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Mishcon Academy: Digital Sessions – Eat out or Lights out: The recovery of the UK's restaurant industry

Posted on 12 October 2020

Mishcon Academy: Digital Sessions are a series of online events, videos and podcasts looking at the biggest issues faced by businesses and individuals today.

The COVID-19 pandemic has been a turning point for the restaurant industry, with many operators having pivoted in new directions, re-thought strategies and re-invented themselves to stay in the market, as well as significant changes in restrictions continuing to affect the sector on a daily basis.

In this session, held prior to the Government's announcement of a second lockdown in England, our panel of industry operators and experts discussed how restaurants are adapting to this new reality, the shift in relationships between landlord and operator, how the industry now needs to focus on a purpose beyond just profit, and what we can expect of the M&A/investment outlook within the sector. Please get in touch with a member of our Hospitality & Leisure team, or your usual Mishcon contact, if your business has been affected by the latest Government announcements since this panel was recorded.

The panel, chaired by Corporate Associate Leanne Maund, comprised: George Bukhov, Co-Founder, Burger & Lobster restaurant group, Petra Barran, Founder, KERB, Darrel Connell, Partner, Imbiba and Payam Keyghobadi, Partner DSW Corporate Finance.

This live session was held on 12 October 2020. All information was correct at time of recording.

The Mishcon Academy Digital Sessions.   

Leanne Maund, Corporate Associate

Mishcon de Reya

Good afternoon everyone and welcome.  My name is Leanne Maund and I’m a Corporate Lawyer in the Hospitality and Leisure Group at Mishcon de Reya.  This is a Mishcon Academy Digital Session, a series of online events, videos and podcasts looking at the biggest issues faced by businesses and individuals today.

This afternoon, I am chairing a discussion with four operators and experts in the restaurant industry to discuss the outlook for the sector as it reacts to the effects of the Covid-19 pandemic and so I’d like to introduce our panel.  Firstly, we have George Bukhov, Co-Founder at Burger and Lobster Restaurant Group.  Petra Barran is a British entrepreneur and the Founder of London street food collective, KERB.  Darrel Connell is a Partner at Imbiba and he leads the Investment Team and finally, Payam Keyghobadi.  Payam is a Founding Partner of the Dow Schofield Watts London Corporate Finance Team specialising in the consumer, leisure and hospitality sectors.  In our conversation today I am going to ask the panel to give us their perspectives on the restaurant industry now, what’s going to happen in a few months and although impossible to predict, what they think the longer term future of the restaurant industry will look like.

Firstly, I wonder if our panellists can just give us a view on how the industry has adapted to the challenges posed by the pandemic and how’s it coping and for Petra and George in particular as operators, what does business look like now?  So, Petra if it’s okay I’d like to go to you first. 

Petra Barran, Founder

KERB

Thanks very much, Leanne.  It’s just mad how everything just becomes normal, doesn’t it?  Even though it’s kind of horrific, everything sort of normalises and you just sort of used to it but the fact is that none of our markets have reopened, apart from one which is not doing very well, there’s just not enough people there, like all of our lunch markets are in high footfall office areas, that’s been our model, so they’re all just gone.  So, our main market is Seven Dials Market which is also in central London but it’s got a roof over its head and it’s doing as well as it could be given that there’s not many people round there but it’s probably 75% down on what we would have expected and, yeah, it’s just completely different in many ways but in lots of ways it’s the same, it’s the same kind of impetus, serve great food and give people a good time. 

Leanne Maund, Corporate Associate

Mishcon de Reya

And George, given that your latest venture was so new when we started all of this?

George Bukhov, Co-Founder

Burger and Lobster Group

Generally we are between 30 and 65% off last year of what it should be.  Surprisingly, the spend in all of the locations is up, I think it’s a general sort of effect throughout the industry where people have less chances to enjoy themselves and they go out and they spend more.  So, how we adapted, first of all with menus and hours and days of trade to make the business models a bit more efficient and think what can we do for those customers and how can we be the best for those customers who actually decided to come. 

Leanne Maund, Corporate Associate

Mishcon de Reya

And so Darrel, I’d like to come to you next.  Lots of restaurant owners have had to seek additional finance in order to stabilise their balance sheet and so far the first port of call has been grants, loans, other measure etcetera but that’s likely to come to an end soon and I just wondered what you think is next in terms of reacting to all of this?

