Subjects: Paying the price, operators need better access to the data, restaurant diversification strategies – moving into retail
Authors: Mark Wingett, Glynn Davis, James Hacon
Paying the price by Mark Wingett
“If you look at failed restaurants, it is generally because they have taken their eye off the ball. It is all very well having a nice menu and good offer, but if you cannot deliver consistently, you won’t be successful.” So proclaimed Jonathan Kaye, founder and chief executive of Prezzo as the Italian restaurant chain, in June 2014, geared up to open its 200th site. Six months later, the then-listed business was taken private in a £304m deal, and by the following summer, Kaye had stepped down. Arguably, you can trace back the decline of the business – which at one point operated 300 sites but now finds itself with under a third of that number – to that point. Whatever the management team or the backer, it has been eight years of trying to stop a business in a continual tailspin. One that shines a light on how the wider sector and consumers’ relationship with it has evolved.
I don’t think there has been a week that has gone by over the past 12 months that I haven’t asked a source, or been asked, when we will hear about another restructure at Prezzo. Not if, but when. The brand had become the pin up boy for the part of the sector in the eye of the current cost-pressure storm – mid-market casual dining. When it was announced last September that Dame Karen Jones was to step down as its executive chair after four years, it was almost like the plug that was keeping the dam from bursting was taken out. Looking back now, Jones’ greatest achievement may be that she kept the business afloat for as long as she did.
Prezzo was founded and floated by the Kaye family and taken private by US private equity firm TPG in January 2015. When Jones arrived at Prezzo, TPG, a previous backer of Punch Taverns, had owned it for four years. After the deal, TPG embarked on a debt-fuelled expansion and the chain quickly ran into trouble. High debt levels, soaring labour costs and rising food prices took their toll. As did the distraction of other concepts – from Mexican chain Chimichanga and Caffe Uno to the lesser-spotted and short-lived Cleaver and MexiCo. In 2018, it carried out a company voluntary arrangement (CVA), shedding a third of its sites in the process. Documents from the CVA revealed that it owed £154m to secured creditors and £65.7m to unsecured creditors. Jones had worked with TPG previously – the investment firm backed her in a deal to establish the Spirit pub group – but after a long career building and selling successful brands, here she was being asked to turn one around. Not surprisingly, she was asked on several occasions why she would want the hassle. Indeed, at least one peer said at the time: “I wouldn’t have taken the job, the leases are too expensive and poorly sited.”
By December 2020, the business had changed hands again when Cain International, the privately held investment firm led by Jonathan Goldstein, which also backs Swingers and Chelsea FC, acquired 180 restaurants from TPG. The price was not disclosed, although Goldstein said at the time he was acquiring its equity and its £57m of debt. A few months later, and in the midst of a third national lockdown, Prezzo underwent another restructure as it struggled with rent arrears. The business was placed into a pre-pack administration and acquired by a new vehicle controlled by Cain for £5m, with a further 22 sites closing.
Goldstein said at the time: “We firmly believe that strong hospitality businesses such as Prezzo have a bright future and will play an essential role in reviving the UK economy.” However, although Jones spoke of the business needing to make bold moves, none seemed to be forthcoming while it remained in fire-fighting mode. In 2021, the business opened its first restaurant since 2018, in Cain International’s Islington Square development. But it is thought that this site has never gained traction and has been quietly marketed over the past year.
In May last year, Prezzo heralded a new senior team, promoting former chief operating officer and finance director Dean Challenger to chief executive, which followed the appointment of Matt Prior, ex-Pret finance director, as chief financial officer and Olly Smith as chief culinary officer. Goldstein stepped up to chairman after the departure of Jones in September, while Andrew Davill, formerly of David Lloyd Leisure, was appointed as its new chief operating officer in January. Prior has since left the business, with Challenger currently overseeing his duties – although I understand a new chief financial officer is close to being appointed. Earlier this month, the company said it had returned to profitability following a strong second half performance ahead of pre-pandemic levels. The company reported revenue of £94.9m for the year ending 2 January 2022. Overall adjusted Ebitda for the financial period was £4.2m and total statutory loss was £22.4m. It said: “Prezzo’s like-for-like performance has been comfortably towards the top of the sector on the CGA Peach Coffer restaurant tracker throughout the year.”
