The fast growing and seemingly successful premium burger chain Byron could close up to 20 restaurants as part of a rescue plan for the business. Is this announcement a sign of wider trouble facing the retail sector in 2018?
Last week the Retail industry revealed the UK Christmas retail sales winners and losers. Amongst the winners, John Lewis and sister chain Waitrose, Tesco, Sainsbury’s, Morrisons, Next and amongst the losers, Marks & Spencer, House of Fraser, Card Factory and Debenhams.
Christmas trading can be a make or break for retailers, with increased competition to win sales due to cash-strapped consumers taking a more strategic approach to get the best deals. With UK consumers now fully embracing American sales days, such as Black Friday and Cyber Monday, retailers are under continued pressure to put their best foot forward to be ahead of the curve.
It is interesting to note the different approaches that companies have taken to dealing with increased pressure and competition. Some companies have merged with other firms (i.e. Sainsbury’s merger with Argos); others have introduced pricing strategies such as pre-Christmas discounting. The fashion and homeware chain, Next, managed to hold its nerve and not drop their prices too soon before Christmas. This has had the desired effect, with Next achieving a 1.5 per cent increase in total sales in the days leading up to Christmas. For House of Fraser and Debenhams, a strategy of heavy discounting has led to reduced sales and profit warnings. The Christmas retail sales figures released last week highlight the importance of staying ahead of consumer demand and adapting to the market. If you are not moving forwards, are you moving backwards?
It is clear that Christmas sales are only part of the picture, as trading conditions for high street retailers are likely to get worse in 2018. Shoppers have a wide choice of stores and restaurants vying for their consumer spend. That level of competition is made worse for retailers because of the decline in household disposable income. Inflation is outstripping average wage rises. Households are finding it difficult to maintain their standard of living. Consumers are cutting back on their discretionary spend on many areas of the retail sector.
Recent years have seen larger restaurant brands such as Byron Burger and Jamie’s Italian opening many new sites to have more of a presence, rather than concentrating on a smaller number of individual restaurants. This policy of expansion has created its own problems. The costs of bricks and mortar sites, such as rising business rates, are becoming unmanageable.
There are also numerous problems arising from Brexit. Brexit is creating economic uncertainty, as well as increased import costs for restaurants and other suppliers. Brexit has seen restaurant owners experiencing a downturn in the supply of foreign labour, making up a significant proportion of their employees.
Retailers are also experiencing increased wage pressures, with employees seeking the National Living Wage as opposed to the National Minimum Wage.
Some businesses are recognising the need for change and are taking steps to restructure their businesses. It has emerged that House of Fraser is pushing its landlords for a rent cut, with plans to downsize some of its stores. New Look are looking into a plan to close 10 per cent of its British stores, amounting to 600 outlets in order to achieve a rent reduction. Negotiations of this nature may become common place in the retail sector. The rescue plan announced by Byron last week is a case in point.
Byron’s proposal, known as a company voluntary arrangement (CVA), is intended to lower its rent bill and focus on a smaller number of profitable restaurants. Byron runs 67 restaurants and employs about 1,800 people across the UK. The company has identified 20 sites where it will pay reduced rent for a period of six months while it negotiates with landlords about future operations. Some are expected to close as a result.
“Byron’s core restaurant business and brand remain strong but the market that we operate in has changed profoundly”, states Simon Cope, Byron’s chief executive. It is apparent from the figures released last week that there has been a change in the consumer mind set towards the food and drink industry. Often households are operating on a limited entertaining budget and more consumers are reverting to their local supermarkets to purchase essential items rather than going out to eat.
Deliveroo, Uber EATS, Amazon restaurants, are just a few of the popular food delivery services on offer to consumers at the moment. These companies have a much cheaper cost base than traditional restaurants; they often operate from smaller premises with fewer employees. Food delivery services have created increased competition in this sector and are arguably taking over a larger proportion of the market.
So, what’s in store for the future for the restaurant sector and retail as a whole?
The Centre for Retail Research predicts that a further 164 major or medium-sized companies will fall into administration in 2018, involving the loss of 22,600 stores and 140,000 jobs.
With the decline in disposable income, there is an increasing list of products consumers are cutting back on or doing without. Retailers will need to work harder to persuade consumers to spend money with them.
The message from the National Federation of Independent retailers is to “Adapt, Change and Transform”. Organisations must take up new opportunities and meet fresh challenges if the current pressures facing retailers are to be overcome. Retailers are encouraged to use technology to help grapple with the pressures of the market and streamline their services and make the consumers experience seamless and efficient. Net-a-Porter is even testing WhatsApp as a customer service and order confirmation tool.
In 2018 we will likely see businesses experimenting with new business models testing what works and what doesn’t. There will be greater emphasis on staying relevant to the consumer, with products that enhance and personalise consumers’ experiences.
In summary, a message for our retailers out there: dare to be different!
Lee Ranford is head of the insolvency team and Hannah Edwards is an associate at Russell-Cooke.