The UK’s top 100 restaurant groups grew their debt pile by 19% in the past year, from £1.65 billion to £1.96 billion, according to national accountancy group UHY Hacker Young.
The company said that many restaurant chains are still increasing their borrowing in order to acquire and fit out new sites, even as high-profile competitors face insolvency.
It noted that many restaurant chains can only reach break-even by scaling up rapidly to achieve economies of scale. This means they have to go through long periods of increasing borrowing to acquire and fit out new sites.
Though trading conditions on the high street have become very challenging over the past year, these businesses often feel they have little choice but to continue with these expansion plans. This may mean taking a gamble on the success of new sites.
UHY Hacker Young says that the borrowing of the UK’s Top 100 restaurant groups now amounts to 35% of their £5.6 billion annual turnover.
While this level is not yet a great concern overall, there are businesses within the sector with much higher levels of leverage, which may face problems if new sites underperform.
Martin Jones, Partner at UHY Hacker Young, stated: “For the restaurant sector’s debt pile to keep growing shows that some groups are continuing to borrow, invest and grow aggressively. A lot of restaurant businesses do not have the option of easing off on expansion plans as the sector struggles – they simply have to grow quickly to reach profitability.
“Significant expansion for a restaurant group is a very expensive undertaking – rent deposits and fit-out costs for a group of new sites often require a substantial increase in borrowing. If new sites don’t turn out to be profitable, restaurant groups can very quickly find themselves facing a CVA or closures.”
Mr Jones added that the margins in the restaurant business are so thin that just one or two underperforming sites can send the whole chain into the red.