As the restaurant sector is hit by a rising cost base, Prezzo was the latest chain to announce closures of up to a third of its 300 plus nationwide restaurants this week as it works with AlixPartners to review company voluntary arrangement (CVA) options.

Last month upmarket burger chain Byron entered a CVA in an attempt to rescue the business and announced it would shut 20 restaurants, nearly a third of its outlets. In January, Jamie’s Italian chain announced the closure of 12 of its restaurants in a similar restructure, while Strada closed 11 restaurants, citing ‘disappointing trading and rising costs’.

Jessica Walker, partner at Mayer Brown said: ‘With proper planning and good management, CVAs can be used effectively to deal with the liabilities created by one or more areas of a company’s business in order to enable the company to continue to trade into the long term.

‘Whether CVAs will become more prolific remains to be seen. There are other high profile companies who are currently rumoured to be considering CVAs to reduce the extent of their rent bill and there is no doubt that they can be a useful and proven tool to help a business to restructure its ongoing liabilities.’

Cost pressure is unlikely to ease, warns Carl Jackson, managing partner at corporate recovery and business advisory firm Quantuma.

He said: ‘We are increasingly witnessing market saturation, with the public’s disposable income just not increasing at a commensurate rate to match the number of eateries that have opened in the recent past.

‘Many restaurant chains are also facing sharp costs rises in the areas of rent, rates, wages and ingredients.

‘In some cases, landlords have offered “rent-free periods” for new venues – typically out of town shopping centres – which while initially attractive can easily create a “false” profit position in the short-term followed by a sudden cash flow drain when those periods expire, and rent must be paid.’

‘On top of this, rateable values are soaring depending on where the venues are based in the UK, with the impact in London potentially resulting in rises of as much as 400%.

‘Food inflation also means that the price of sourcing ingredients has increased, which places an increased burden on margins.

‘Meanwhile, restaurants typically employ people on hourly wages based on the minimum wage, which is due to rise from £7.50 to £7.83 per hour in April.

‘But they are also facing growing pressures to apply a National Living Wage which is £8.75 across the UK and as much £10.20 in London, which is having a significant impact on payroll costs alongside the cost of implementing and offering auto-enrolment to large workforces.

‘Differentiation has also been an issue with many comparable chains bringing similar offerings to the marketplace, resulting in the need to utilise special offers to attract custom, a further negative impact on margins if the volume of sales do not increase sufficiently.’

The challenges faced by struggling restaurants are mounting as competition is fierce on the High Street with an over-supply of outlets, costs escalate and consumer spending is dampened.

Jackson added: ‘To put it bluntly, the increasingly abundant sites that have been opened by restaurant chains in particular are vying for a portion of a market that is just not increasing in size.

‘There are too many restaurant chains on our high streets for the marketplace to support, while that marketplace is getting much more expensive to operate within.

‘The businesses involved need to take heed of what has become a perfect storm and should take the appropriate action now, regarding cost management and efficiencies, before it’s too late.’

Report by Sara White