Darrel Connell, Partner

Imbiba

Yeah, look it’s been a turbulent few months, you know, everyone has pulled down whatever they can get in terms of grants and then there’s obviously the sea bills and then there’s furlough and all of these different initiatives.  With regards to bank funding sea bills, we didn’t want all of our companies to sort of take loads of bank debt because I don’t really think that’s a prudent way to run young businesses in general but we’ve taken a measured amount where appropriate and I think we’re coming into the sort of next phase a bit, I think the big thing that still needs resolving is around the whole rent piece, you know there’s all this legacy, rent arrears, a lot of people, including ourselves, we haven’t agreed everything with all our landlords, when the moratorium lifts in December that’s going to be a big balance sheets issue for a number of companies and how they resolve that and the Government and Government support and Government led funding initiatives is not going to be the answer in every regard, we know that. 

Leanne Maund, Corporate Associate

Mishcon de Reya

Payam, I’d like to bring you in here.  So, I think we all know there have been some really difficult conversations between operators and landlords recently.  How has the relationship shifted do you think?

Payam Keyghobadi, Founding Partner

Dow Schofield Watts

Yeah, so in terms of the landlord-tenant relationship, I mean this was a contentious issue for most of my clients pre-Covid.  Tenants have historically struggled with the upwards only rent reviews and I think what Covid has done is it’s somewhat rebalanced the conversation and with regards to brand new leases, I absolutely believe the dynamic has shifted and it’s for once in a generation it’s a tenants-friendly market.  I think in the longer term, there’s probably going to be a more equitable arrangement and relationship whereby it’s going to be somewhere between pre-Covid sort of 5-10 years ago and also you know the scenario that we’re in right now. 

Leanne Maund, Corporate Associate

Mishcon de Reya

What do you guys think the Government could be doing to support the sector?

George Bukhov, Co-Founder

Burger and Lobster Group

The VAT reduction is the biggest one.  I mean, in simple words it’s just cash, it’s real money.  I would think that to support the hospitality sector, the Government has to definitely extend the VAT reduction further, probably till the end of next year.  We all understand that the impact of Covid is much, much longer than January or February, you know?

Leanne Maund, Corporate Associate

Mishcon de Reya

Payam, I’m going to come back to you in terms of do you think there’s anything more then Government should be doing?

Payam Keyghobadi, Founding Partner

Dow Schofield Watts

I think from longer term support, I think we come back to the ugly word of business rates, I think that’s something that has been at the forefront of most operators’ minds, particularly in London, for a long time and I think that’s an area which really needs a review.  I think in sort of more immediate Covid support, as Darrel alluded to earlier, it’s about supporting those balance sheets and propping up those balance sheets with, you know, re-capitalisation, in my mind via equity but it’s all about investment in subsector, tax efficient for the incoming investor at the right valuation and securing the lifeblood of these businesses but also giving these businesses the best chance to thrive post-Covid because I do believe it’s a once in a generational opportunity for good businesses to get through this to grow in 2021 and 2022 and perhaps open four or five sites per year when, you know, naturally it was, you know, one or two sites per year. 

Leanne Maund, Corporate Associate

Mishcon de Reya

And Darrel, given that Payam’s just been talking about, you know, bringing investment in, what do you think the investment and M&A landscape is going to look like for the next sort of 12 to 18 months and what are investors going to be looking for?

Darrel Connell, Partner

Imbiba

The M&A market is going to be very, very quiet in the next 12 to 24 months for what you would traditionally call buyouts so, M&A specifically, mergers and acquisitions specifically, I think it will be very buoyant for fundraising and growth capital type rounds so, rather than selling your business per se, you’ll raise a million, 5 million, 10 million of equity and/or debt to effectively strengthen your balance sheet and shore up the future of the business.  In terms of the opportunities that are out there, I mean we’re broadly seeing things fall into three buckets.  The first bucket is the distressed stuff so, stuff that’s going through some form of pre-pack or process where, you know, brands such as Byron or Carluccio’s or, these things have all been in the press, or the GBK or whoever, where you can pay not very much for them but you don’t, you know, you’ve got to question the longevity of these businesses, where they are going to end up etcetera, etcetera.  The second thing is around businesses which are, you know, they are really, really, they were good businesses but their balance sheets were a bit stretched on the way into this and now they really need funding just to normalise themselves.  And then the third bucket is really good businesses which were doing really, really well prior to lockdown who now actually want to raise capital to expand quicker because they want to take advantage of the property opportunities etcetera that Payam and the others have mentioned.  So, it’s really about risk appetite in every regard. 

Leanne Maund, Corporate Associate

Mishcon de Reya

Okay.  Thank you.  And George, you spoke about already that consumer habits have changed slightly, you are getting fewer people in but they are spending more.  How do you think consumer habits are going to change as we head into winter and, you know, outdoor dining probably isn’t an option and how can operators prepare for the next six months?