However, three weeks later it announced the closure of 46 loss-making sites, putting around 810 workers at risk of redundancy. The brand said the closures come after its utility costs rocketed by more than double. It said cuts, which are part of a broader strategic review, will affect sites where “the post-covid recovery has proved harder than we had hoped”. The closures will leave the business with 97 restaurants and about 2,000 staff. The business said the closures will impact some high street sites as its portfolio shifts more towards those “in better locations to cater to changing consumer habits” such as shopping centres, retail parks and tourist destinations. Everyone has suffered from some, if not all of the issues Prezzo has faced, but many have realised that providing average mid-market fare, no matter if it is done well, doesn’t cut it anymore.
Unsurprisingly, the reaction to the latest closures has not been positive. As The Independent stated: “Prezzo closing isn’t sad, the UK has moved on from overcooked pasta and soggy calamari. Prezzo has been serving a dated menu to an increasingly discerning nation.” Or, as one sector investor put it to me: “Prezzo has always been a bit rubbish, so no surprise it is dying. Ever thus, in our turbulent sector, creative destruction. Especially in this era of raging inflation and a cost-of-living crisis.” Another said: “A basket case. It has been dead since about a year after TPG bought it.” Many more gave unprintable reactions, others simply shrugged their shoulders, and surely apathy is worse than having no feelings about a brand?
It is also no surprise that the majority of the 46 sites that are closing – and it’s worth noting that a number of sites had already quietly been disposed of by the business since the turn of the year – are located in market towns across the country like Buckhurst Hill, Buckingham, Harpenden, St Neots and Whitstable. Alongside PizzaExpress, Prezzo was the first into market towns, but it has been a long time since they were the only show in those locations. These locations have become economically unviable. As one operator said: “The days when you could make money from generating £12,000-£13,000 a week are gone. Now it has to be £20,000 and above, and they have struggled to bridge that gap with a concept that hasn’t evolved significantly, a cost base that is fundamentally different to what it was and greater competition – whether that is from local operators or the likes of Loungers, Giggling Squid, Cote etc.”
While rivals have looked to move into the more premium market – such as Gusto and Zizzi – or tapped into their local communities and become more independent – see ASK Italian – Prezzo has seemingly done neither. It has also provided another example that the days of casual dining brands having 150-plus sites, perhaps even 100-plus, are over. As one sector investor said: “The whole easy rollout and teach guys to do the menu in two weeks kind of concept doesn’t work anymore.”
Before Cain came to the decision to close the 46 sites, I understand that it did reach out to explore a sale of the business and has been working with FRP Advisory on its options. It is thought the likes of PizzaExpress and the Zizzi and ASK owner Azzurri Group were approached pre-Christmas, but neither were tempted to take a rival off the board at that time. Some have voiced surprise that a further restructure wasn’t explored, although having undergone two already, a third may have been too much for the group’s landlords, which still include the Kaye family – which is thought to own circa 20 freeholds. It is thought that no property agent has so far been appointed on the closed sites. Some will appeal to the likes of Loungers – which has recently picked up former Prezzo sites in Thornbury and Malvern – while others might be picked up by local operators. Gail’s recently secured the ex-Prezzo in Horsham but usually steers away from restaurant sites, which are often too big and over-rented compared with other locations.
One of the issues still facing the business is that it will remain liable for the closed sites. As one agent said: “The landlords aren’t going to allow it to surrender, so it could take years to ship some of those sites in the current market. Why didn’t it do another restructure? It is worried that people will jump in and have a chance to pick up its better sites.” Another said: “One theory is that the business is going to write to landlords of the closed properties and make them an offer. Something along the lines of ‘here’s a month’s rent, and if you accept a surrender, you’ll get three month’s rent. If you don’t, we will put the company in administration and you won’t get anything’.” As one operator put it: “It seems now to have the worst of both worlds. It has all its liabilities and it’s got all of the bad press that came from doing it in a quiet news week. So, you question the timing and also the mechanism, which hasn’t dealt with the problem. If anything, it’s kicked the can down the road.”
