Higher minimum wages will cook up trouble for restaurants and cafes
One third of the larger restaurant and cafe companies are loss making, meaning that increases in national minimum wage, which came into force on 1 April 2018, will put even more pressure on an already-besieged sector.
Company Watch, the financial analytics firm, analysed a representative industry sample, examining the published full year financial accounts of 324 larger restaurant and cafe companies (those with total assets of more than £5m) that were filed with Companies House between January 2016 and March 2018 and representing an estimated half a million jobs.
Forty four percent – or 144 – companies in the sample featured in the Company Watch Warning Area (H-Scores 25 or less out of a maximum of 100), which means they are around 25 times more likely to suffer financial distress than companies outside of the Warning Area.
Some of the higher profile loss-making companies in the study included: Casual Dining Group Ltd. (parent of Café Rouge, Bella Italia, Las Iguanas) with an H-Score of 2; Leon Restaurants limited (H-Score of 12). Spaghetti House Restaurants Group Limited (H-Score of 16); Café Nero Group Holdings Ltd. (H-Score of 0); C1 2014 Ltd. (Parent of Carluccios with an H-Score of 3); Pret A Manger (H-Score of 6); Five Guys JV Limited (H-Score of 4); Various Eateries Ltd. (Parent of Strada) with an H-Score of 1; Viliers Topco Ltd. (Parent of Eat Limited with an H-Score of 3); and Honest Group Ltd. (Parent of Honest Burgers Limited) with an H-Score of 4.
In recent weeks, several large restaurant groups have been forced into a Company Voluntary Arrangement (a financial rescue procedure), including Prezzo Limited (parent company Papa Topco, with an H-Score of 3 at the point of failure); Byron Hamburgers Limited (H-Score of 13) and Jamie’s Italian Limited (H-Score of 9 at the point of failure).
Company Watch modelled the effects of this April’s rise in the National Living Wage, which increased from £7.50 per hour (p. h.). to £7.83 p.h for over 25s, and from £7.05 p.h. to £7.38 p.h for 21-24 year olds.
Of the 324 companies in the sample, 283 companies (87%) disclosed the number of employees in their latest accounts. (In total there were 550,668 employees.) Based on this reduced sample, Company Watch calculates that the additional Higher Living Wage cost adds an extra £120 million across the sample to the total wages bill, a rise of 4.7%.
In terms of the effects on pre-tax profits across the sample, higher minimum wage costs would reduce total profits from £1.58bn to £1.46bn, a reduction of 7.6%.
There were many restaurants in the sample that were thriving and making good profits, but these tended to be budget takeaway restaurants and cafes, rather than establishments for dining out.
For example, the strongest businesses with the highest H-Scores included: McDonald’s Restaurants Limited with an H-Score of 96; Patisserie Holdings Plc, (owners of Patisserie Valerie) with H-Score of 100; Whitbread Plc (owners of Costa, Beefeater, Brewer’s Fayre) with an H-Score of 93; Domino’s Pizza Group Plc with an H-Score of 82; Just Eat Plc with an H-Score of 82; and KFC with an H-Score of 55.
Businesses with private equity owners, such as Pret a Manger (H-Score of 6) and Café Nero (H-Score of 0), while generating strong operating profits, have both accrued large interest charges to their owners, making them vulnerable should their owners decide to offload them or if the owners become financially distressed themselves.
Jo Kettner, CEO of Company Watch, said:
“With average wages still struggling to keep up with rising household bills, it’s the mid-market restaurants and cafes that are most feeling the pinch. We’ve seen in recent weeks how this has hit Prezzo, Byron Hamburgers and Jamie’s Italian. From our study, these are unlikely to be the only restaurants that will struggle this year.
“Taking into the immediate impact of higher wages bills from this month’s new higher National Living Wage we expect some of the 144 business currently in our Warning Area will either go under or need urgent refinancing.”Download Resource