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Restaurant chains cutting off weak arms

Restaurants have one major advantage over high street retail outlets and that is their immunity from the effects of the internet. By Glynn Davis, City editor


Restaurant chains cutting off weak arms

Restaurants have one major advantage over high street retail outlets and that is their immunity from the effects of the internet. By Glynn Davis, City editor

There is no such thing as virtual eating out (yet) that is negatively impacting the sector unlike the retail industry where physical stores are under constant attack from the online channel.

But this does not mean that life has been any easier for restaurant chains and recent statements from two established operators have highlighted just how tough things continue to be on the high street. They also show that the best way to move forward is to take the hit and offload the weakest parts of the business and concentrate on the stronger components.

In a move that had been on the cards for some time, Clapham House Group announced that it had withdrawn support and funding for its Tootsies chain that has performed badly ever since it was purchased in May 2006. The ongoing economic situation suggested to management that the corner was unlikely to be turned any time soon, if ever.

Having attempted to sell the loss-making business, and failed, the group finally pulled the plug and sent it careering into administration. The Giraffe chain has purchased 11 of the 21 units and will convert them over to its fascia.

The move resulted in Clapham House enjoying a double-figure boost to its share price – moving up from 60p to a current 70p - as Tootsies has long been regarded as a serious drag on the overall group. It is now free to grow its successful Gourmet Burger Kitchen brand or it could now prove to be a sufficiently tasty target for Capricorn that holds a long-standing 24 per cent stake in the group.

The other restaurant chain taking the decision to cut out its weakest link is Carluccio’s that is to sell one of its stores following its underperformance. Since it has also taken a provision against the carrying value of another unit, it looks likely that this will also find itself in the estate agents window. 

Although this is the first time the company has resorted to closing units - which is pretty good going considering it operates 45 outlets - investors will be hoping that this does not signal the start of a trend. The share price has already retreated slightly – from 96.5p before the announcement to a current 90.5p.

The most worrying aspect of this situation is that the two outlets on the block are believed to be newer restaurants. Any evidence of further misfiring on its site selection would be of extreme concern as the Carluccio’s strategy is based on its roll out of five stores per year in the UK (along with a franchised strategy overseas that has seen it open its first outlets in Dublin and Dubai).

This is not an aggressive expansion programme, highlighted by the fact it is funded entirely out of cash flow, but any lower-than-average contribution from new outlets would hit the group hard as its growth story to the City is very much based on growing the top-line through new units.

Its policy of not disclosing like-for-like sales numbers combined with its first closures represents a worry but the City remains upbeat on Carluccio’s prospects, as they also do for Clapham House Group, with both groups probably gaining some credit for showing that they are willing to wield the knife when it is needed.

What both operators now need is for consumers to also wield the knife (and fork and spoon) in increasing numbers in their restaurants in order that the investment community’s faith in their business models is justified.

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