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Morning Briefing for pub, restaurant and food wervice operators

Tue 3rd Sep 2019 - The Restaurant Group to exit at least half of its 352 leisure sites at first opportunity
The Restaurant Group may exit at least half of its 352 leisure sites at first opportunity: The Restaurant Group may exit at least half of its 352 leisure sites at the first possible exit opportunity, the company reported this morning. The company stated: “In the first eight months of 2019, we have closed 16 sites (ten Frankie & Benny’s, four Chiquito, one Coast to Coast and one Garfunkel), reducing the overall leisure estate to 352 sites. Among those closed, we executed the following actions: eight sites converted or are in the process of converting to Wagamama; three sites closed and were exited, by exercising the break clauses or lease expiry; five sites closed as they were no longer generating acceptable cash returns. We are making progress in negotiations with landlords when there are lease events, having obtained rent reductions in the most recent negotiations as well as greater flexibility in lease terms. The remaining estate has a median of six years to the first potential exit date (i.e. lease expiry or the date at which we can exercise a break clause). We expect to exit at least 50% of Leisure sites reaching their next exit date, and will continue to explore market opportunities to exit these sites earlier where possible.” The Restaurant Group has reported like-for-like sales rose 4% in the 26 weeks to 30 June 2019. Sales rose 58% to £515.9m and adjusted profit before tax was £28.1m (2018: £20.7m). There was an exceptional pre-tax charge of £115.7m (2018: £8.4m) predominantly relating to a £100.2m impairment charge and a £10.7m onerous lease provision in its leisure business, leading to a loss before tax of £87.7m. Group like-for-like sales up 3.7% for the first 34 weeks of the financial year benefiting from soft comparatives in the prior year. Like-for-like sales in the most recent six weeks were up 0.2%, driven by the strong performance of our three growth businesses which have continued to outperform their respective markets, largely offset by our Leisure business reverting back to a trend of modest like-for-like sales decline. Debbie Hewitt MBE, non-executive chairman, said: “We have traded well throughout the first half of the year, delivering 4% like-for-like sales growth, driven by the market outperformance of Wagamama and our Concessions and Pubs businesses. Our Leisure business delivered a marginal decline in like-for-like sales despite benefitting from the weaker comparatives following last year’s extreme weather and football World Cup. We continue to focus on improving our brand offerings and delivering the best possible experience to our customers whilst optimising our Leisure business to enhance the overall group performance. We are mindful of the headwinds in the casual dining sector and the meaningful uncertainties created by the potential of a ‘no-deal Brexit’ and are planning with this in mind. However, our business is now better diversified and purposefully positioned to benefit from multiple opportunities for growth. I am pleased to welcome Andy Hornby as our new chief executive, who is bringing a strong consumer, brand and people focus to the business.” Andy Hornby said: “I am delighted to have joined The Restaurant Group in August. Our three growth businesses of Wagamama, Concessions and Pubs are all out-performing the market and have potential for further growth. At the same time, we have an acute focus on optimising our Leisure business, through targeted operational initiatives and disciplined estate management.”

