Are UK restaurant chains getting indigestion?

Jon Ashworth asks whether restaurant chains in the UK are doing enough to keep their customers coming back for more

When the World Trade Center towers came crashing to earth, the financial ripples were felt by more than just the world�s major airlines. On the UK�s side of the Atlantic, big name restaurant chains like PizzaExpress, Chez Gerard and Belgo had millions of pounds locked up in ambitious expansion programmes. Foot-and-mouth travel restrictions had already put much of the UK countryside off-limits, forcing tourists to postpone their visits. The attacks of 11 September would inevitably result in more empty tables.

Restaurant owners could not have anticipated the additional misery that would flow from the collapsing stock market. Some of their best customers - the City bankers and their families - were soon being laid-off in their thousands. Dealmaking had dried up and banks were forced to take drastic action to reduce their cost base. Plunging share prices meant that consumers generally were eating out less often. On top of all this, restaurant groups had seen their costs soar enormously. Wages now account for up to a third of costs for a West End restaurant, while rents in some fashionable locations have increased three-fold since the mid-1990s.

The gathering stormclouds finally broke this year in a deluge of profit warnings, collapsing share prices, closures and takeover battles. City analysts and investors have turned on the former restaurant glamour stocks, accusing them of arrogantly ignoring the changing tastes of their clientele. Customers have been voting with their feet, benefiting a new breed of cost-conscious eateries and forcing the established players to take some painful decisions.

The restaurant battleground is neatly captured by events at two of the biggest names - Groupe Chez Gerard and Signature Restaurants. Chez Gerard owns Livebait and Bertorelli along with the Chez Gerard French bistro chain. Signature owns the Belgo mussels and chips chain along with La Caprice and The Ivy.

Chez Gerard came to personify late-1990s restaurant chic, but foot-and-mouth and 11 September wrought havoc with its finances. The decline in tourist visitors to London turned a £2m pre-tax profit in 2001 into a £3.5m pre-tax loss in the year to end-June 2002. The company�s shares hit a new low of 55p in 2002 compared with a peak of 357p four years ago.

Chez Gerard�s chief executive resigned in March 2002, prompting Neville Abraham, co-founder and non-executive chairman, to return to day-to-day management. He acted decisively, selling outlets and reducing debt. Livebait was singled out as a problem area. It was taking £10m a year in sales yet made a negligible profit of £300,000. Abraham conceded that Livebait had �lost its way� and pledged to relaunch it with a new menu and new pricing.

JO Hambro, the investment bank, holds a near-30% stake in Groupe Chez Gerard and is eager to sell out within the next year or so. The heat was turned up in October when Paramount, a cash shell backed by Guy Naggar, a City financier, waded in with a £20.6m takeover bid.

Things are even more dire at Signature, backed by Luke Johnson, who co-founded PizzaExpress with Oxford contemporary Hugh Osmond. Johnson set about taking Signature private, only to cross swords with Giuliano Lotto, owner of top London restaurants Aubergine and L�Orangerie. Reeling from the slump in tourism, Johnson has been shifting emphasis from Belgo onto a new pizza chain, Strada, where sales have proved resilient.

Johnson�s experiment with Strada brings him head-to-head with PizzaExpress and highlights much of what has gone wrong for restaurateurs. PizzaExpress customers have long complained about shrinking portions and spiralling prices - in fact, the portions have stayed the same, but competitors are dishing up bigger helpings. Strada openly boasts about serving pizzas 30% bigger than those served in PizzaExpress, but without the mark-up.

PizzaExpress� problems came home to roost this autumn, when the company conceded that sales at its core London outlets were continuing to fall. Many of its sites were �overdue for complete refurbishment�� - endorsing comments by City analysts that the PizzaExpress format has become old and jaded. The chain blamed its woes on aggressive discounting by rivals like Strada, ASK Central and Caffe Uno. The shares lost two-thirds of their value in 2002.

In November, Hugh Osmond teamed up with the family-owned Nando�s chicken chain to launch an unsolicited £250m bid for PizzaExpress. He abandoned his bid after just three weeks - unable, seemingly, to agree on basic terms with the management. There were whispers that other bidders, possibly including Luke Johnson, were waiting in the wings.

PizzaExpress and its struggling competitors pushed on with plans to reduce costs by closing outlets. Branches are being given makeovers. City analysts warn that it may take years to claw back the lost ground.

The trendy Fish! restaurant chain went into administration in the summer of 2002, although its founder, Tony Allan, subsequently bought a handful of the most profitable outlets as well as the rights to the trading name. Allan, a former chef, was emboldened by his success in the late 1990s with Bank restaurant on London�s Aldwych. He opened his first Fish! outlet in Borough Market and turned a £1m profit in his first year.

Allan thought he could do no wrong, opening outlets at a dizzying pace. Unfortunately, customers did not share his enthusiasm.

Restaurant groups would do well to look to the lessons of the 1980s, when entrepreneurs showed that it was perfectly possible to make a go of things. The stars of the day were Roger Myers and Karen Jones, whose Pelican group pioneered the Café Rouge and Dome chains, introducing Londoners to the French bistro theme. Myers and Jones sold out to Whitbread in 1995 for £133m.

Whitbread went on to pay £32m for BrightReasons, owner of Bella Pasta. In the summer of 2002, it sold Pelican and BrightReasons to a venture capital-backed team for a trifling £25m. Whitbread commented ruefully that it had �underestimated the speed with which the competition would catch us up�.

The new-breed of restaurant owners would do well to study the lessons - or risk another unpleasant bout of indigestion.

Jon Ashworth is business features editor at The Times.