So, is there a way to reverse the negative momentum? Some suggest Prezzo should have gone further in downsizing, something that has been levelled at the business before. As one advisor said: “What we tend to see is, whenever you do these types of site rationalisation programmes, they generally don’t go deep enough.” One rival operator was blunter, saying: “It should have just gone: ‘We are going to get rid of 130, keep 20 sites, fire the whole head office and try and do something exciting with the brand’, or try something new. If I had picked that business up, I would have closed that many on day one.”
Sector consultant Simon Stenning says: “Prezzo surely has to go through a brand and proposition redevelopment to amend and refine the whole deal. If it continues to sit as a mid-market Italian proposition, it will be nibbled at by better value social refuelling propositions such as Franco Manca or Pizza Pilgrims, or by better quality, higher priced but more of an experience brands such as Gusto. Add in the other competitive elements to the market, and not just restaurants (Market Halls, New Fast Food etc), then it remains a tough place to be.” Perhaps a new brand being developed and applied into certain sites – a bit like Hugh Osmond did with Strada converting to Coppa Club – could also be explored, but it depends which locations it has left and how it can invest into the better ones.
It also depends on what appetite Cain has to invest further into the business. Can it afford not to? A strategy of holding it and seeing if it can turn it around hasn’t worked. As one chief executive said: “If it doesn’t have any cash to invest, buildings get materially worse and you have an estate that is ageing. On top of that, staff won’t want to work there and the customer experience is going to be terrible, and then revenue drops. It’s a tailspin from there on in.”
Perhaps Cain believes it can get it down to a certain size, and that as it makes some money, the market returns and it can sell it for more than one times. As one sector advisor said: “Even with it being where it is now – and you could argue whether it is a dead brand – it still has a core of profitable sites, and it might take a view on that, and that it can exit that way. Azzurri and PizzaExpress would look at it from a site perspective, but like most other businesses/possible suitors, they want growth brands. They want cool teenagers, not adults. At the moment, there needs to be the right mix of desperation and valuation.”
The plight of Prezzo will also have sent a shiver down the spine of other operators. There are still some brands facing a similar predicament, and it remains tough trading conditions out there. As Stenning says: “I am forecasting the Bank of England will increase interest rates again in May, and possibly further again, in order to bring down inflation. So, rather than seeing the economy get better in the second half of the year, we could see further tightening – purely because despite inflation staying high in the first quarter (it will fall in second quarter), it hasn’t stopped consumers from spending, and the economy (GDP) is still okay. Current interest rate rises haven’t curtailed spending, which is required in order to put the stop on rising prices.”
It could also lead to further bifurcation in the sector. As one sector executive said: “Dine-in covers have not recovered to what they were pre-covid. Nobody really knows where they’ve gone and why. There’s a whole proportion of people that just haven’t come back. Covid is now in the rear-view mirror and has been for a while, so where are they? The benefit for many is that they have a delivery business to compensate, so they are trading up, because the delivery business is offsetting the decline in dine-in, but you don’t have that benefit you must have just pure decline. So, if your revenue is in decline and you have all the cost increases, it must be a nightmare. There are some winners who are winning from delivery and whatever else, and there are some people, through no fault of their own, who are just not as profitable because of the structural shift taking place.”
Prezzo was at the forefront of a previous structural shift – the mass movement of eating-out brands on to UK high streets – creating an over-saturated market in the process. It is now again paying the price for failing to move with, or stand out from, the crowd.
Mark Wingett is Propel group editor. This article first appeared in Propel Premium, which is sent to Premium subscribers every Friday. Companies can now have an unlimited number of people receive access to Propel Premium for a year for £995 plus VAT – whether they are an operator or a supplier. The single subscription rate is £495 plus VAT for operators and £595 plus VAT for suppliers. Email email@example.com to upgrade your subscription.
