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Fri 26th Aug 2016 - The Restaurant Group – reinvigorating Frankie & Benny’s, learning from its mistakes, strategic review update
The Restaurant Group – reinvigorating Frankie & Benny’s, learning from its mistakes, strategic review update: Following today’s (Friday, 26 August) first-half results, The Restaurant Group chairman Debbie Hewitt outlines the company’s plans for reinvigorating Frankie & Benny’s, learning from its past mistakes, and the next part of its strategic review.
Overall trading:
Hewitt said trading was in line with guidance and had improved slightly in recent weeks with like-for-like sales for the 34 weeks to 21 August down 3.7%. She said: “Although the leisure division continues to face a difficult trading period, our pubs and concessions are doing well. We have a new executive team in place. We have decided to close 33 sites and impair a further 29. I think when you are running a business day to day it’s easy to assume competition is causing the problem. What has happened here is a business that has been run very instinctively. Our review though has allowed us to drive down in a data-driven way where we have lost our customer focus. What our competition has done is provide a much better value offer. We compete for every pound that is spent on eating out. I can’t control the market but the things we are in control of ­I am very confident about. Having the right focus and the right team puts big ticks in the box.”

Strategic review update:
Hewitt said the company would now apply many of the findings from its review of Frankie & Benny’s to its other brands. She said: “Some of the things that have picked up in Frankie & Benny’s are likely to have affected our other brands. We will look at price and customer service across all our brands. We won’t be looking to convert Frankie & Benny’s sites to other brands – in fact there’s opportunity to expand Frankie & Benny’s. Following the review, I’m more confident about the roll-out of Frankie & Benny’s. The new executive team will have totally responsibility for the direction of the business. The first key job for them is to get to know our customers, and get to know why our customers come back to us and go to the competition. The second part is to get to know the people in the business. They need to take those two bits to influence the next part of the strategic review. We don’t think there’s a need to change our strategy in terms of location. There are one or two retail parks where we struggle but overall our locations work for us.”
Frankie & Benny’s:
Hewitt has vowed to put the customer first as it looks to reinvigorate its biggest brand Frankie & Benny’s. Hewitt admitted internal decision-making had been a factor in the brand’s problems as well as increased competition in the casual dining segment. She said: “We pushed our prices up too high and removed some of our popular value offers. We failed to test the new authentic menu as a concept before rolling it out across 200 restaurants. The complexity of these new menus created significant operating problems in the restaurants and that hit our level of service. Despite these own-goals, Frankie & Benny’s is still loved by families. We are moving on very rapidly with our plans. It’s value we are looking at. First of all we are going to do price testing across our sites. We are also going to look at bringing back some of the dishes that were popular before. It’s about creating value for the sites and testing that rigorously. Some of the dishes we now have are complex for our chefs to make. Consumer trends change so it would be foolish to say we will bring back all the old favourites. We also have a new managing director for Frankie & Benny’s, who started in June. Until then we did not have a leader for the brand that was the most substantial part of our estate. We are confident once these things have been fixed we can roll-out Frankie & Benny’s to other sites but this will take time.”
Hewitt said expanding the concessions side of the business was very much part of the company’s plans. She added: “Concessions is a very successful business. What I have learned very harshly from this review is delivering outstanding customer service is essential and we need to do that across all our brands. However, expanding the concessions is very much part of the agenda.” 
Site closures:
Hewitt said the company had decided to close 33 sites across the business following the first part of the review while a further 29 were being impaired. The closures would be 14 Frankie & Benny’s sites, 11 Chiquitos, three Coast to Coast, two Joe’s Kitchen, two Garfunkels and one pub. Hewitt said: “We are closing 33 sites that are not sustainable. We also found 29 more sites that we needed to impair. Following the review, we feel more confident that if we learn from these lessons then we can turn them around.” The closures will leave us with 250 Frankie & Benny’s sites by the end of the year and 500 across The Restaurant Group. 
Focus and investment:
Hewitt said the focus of the business would be making sure the customer was put first. She added: “It’s all about making sure we offer value and all of these things will start with the customer. It’s about thinking about what the customer wants. Giving them choice is the important thing as well as a quality offer. I don’t think we need to invest money in the sites themselves. It’s the dishes and the prices that need looking at. We will be investing £6m of capex into technology. This will include tills, other systems and workflow systems. Our three main cost drivers are wages, input of food and then business rates. Our focus at this stage is the offer, the food and the service. Let’s get our cover numbers up before we start looking at increasing our space.” 
Analyst reaction:
Numis Securities leisure analyst Tim Barrett said: “Frankie & Benny’s is still the underperformer and management believes that menu changes have alienated the core-customer base (families) which it is seeking to address. The appointment of Andy McCue (ex Paddy Power) as chief executive is strategically important. We expect him to prioritise stabilisation of the Frankie & Benny’s brand, but we also see scope for more effective capital allocation. The decision to close 33 underperforming sites seems a sensible start. We view it as an attractive, cash generative, turnaround situation that under the credible new management team should return to earnings growth relatively quickly.”

Peel Hunt leisure analysts Ivor Jones and Ali Naqvi said: “The review of Frankie & Benny’s estate is complete and has identified issues with pricing, operational execution and menu development. We believe this is the start of a long journey for the group but shows that management is ready to make the changes necessary to prepare the business for the future.”
Cenkos leisure analyst Simon French said: “The Restaurant Group has announced first-half results ahead of reduced expectations reporting £36.6m profit before tax (14.2p earnings per share) ahead of our forecast of £32.5m profit before tax. The statement contains a number of relatively positive messages including an improvement in current trading (like-for-likes circa 3% for past eight weeks versus -3.9% for 26 weeks to end of June), a maintained interim dividend and reiterated full-year guidance (£74m to £80m profit before tax on a 52-week basis). The group has identified 33 restaurants to close/sell and a circa £7m profit improvement for 2017 from lower depreciation (following closures), onerous leases and other efficiencies. Given the potential for further profit improvement and with Andy McCue joining as chief executive next month we do not think the stock is expensive trading on a 2017E adjusted EV/Ebitdar of 7.2 times (price-to-earnings ratio 12.7 times) and yielding more than 4%, ‘Buy’.”

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