Pizza Express closes restaurants as Covid serves more challenges
Restaurant chain Pizza Express is shutting 73 of its restaurants, putting 1,100 jobs at risk. Insolvency practitioner John Bell expects more hospitality casualties in the coming weeks and months.
For some time now, reports in the media have said that the pizza restaurant is struggling – even before the Covid-19 struck. In late 2019, the popular high street chain was saddled with debts that average around £1.6m per restaurant and has until August 2022 to repay £655.6m of its total £1.1bn debt.
So, it is not a total surprise that Pizza Express has to make several closures.
Turbulent times for restaurants
The government’s initiative to help the hospitality sector with the introduction of the ‘Eat Out to Help Out’ scheme has provided a much-needed boost. However, with the scheme ending on 31 August, it is unlikely to be a complete rescue package for companies in the sector, given the serious challenges they are facing.
We are living and working in turbulent times and many restaurants have been caught up in the financial crisis brought on by the pandemic. Other contributory factors include a steady decline in consumer spending, an over-saturation of restaurants, the pressure to compete with rival chains and online delivery firms.
Confusion surrounding Brexit is also likely to have an impact on the cost and availability of supplies and is going to force restaurants to choose between increasing their prices or reducing profit margins – which, for many, are already very tight.
So, despite the government’s concession, I fear we will see many more casualties in the hospitality sector over the coming weeks and months.
CVA option for businesses
Many restaurants are looking to reach an agreement with their creditors via a Company Voluntary Arrangement (CVA).
A CVA is a procedure which allows a company to put a formal proposal to its creditors for a composition in satisfaction of its debts. It can last up to five years and means that the creditors can accept a sum of money as a way of settlement towards the debts which are owed to them. A CVA requires the approval of at least 75% in value of the creditors.
One reason that a CVA is popular with multi-site companies is that it can provide them with an ‘escape route’ from unprofitable sites. In the good times, a company will often carry these sites – but, when times are tough, they will be looking to keep only those sites which are making money.
Through the CVA process, a company will be looking to get a reduction in rent and/or close the sites it no longer wants. The company’s landlord is left with the option of (a) accepting the CVA and reduced rent, but having the company remain in the premises; or (b) not accepting the CVA and the company moving out, leaving them with an empty premise. Given the problems on the high street and so many already empty premises, landlords will often be prepared to take option (a).
The increasing number of companies closing down – either going through a CVA or going bust altogether – is having a knock-on effect on commercial landlords. I don’t think it will be long before we see an increase in the number of landlords who are looking for an insolvency option to help them deal with their cashflow problems. This could also impact people’s pension plans which often had an element of commercial property portfolios in their funds.
Corporate Insolvency Act
Because of the extraordinary circumstances we are in, there is now the new Corporate Insolvency and Governance Act to help companies knocked off balance due to the Covid-19 crisis. But it is not a solution for a so-called ‘zombie’ company – it is not intended to be used merely to postpone going into a formal insolvency procedure.
The Act introduces a new moratorium or ‘debtor in possession’ rescue, designed to give a strong company the breathing space of 20 business days’ to get things in order, but leaving the existing management to run the company’s day-to-day business.
The main aim of the moratorium is to help rescue the company, keep it trading and get it making profits. This could be via a new restructuring plan or just an injection of new funds into the business; or with a CVA.
Businesses need all the help they can get right now, and many restaurant owners have some tough decisions to make. Pizza Express has been trading since 1965 and is a great brand; hopefully, it will be able to find a solution to help it continue to stay open on our high streets.