Number of restaurants in financial distress rockets as CVAs up by 143%

The number of restaurants in financial distress has rocketed by 143% in the last six months, compared to the previous six months. Data analysed by global law firm Linklaters shows that there were 12 CVAs, a process which a struggling business can enter into, allowing it to restructure its estate, in the first quarter of this year. This compares to 17 over the whole of 2017.

A string of restaurant groups have resorted to CVAs to close outlets this year, including Byron, Carluccio’s and Prezzo.

Richard Hodgson, Restructuring & Insolvency partner at Linklaters, says:

“The sector has been faced with a number of issues that have caused a stranglehold. First, there’s oversaturation in the market. A number of chains expanded rapidly to the point that supply has raced ahead of demand. Couple that with increased food prices, staff costs and business rates, owners are looking at where they can reduce costs to put the business on a more sustainable footing.” 

 

In 2018 there have been a number of high profile CVAs on the High Street too, with CVAs up by 42% over the last six months compared to the previous six months. Toys retailer Toys R Us, Carpetright, Mothercare and just last week, House of Fraser, all launched CVAs.

Hodgson says: “The idea is that by launching a CVA, as an emergency option, the company has an opportunity to tackle underlying problems, such as an overrented and inflexible store portfolio and ensure that a sustainable business survives. But if some of the root causes aren’t dealt with, it could be a case of delaying the inevitable.”

Whilst CVAs have been used to help businesses, there is a significant knock on effect for property companies with figures from the Centre for Retail Research showing that 23 retailers failed this year, affecting 1,851 stores, a 33% increase compared to the whole of last year.

Simon Price, Real Estate partner at Linklaters, says:

“When used successfully, CVAs can lead to businesses being saved and therefore fewer property vacancies. However, their use has become much more wide-spread and is therefore having a more significant impact on landlords than was maybe originally conceived. As a result, we have seen some resistance and pressure from a number of landlords this year, calling for the government to reform the system.”  

 

He argues that whilst CVAs are an issue for landlords; retailers, landlords and investors are facing equal challenges. He says: “The number of recent occupier defaults is part of a wider set of challenges facing investors in high street retail at present and we are seeing an increasing number of investors looking to reduce the overall retail floor space by focussing on an increased mix of uses such as leisure, while looking for opportunities to carry out residential development on available land in town centres.”