Operators need better access to the data by Glynn Davis
Gone are the days when restaurants were simply about word-of-mouth recommendations, placing adverts in the local newspaper and seeking to fill the dining room. The industry is now increasingly about using digital marketing techniques to draw people into buying a restaurant’s offering down a variety of channels, through the use of myriad third-party tools and applications.
There is no doubt that as businesses have become increasingly multi-channel, they are relying on an ever-complicated infrastructure of technology solutions. This certainly adds complexity to operations, but on the upside, it also provides businesses with a potentially rich source of data. This very much represents an opportunity for companies to run their businesses in a more intelligent way, using a variety of new metrics alongside some updated key performance indicators (KPIs).
By moving into digital channels, restaurants have become much closer to operating as e-commerce companies, where metrics such as customer acquisition costs (CAC), search engine optimisation (SEO), conversion rate optimisation (CRO) and customer lifetime value (LTV) are all important measures to determine the levels of success of companies in attracting customers, and then driving sales over the long-term.
Much of the data necessary for determining these metrics should be available from the technology providers – including the delivery aggregators and the booking tool operators – but it can be tough to get the necessary data out of them. This is a serious worry, because as non-dine-in channels become more important, restaurants need to get a better handle on exactly what is going on online when they tie up with the likes of UberEats, OpenTable and the mass of other providers. What advertising is working and with what particular grouping; and what are the levels of cart abandonment and does it occur at certain times; should all be easily answerable.
The lack of access to customer data can be a major hurdle for restaurants and their ability to operate more efficiently and profitably. Nick Kokonas, owner of US-based The Alinea Group and founder of restaurant booking system Tock, is critical of the typically poor access to data that restaurants have from their third-party solution providers. He reckons this stymies them from deploying KPIs that are essential to helping them succeed in today’s competitive multi-channel environment.
He has adopted the sales-per-seat-hour metric at his restaurants, which he believes is the critical KPI for measuring efficiency. The data generated from the Tock booking tool, overlaid with the point-of-sale data, enables the viewing of this measurement by the hour and day of the week. This can highlight whether tables should be turned more quickly, or if the focus should be on tempting customers to bump up their spending.
Tom Kerridge has also placed a greater focus on this metric as he believes putting a total value on a seat is more meaningful than on a single dish when looking to juice the performance at his various venues. He suggests this takes the restaurant industry into operating more like airlines, theatres and sports event venues, where there is a concerted strategy to maximise the value of the seat through offering attractive add-ons and extras.
Recognition of the need to maximise the value from space is also evident in the hotel sector, which is looking at relying more on a different set of metrics. Traditionally, they have sought to generate the highest annual daily rate (ADR) for the rooms that has fed into the ubiquitous revenue per available room (revpar), but this fails to take into account the other revenue streams outside the rooms, such as the restaurants and conference operations. These could easily account for half of a hotel’s total revenue, as food and beverage has become such a key feature within the modern hotel. There are, therefore, moves to place increased importance on measuring the efficient utilisation of the entire property through the metric revenue per available square metre (revpam).
This shift away from historical, increasingly outdated metrics is sensibly giving much greater visibility to revenue generation and profitability across whole businesses in the hotel sector. This is certainly something the restaurant industry can learn from as operators pursue more multi-channel models. But essential to such moves succeeding is access to the relevant data from third-party providers.
Glynn Davis is a leading commentator on retail trends
Restaurant diversification strategies – moving into retail by James Hacon
Restaurant brands are increasingly ripping up the rule book of just delivering traditional hospitality in-venue and at the table, to thinking much more holistically about the commercial opportunity to stretch their brands beyond bricks and mortar. While sound advice in the past might have been “do one thing well”, many would now agree that with the hindsight from a chain of crises, including a global pandemic, the brands that have come through on top are the ones with an omnichannel approach. In this article, I’ll share some examples of the ways restaurant brands are diversifying their revenue sources and following alternative paths to success through moving into retail.