On Wagamama, it stated: “Wagamama delivered another strong performance in the first half of 2019 with the core UK business benefiting from both strong in restaurant and delivery growth. UK like-for-like sales growth remained significantly ahead of the wider market, with like-for-like sales up 10.6% in the first six months of the year (to 30th June 2019). Adjusted Ebitda (on a rolling 12 months basis) grew to £51.4m in the period to 30thJune 2019 from £42.3m (for the last reported financial year ending 29th April 2018). Wagamama retained its market leading position with the highest net promoter score among casual dining brands in the UK, and we have benefited from excellent staff retention at our restaurants, with employee turnover reaching its all-time best position for both front and back of house teams. Among other initiatives implemented in the first half of the year, we launched a new menu in May, continuing our commitment to provide constant innovation aligned with our customers’ evolving preferences. The new menu extends the range of vegan options, including ‘Avant Gard’n’, our bestselling vegan dish. We also launched our new lighter ‘Kokoro’ bowls (sub-650 calorie range) giving our guests additional healthy eating choices, as well as launching an improved drinks and desserts range. Over the period, a strong partnership with Deliveroo and the implementation of operational and technological improvements in our delivery proposition contributed to delivery sales rising to c.12% of total sales from c.9% in the same period last year. We completed five transformational restaurant refurbishments in the period, adding 200 covers with an expected return on invested capital of at least 45%. We are progressing well on the multiple growth avenues that the Wagamama acquisition has unlocked. Our selective approach to high quality openings continues and we expect to open three sites this year including “The Bower” in Old Street, London, and a site in Heathrow Terminal 3. We currently expect to open four to five sites in 2020 including a site in the planned terminal redevelopment at Manchester airport. We continue to explore how best to serve our customers where we don’t have a Wagamama restaurant and launched our first Wagamama-only Delivery Kitchen in Hackney in July. We plan to open at least another two delivery kitchens by the end of the year. We are on track to launch our first food-to-go concept, “Mamago”, in Q4 2019 in Fenchurch Street, London. The proposition has been inspired by the Wagamama core business, with a menu of made-to-order pan-Asian cuisine ranging from grab-and-go adaptions on Wagamama classics like Katsu to new and innovative, nutritionally-balanced and flavour-packed dishes built for breakfast and lunch. Our US business has delivered improved trading momentum benefitting from improved team stability and operational execution. We are progressing with our review of strategic options for the business and will provide a further update in due course. We are on track to deliver at least £15m of cost synergies in 2021, having made good progress in the first half of the year. In line with the acquisition plan, we prioritised the renegotiation of supply contracts for food, drinks and consumables, and have obtained significant savings through rate equalisation and economies of scale. We have also obtained additional savings through shared expertise across the group in areas such as energy efficiency and maintenance, as well as through eliminating the duplication of certain professional services. We anticipate that 60% of the cost synergy programme will benefit the cost base of Wagamama and 40% in to the Legacy-TRG business. On the site conversion programme we are on track to deliver an incremental Ebitda benefit of £7m per annum at maturity in 2021 from the conversion of 15 sites. Our Leisure sites in Stevenage and Bletchley converted to Wagamama in late August and another six sites will convert between September and November, with an expected return on invested capital of circa 50%. We are planning to convert at least seven more sites in 2020.”

Of its Concessions business, it stated: “Our Concessions business primarily operates in 16 UK airports and four UK rail stations. At its core we manage long-term partnerships and operate multiple formats and brands to deliver food and beverage solutions to our partners. Our sales continue to trade ahead of passenger growth and we continued our strong track record of retaining sites with at least 85% of sites having received contract renewals beyond the term of the initial contract. On average our contracts have been extended for 90% of the original concession term. In the first half of 2019, we developed further trials and rollout of technologies to improve customer convenience, particularly through waiting time screens (a display that informs the average service and kitchen time to receive an order), pay-at-table and order and pay functionalities. We expect to open at least five new sites in 2019, two of which have already opened, including our Sonoma site at Gatwick airport which is our largest Concessions restaurant at circa 7,000 square feet, and can accommodate over 300 covers at a time. We have also secured six sites in the planned Manchester airport terminal redevelopment which are due to open in 2020. The terminal is expected to reach maturity in 2022, with the gradual shift of passengers out of the existing terminal having a short-term impact on profitability through 2020 and 2021. We are also exploring opportunities in adjacent markets outside of travel hubs in the UK and in international airports.”