George Bukhov, Co-Founder

Burger and Lobster Group

The simple advice is, invest in your best people, you know, obviously don’t try and save on the guest, on customer experience.  Invest and people will be, will remember the guests, the team will remember, the guests will remember and when Covid is over, those points that the restaurants won with customers, they will all kind of come to fruition and those businesses will perform better than the others because they’ve been so good to their customers.

Leanne Maund, Corporate Associate

Mishcon de Reya

Lots and lots of businesses have had to pivot.  We saw even sort of super high end restaurants moving to offer delivery services etcetera and, you know, then of course you had businesses creating, selling new products, DIY meal kits.  Petra, do you think that that trend to sort of, I don’t know, diversify or do new things is going to continue after the pandemic?

Petra Barran, Founder

KERB

I think diversification is absolutely crucial.  Mobility, getting your food to where the people are, not being tethered to one space, you know, one location, is really important and just, yeah, just really thinking about how… obviously people are always going to need to eat and people are always going to want to come together over food and it’s figuring out new ways of letting that happen.

Leanne Maund, Corporate Associate

Mishcon de Reya

Payam, Petra just spoke about businesses pivoting and diversifying a bit and one thing that I would quite like to talk about is the implementation of tech so, some of that’s been reactionary with QR codes and ordering via an app etcetera, etcetera but do you think there’s a future for increased tech in our dining experience?

Payam Keyghobadi, Founding Partner

Dow Schofield Watts

Well, absolutely.  From a financial point of view, if tech helps drive margins then for my clients and from a valuation perspective, that’s great but in terms of sort of technology, I am sure there’ll be new and more interesting types of technology that arise, it’s only going in one direction and if the more the technology becomes cost effective so it’s not just the McDonald’s of the world that can afford the ordering technology and the queuing systems then absolutely, it will be much more common in more of the high street restaurants across the country.

Leanne Maund, Corporate Associate

Mishcon de Reya

Yeah, okay.  Thank you.  Petra, there’s been a huge shift in ways of working and people’s perspective on work-life balance and what they’re working for.  What do you think that operating in this sector will look like in the future in terms of operators as human beings?

Petra Barran, Founder

KERB

Anyone who wants to get their business back up and running and thriving is going to have to need a lot of energy to do it and I think that’s going to cause, in itself, a lot of people to go “Do I have that in me?” because actually, there’s probably easier ways of doing this so, it’s going to almost like filter out even more the passion, like the real kind of like drive and passion for beyond, I can make money, it’s like do I actually want to spend my life doing this in such a tenuous world, like, what do I actually want to put my energy into?  What do I really care about?  In recent years, and especially how businesses have reacted to the pandemic, all industries have come under increasing scrutiny for putting profit ahead of purpose. 

Leanne Maund, Corporate Associate

Mishcon de Reya

I’d be interested to hear from all of you on what you think the restaurant industry can do to improve its contribution to society as a whole?

Payam Keyghobadi, Founding Partner

Dow Schofield Watts

So I think in the shorter term, it’s about the individuals, it’s about the individual owners and the individual management teams and effectively ensuring that they’re good people and at the heart of it they are trying to build good businesses and that their staff and the environment and, you know, the whole green issues, are at the forefront of their mind alongside customers and profit.  I then think it’s the responsibility of the customers, so everyone whose, all panellists on this call and everyone listening, that we dine at the businesses which make positive contributions to society.  A big part of due diligence for us when we make any investment into a new company, is around the whole staff, you know, culture but also staff retention, that tells you an enormous amount about business.  If a business has got really good staff retention and a really good culture in it, you often know that it has a very good social purpose.  That shows you that the management team are putting back into the staff so, we have big programmes across all our companies around training, around career development and all of that’s really, really important.

Leanne Maund, Corporate Associate

Mishcon de Reya

Yeah, absolutely.  And George, I’d like to hear from you in terms of what you think the industry can do to better contribute to society as a whole?

George Bukhov, Co-Founder

Burger and Lobster Group

I feel that in the future, the restaurants will be even more important as the place for people to meet and socialise because people want to see each other in real life as much as, you know, technology’s great of course, I don’t believe that’s ever going to go away so, restaurants are going to be, and hospitality is going to be, even more, you know, more important and I think more expensive.  I think people in hospitality, all the way from kitchen porter to general manager and a business owner, they will all make more money because it’s really, really about people, they are creating the experience, they are creating the magic.

Leanne Maund, Corporate Associate

Mishcon de Reya

And that is a good note to end on, I think.  It’s nice to end on an optimistic message so, thank you, George.  And thank you to the rest of you for giving up your time today and for all of your insight.  Thank you so much for joining us everyone. 

The Mishcon Academy Digital Sessions.  To access advice for businesses that is regularly updated, please visit mishcon.com.

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