It’s fair to say I’d possibly not have survived lockdown without the treat of the occasional meal kit from our favourite restaurant. Whether it was a sneaky Honest Burger, cheeky Dishoom Breakfast Naan or indulgent Hawksmoor steak kit, these brands delivered a little normality, and with it, joy to those dark days. Fast forward almost two years, and it’s hard to remember that the idea of the meal kit was with us before the pandemic, and there has been a lot of discussion as to whether there would be a market for this after the pandemic, when everyone got back to normality. In one way, brands hoped not as everyone in hospitality prefers full, buzzing venues over meal kits through the post. But equally, there was clearly money to be made and it was profitable, so many worked hard to retain and build their business within this billion-pound industry, created and dominated by industrial players from outside the hospitality sector.
Hawksmoor was one example, which was was quoting sales volumes of 2,500 to 3,500 meal kits a month in March 2021, and even appointed a dedicated heavyweight director to lead this division. Today, the brand is no longer promoting the offering on its website, so has presumably discontinued the service but has continued a relationship with Ocado, with branded steaks on offer via the online retailer. Industry favourite Dishoom, on the other hand, is still offering its popular Bacon Naan Meal Kits for home delivery, as is Pizza Pilgrims with its Pizza in the Post.
Celebrity chef and restaurateur Rick Stein created Stein at Home, selling both meal kits and an online fishmonger service, which is filling a gap in the market, with a decline in bricks-and-mortar fishmongers and the removal of the counters from many major supermarket chains. This project won our Restaurant Marketer & Innovator Award for Best New Product Development last year and is still going strong today.
It’s clear there will be a continued demand for such service – positioned between cooking completely from scratch and ordering a ready meal – so the question is who gets to grab that pound? Will it be industrial players like Gousto, or could it be a chance for people to enjoy their favourite brands at home? In my observation, strong and trusted restaurant brands ought not to discount this opportunity, but should consider meal kits among their strategic options.
Winning in this market is not without its challenges though, and getting it wrong risks damaging the brand and stealing valuable management attention, in addition to the purely financial risks. One challenge for operators is to balance running their restaurants and maintaining these services. We’ve seen several brands outsource the solution and others build it into their central production kitchen models. One company, Dishpatch, has offered celebrity chefs and high-end restaurants the option to partner them in retailing a limited range of dishes to be finished at home. This service has not only attracted the interest of the likes of Michel Roux Jnr, Ottolenghi, Tom Kerridge and Angela Hartnett, but also the investment community, with £10m raised in 2021.
The power of a successful restaurant brand should not be underplayed, even when pitted against the biggest names in grocery or supermarket home brands. They not only hold their own but can often compete fiercely, even at a premium price point. The phenomenon of seeing restaurant brands on our supermarket shelves got its kickstart with PizzaExpress launching its retail pizza range in 1998, since when it’s gone from strength to strength. In 2020, the brand was reportedly selling more than 30 million pizzas in UK supermarkets each year in 4,500 outlets – nearly ten times the number of its own restaurants. Being the second most purchased ready-to-cook food in supermarkets, and with a market worth £231m a year, the chilled pizza market has attracted other players too, with Carluccio’s and Franco Manca both competing for a slice of the action. Meanwhile, casual dining brand Zizzi has opted for the frozen aisle, with a range of pizzas, pastas, sides and desserts in a Tesco tie-up. On the back of the Pizza in the Post initiative I touched on above, Pizza Pilgrims has a partnership selling pizza kits with Ocado.
Pizza as a category has laid the foundation, and many other brands have used this to build their own retail ranges and partnerships. Frozen food specialist Iceland is, perhaps surprisingly, a major player in this space, having built out exclusive supply deals with a range of the biggest names in the sector, some with entire branded freezers baring their name. These include TGI Fridays, Frankie & Benny’s, Greggs, Ed’s Easy Diner, Chiquito’s, Harry Ramsden’s & YO!
