Wagamama could become focus in Restaurant Group’s evolution | Business News
Investors in the Restaurant Group have not had much to smile about during recent years.
Shares of the company, which owns the Frankie & Benny’s, Garfunkels and Chiquito restaurant chains, cratered a fortnight ago to levels last seen in August 2009 amid deepening pessimism over its prospects.
The group has been among those caught in the storm engulfing the casual dining sector during the last 18 months or so in which it has become apparent that there is too much capacity in the market.
The Restaurant Group’s solution was to pay £559m for Wagamama.
The deal was deeply divisive, with two in five shareholders voting against the takeover, arguing that the company was paying too much for the noodle and pan-Asian restaurant chain.
Doubts among investors were then amplified when Andy McCue, the architect of the takeover, abruptly announced last month that he would be stepping down as chief executive due to “extenuating personal circumstances”.
Accordingly, ahead of today’s full year results, expectations were suitably depressed.
Yet things have not turned out quite as badly as feared – sending the shares up by 13% at one point today.
Sales on a like-for-like basis – which strip out restaurant openings, closures and refurbishments – were down by just 2%, while overall sales were up by 1%, to £686m.
And, while pre-tax profits slumped from £28.2m to £13.9m, they were down by just 8.1%, to £53.2m, on an underlying basis. That was appreciably better than analysts had expected.
The accompanying statement, too, offers hope to investors.
Wagamama, on which the company got its hands on Christmas Eve, continues to trade strongly with like-for-like sales rising by 9.1% during the final three months of the year. That is much faster than the Restaurant Group’s existing assets but nonetheless represents a slowdown from earlier in the year.
Four new restaurant openings are planned for 2019 while a further eight sites already owned by the company and trading under other formats – probably Frankie & Benny’s or Chiquito – will be converted to Wagamama.
A delivery concept for Wagamama is also being rolled out.
The company also talked today about growing its concessions and pub businesses.
It currently operates concessions across 35 brands in Britain’s railway stations and airports. If you’ve eaten in the Giraffe World Kitchen at Heathrow, Manchester or Stansted Airports, or had a drink at the Hourglass Café at Manchester Piccadilly station, you’ll have sampled some of the company’s wares.
The concessions are now being taken beyond stations and airports. Two new brands, Mezze Box and Grains and Greens, are being trialled at Sainsbury’s stores.
The pub business, not a part of the company to which the City has paid much attention in the past, appears to be outperforming the sector and further openings are planned for the group’s Brunning & Price pub operation which, having been originally based in the North West of England and North Wales, now also has sites in the West Midlands and South East of England.
But investors have plenty of questions.
One concerns whether Wagamama can continue growing at its current pace.
The other is whether the likes of Frankie & Benny’s, Garfunkels and Chiquito can ever return to growth in an environment in which home delivery services like Uber Eats and Deliveroo are attacking the established restaurants, in which costs are being driven higher by increases in overheads like business rates and wages and at a time when consumers have more choice than ever: the last five years have seen the number of branded restaurants across the land increase by more than a quarter.
The company admitted today that nearly one in three of its 248 Frankie & Benny’s outlets are trading from what it calls “structurally unattractive locations” and are likely to be closed in coming years.
Looking at these results, it is possible to detect some signs of change, but the turnaround is going to take time.
Some in the City believe in the story. Greg Johnson, of broker Shore Capital, told clients today: “Over the next five years, the Restaurant Group will shape significantly towards a faster growing business.”
But Douglas Jack and Ivor Jones, at Peel Hunt, are nervous that sales growth at Wagamama is slowing. They added: “The company will need almost 2% like-for-like sales growth just to cover labour cost inflation. We view the shares as being inexpensive, but with too much risk to buy.”
To that end, the appointment of Mr McCue’s successor will be vital.
They may need to be more ruthless with some of the older brands. Previous managements have been: brands that have been sold or closed down the years by the company include Deep Pan Pizza, Wok Wok, Rik Shaw’s, Nachos, Caffe Uno and Est Est Est.
And, if the new boss balks at the degree of ruthlessness required, he or she might seek to change perceptions of the company by changing its name from the Restaurant Group to Wagamama.
If that sounds implausible, bear in mind the company has done it twice before. Its original name was Belhaven but, in 1989, this was changed to City Centre Restaurants.
It was rechristened again in 2004 to reflect the fact that more of its sites were not, in fact, in city centres but in out-of-town locations like retail and leisure parks.
A name change to Wagamama would emphasise that things have changed again.