious and consumers are reining in. Even in the City, belts are being tightened. People are spending less, there are fewer people in work and everyone is more worried about job security and bonuses," says Jack.

According to Barclays’ Silk, changing economic conditions are hitting the upper end of the restaurant trade particularly hard.  "Declining levels of confidence mean the fine dining market is finding life exceptionally tough," he says.

The attitude of those in the City is reflected elsewhere too.  Consumer confidence is not as robust as it was and the economic outlook is uncertain.  This has clear implications for the restaurant trade. "Restaurants are one of the first places where people scale back.

They either eat out less, they scale down or they drink less. All of these can be catastrophic for owners," says one venture capitalist.  "This is a very good time to watch the business. We are nowhere near the bottom and there will be a lot more pain to come. The right time to buy will be just as demand is beginning to rise again," says Bridgepoint’s spokesman.

"It’s already difficult and it’s going to get increasingly difficult," says Silk. Bankers, City analysts and venture capitalists concur that winning formulae are hard to find, particularly when the external environment is inauspicious.

"Restaurants are cyclical. They are more cyclical than pubs and pubs are more cyclical than betting shops.  The British public is more likely to give up eating out than gambling," says Feehely.

Restaurateurs, would-be restaurateurs and financial backers should perhaps bear this in mind.