Elsewhere in the market, we see Sainsbury’s selling a range of Patisserie Valerie premium cakes (yes, PatVal lives on); Thomasina Miers’ brand Wahaca with a meal kit range; Gourmet Burger Kitchen burger kits and sauces; and even Pret with a range of cereals, bakery items and smoothie mixes. These last two are partnerships with All About Food, a company specialising in taking restaurant brands into fast moving consumer goods (FMGC). Built out of industry heavy-weight Nando’s, and starting out as the Nando’s Grocery Company, it has gone on to take the likes of Costa Coffee, Wagamama and Red’s True Barbecue on to supermarket shelves. It’s hard to look beyond its success with the Nando’s sauce range, however, which first launched into retail in 1999 and last year overtook Colman’s in sauce sales, shifting £35.9m worth of sauces last year – and that’s just here in the UK. The range is reportedly now available in more than 10,000 stores in the US and is popular elsewhere, including in Australia.
Moving from supermarkets to convenience retail, one example of a successful brand tie-up came by the way of Jamie Oliver’s partnership with forecourt operator Shell on a new to-go range in 2019. It launched to 500 filling stations across the UK with a range of 80 products, focusing on a healthier range with more fruit, vegetables and colour. Coming shortly after the collapse of Oliver’s UK restaurant group, it goes to prove that there may be power in a brand even if it's in a different format or situation.
Winning in retail is a step further away from many restaurants’ core business than offering meal kits, and getting access to shelf space requires much more than just a great product and success as a hospitality business. Suddenly, one is up against the many thousands of new products that are introduced to supermarket consumers every year, and supermarkets are themselves among the toughest buyers and partners in the retail world. If it works, it can be strong leg up for any hospitality brand – but it does require solid groundwork to succeed.
Counters and kiosks
The opportunity in retail is not just in FMCG retail ranges, as highlighted above. Having seen the incredible success of businesses like KellyDeli, the brand that partners supermarket chains with franchised sushi counters, the supermarket concession model has proven to be quite the prize, with many high street restaurant brands trying their hand – although many have also retreated quietly after fanfare launches, suggesting it’s not quite the gold rush they may have first hoped.
Going back to KellyDeli, this is a business that was founded in 2010 and really has grown at breakneck speed, with thousands of sushi and Asian food kiosks across 11 countries and with four consumer facing brands: Sushi Daily, Kelly Loves, BamTuk & TukTuk. This growth has predominantly been through supermarket counters and concessions, with the largest of these deals being with Carrefour across France, Spain and Italy. Here in the UK, it has agreements with Waitrose and Asda, and recently launched a new multi-concept brand with Tesco called Kelly’s Market offering five food concepts: CKN + BAO, Dos Mexicanas, BamTuk, My Little Dim Sum and Little Moons ice cream mochi.
Also very active in the sushi counter space is The Snowfox Group, parent company of YO! and three other brands – Snowfox, Bento and Taiko. It operated close to 6,000 kiosks back in 2020 and has since reported a near 50% jump in sales driven by its push into grocery retail and in-store kiosks. Here in the UK, the business has retail partnerships with Sainsbury’s and Tesco with its YO! Brand, and Asda, with Panku Streetfood.
Just this month, we’ve seen the announcement that Gail’s Bakery-dedicated areas are to be introduced to 64 Waitrose shops in the south and east of England, following a trial in three stores in 2022. This is the next step in a relationship founded in 2010, when the supermarket started stocking a Gail’s Bakery bread range.
Two notable examples of discontinued trials that have failed include Zizzi, which partnered with Sainsbury’s in 2017 to offer a hot, ready-to-eat pizza proposition in store, and Pret A Manger, which ended its in-store concessions partnership with Tesco after just over a year last September, having only opened one of the four planned outlets.
It’s fascinating to see how brands are constantly adapting, considering new routes to market and revenue generation opportunities. What is clear is if done properly, these brand extensions can help to solidify the brand as a high street name – not only providing direct commercial return, but also improving brand recall and authority.
James Hacon is the founder and partner at THINK Hospitality, the strategic restaurant consultancy, innovation think tank and venture partner