Of its Pubs business, it stated: “We currently have an estate of 83 Pubs, which are predominantly located in countryside and suburban locations, with a premium proposition focused on the local customer base. In the first half of 2019, like-for-like sales continued to outperform the overall pub restaurant sector. In the first half of 2019, we continued to evolve our menus in line with customer preferences. For example, we refined and extended our vegan range, with the introduction of items such as mushroom pie and beetroot burger, now our top selling vegan dishes. On our drinks range, we have introduced a larger selection of low/no alcohol beers, reflecting increasing customer demand, and extended the opportunity for pub managers to source and stock local beers and craft lager, in addition to the already well-established cask range, which have been well received by customers. We have, in certain locations, developed existing space to cater for private functions, including weddings. For instance, at the Mill House in Hook we have refurbished the adjacent barn, which is now available to host private events, meetings and small family parties. We also continue to explore opportunities to expand our accommodation offering, currently available at the Arrow Mill in Alcester and The Highdown in Goring-by-the-Sea. We made further progress in the rollout of technology initiatives to improve our customer experience and commercial performance. We started trialling an in-app ordering function that allows customers in our busy gardens to order from their table. We also launched an improved version of our reservation software, which allows for improved customer flexibility. We have maintained our social media score reviews at 4.4/5, confirming our commitment to delivering a high standard of customer service. We expect to open four new sites this year, three of which have already opened. We will continue our selective approach to site expansion, with a disciplined approach to site criteria and strict financial hurdles, whilst our geographical reach is gradually expanding across the UK.”

Of Frankie & Benny’s, it stated: “Our focus over the half year has been on enhancing the brand’s food proposition, improving customer engagement and affinity, and continuing to leverage the existing estate. In May we launched our new menu, where we reduced the overall size of the menu by circa 10%, simplifying our offer for customers and streamlining operations for our restaurant teams. The reduced menu includes 26 new dishes that refocused on our Italian American heritage and the removal of a number of less popular dishes. Feedback on our new menu has been positive, with dishes such as the Meatballs Al Forno and Toblerone Cheesecake being particularly popular with customers. Our increased focus on customer engagement has been driven through the better use of social media, and proactive marketing to create a ‘buzz’ around the brand. A key campaign in the period was “Bring It Back” where we surveyed our customer base using social media to find out what they would like to see return to the menu which led to previous dishes such as Spaghetti Chicken Alfredo and Vegan Nuggets returning to the Summer Specials menu. We also created significant engagement around the news of Prince Archie’s birth, where we offered everyone named Archie a free meal in our restaurants. The social campaign had organic reach of over two million, with 30,000 customers engaging with the content. We continue to look for opportunities to leverage our estate and have increased the penetration of delivery sales in our core menu and virtual brands. We are now active across 193 sites in partnership with multiple aggregators and operate two virtual brands from most sites. The two virtual brands are “Stacks”, providing our customers with “fully loaded burgers” and “Birdbox” our fried chicken brand with a southern American twist. As a result of our initiatives we continue to see a consistent improvement in customer ratings on social media.”

Of Chiquito, it stated: “In the first half of 2019, the key objectives have been to further refine the brand identity and proposition, re-focusing on our core values of fun, choice and value. We launched a new menu in April which had better choice and a range of options focused on health and premiumisation. We have created a new menu category, “Greens and Grains”, which includes new dishes such as “Burrito with Benefits” and “Chopped and Topped Salad”. We also launched vegan and breakfast specific menus, providing our customers with greater choice. We have also increased our presence on social media, with a more proactive engagement with our customers. For instance, a video involving Sam Thompson and Pete Wicks from the reality programmes ‘Made in Chelsea’ and ‘The Only Way is Essex’ featured in one of our restaurants and raised our brand’s share of voice on social media to a new high. We continue to look for opportunities to leverage our estate and have increased the penetration of delivery sales in our core menu and virtual brands. We are now active across 73 restaurants in partnership with multiple aggregators and operate two virtual brands from most sites. The two virtual brands are “Kick-Ass Burrito” and “Cornstar Tacos”. Kick-Ass Burrito is a great value, virtual-only burrito brand. Cornstar Taco offers fresh, full flavour and fully loaded crispy tacos and nacho boxes. As with Frankie & Benny’s, we continue to see an improvement in our customer ratings on social media particularly in areas related to service and value.”

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