Substantial changes to the UK restaurant sector in recent years have had a large impact on the industry. Some of these impacts have been a rise in casual dining, the introduction of new technology, an increase in the number of new entrants to the market and the launch of food delivery services. The sector is evolving and as a result, some well-known businesses have faced extremely hard times.
Jamie’s Italian restaurant being one of the most famous of those affected, appointed an administrator in June 2019, after completing a creditors voluntary arrangement in March 2019.
The issues Jamie’s Italian faced
The last set of statutory accounts for Jamie’s Italian Limited make for interesting reading and highlight a number of problems being affected by the business, including:
- A marked deterioration in UK consumer confidence
- Negative impact on discretionary spending in the economy
- Significant and new increased competition from new entrants
- Roll out of established offerings
- Under investment in properties
- Increases in national living wage
- Food cost inflation
- Menu complexities
- Increases in rent and rates
- New executive management team appointed
These have affected all businesses in the sector not only just Jamie’s Italian.
Jamie’s Italian had tried to act on these issues. They introduced an entirely new management team in the second half of 2017 focus on the operational and financial challenges. Previously, the business had closed 6 unprofitable locations and was reviewing the others, with the mindset to reduce the number of sites from 37 down to a mere 24. Numerous discussions had been held with landlords for these sites and some landlords had served notice for the business to vacate.
New and improved menus were implemented by the new management team which were designed to reduce complexities in the kitchen, reducing waiting times for customers, and to lower food and wage costs. A complete review of overhead contracts and procedures were also taken on.
The 2017 accounts showed numerous future developments that the business could commence. The directors thought all of these would be applied, and the business would see improvements. The future developments highlighted were:
- Recruitment of sector and change management specialists
- Capital investment in remaining restaurants
- Evolving new design menu, service and restaurant experience
- A review of the company’s supply chain
- Greater emphasis on labour management and cost reductions
- New commercial alliances with operators within the restaurant sector to drive top line growth
The above were to happen after September 2018, but financial results and the position of the company prevented these plans to be fully implemented.
Menzies have previously produced a report on the Key Performance Indicators (KPIs) for restaurant businesses and these make interesting reading when compared to the results of Jamie’s Italian.
Gross Profit Margin
Controlling your gross profit margin in the restaurant sector is key and ensuring your management accounting systems can provide accurate, timely results is a must. It’s expected to see the gross profit margin in the restaurant business ranging from 60% to 70%, with the casual dining market sitting near the lower end of this range.
Looking at the accounts of Jamie’s Italian, the gross profit margin in December 2017 showed 42.25%, which had previously reduced in the last accounting period from 43.72%. This is significantly below expectations and one of the key reasons why the business was experiencing financial difficulties.
This margin is due to the cost base being too high, too frequent use of sale discounts or sale prices not set at the right amount. The primary activity of Jamie’s Italian was to “focus on ethically and well sourced produce, healthy eating and imaginative Italian food”. However, it looks like they could not transcend this into a healthy gross profit margin.
Interestingly though, the gross profit margin for Jamie Oliver’s Restaurant in Newquay is a much higher 69%.
In recent years, the industry has seen mounted pressure on wage costs –such as increases in national living and minimum wage, pension costs and a general shortage in staff. Despite these pressures, business owners still need to keep wage costs to a sensible amount and look to control them.
Wages costs can be expected to be between 27% and 30% of turnover. But looking at the accounts for Jamie’s Italian, the wage costs were 38.05% of turnover in the period to December 2017 and 36.08% in the previous accounting period. From the turnover, if wage costs were in line with our expectations, this would have led to a huge saving of £10m per year.
Rent and Rates
Another key cost, that we would expect to be about 10% of turnover, are the property costs. It’s difficult to completely appreciate the level of property costs in the accounts for Jamie’s Italian but the operating lease note suggests that the rent was approximately £12.8m per annum equating to 11.6% of turnover before including any charge for rates, showing that this expense is too high in comparison to the level of turnover for the business.
Furthermore, we see several business owners not fully appreciating the KPI’s of the business and are unaware that achieving these KPI’s can make the difference between whether your business is successful or not. With the KPI’s highlighted above the writing was on the wall for Jamie’s Italian and a change to the business model was needed.