For more than a quarter of a century, the restaurant Chameleon had been a visible, popular presence in the heart of Dublin’s Temple Bar. Having started out serving Indonesian food, it gradually expanded its menu to cover a range of Asian cuisines.

It was popular with diners, and within Ireland’s small, yet hyper vocal, army of food writers. Last September, the 50-seater restaurant was a finalist in the readers’ choice category at the Food & Wine Magazine annual awards.

Weeks later, it was forced to pull down the shutter for the last time. Kevin O’Toole, a chef who ran the restaurant with his wife Carol Walsh, worked the phones and secured alternative employment for most of its 15 staff. But for Chameleon, there was no reprieve.

Four months on, and O’Toole has had time to absorb the reasons for the restaurant’s demise. In truth, there was not one reason for the closure, he says, but many.

The abolition of the reduced Vat rate for the hospitality sector was a factor, as was everything from rent, rates, insurance and wages. A skills shortage also played a part, he says.

Combined, O’Toole says the myriad economic and consumer trends point to a grim outlook for Ireland’s seemingly booming restaurant trade.

“The cost of doing business, in particular for independent restaurants have increased so much that the consumer will not be able to afford to dine out, unless it’s fast food,” O’Toole says.

“We will become known as rip off Ireland again and the food destination that we are trying to create will simply not happen, purely based on short-sighted governmental policy of screwing the little guy.”

O’Toole’s eatery is not the only loser. Last week, staff and customers were shocked when the high-profile food retailer and restaurateur Fallon & Byrne has decided to shut down its biggest outlet in Dublin’s Rathmines.

It said the outlet, which opened less than three years ago, was loss-making and the company had chosen to act “decisively” now to protect the rest of the business.

Meanwhile, the Restaurant Association of Ireland (RAI), the industry lobby group, says that five restaurants closed in the first two days of January alone. More, the group says, are expected to follow due to the high cost of business.

Crowe Ireland, the business advisers, expect as many as two restaurants a week to close their doors throughout 2020, a forecast that, if correct, would see 100-plus closures.  

There is a market paradox, however. The number of applications for new restaurants, particularly in the fashionable areas of Dublin, continues to grow while new figures from Eurostat show that Irish households devote a higher percentage of their expenditure to eating out in restaurants and on takeaways than any other country in the European Union.

Irish households spent some 14.4 per cent of overall expenditure on catering services, which includes restaurants, takeaways, cafes and canteens. This is more than double the EU average of 7 per cent.

So just what is going on? Is it simply healthy competition, or have we reached peak restaurant?

Cash is king and margins matter

Any examination of the economic dynamics of the restaurant sector must begin with margins. A company with a healthy margin has the capacity to absorb higher costs or flatlining sales. Those operating on a tight one simply don’t have the buffer.

And Ireland’s restaurant sector has historically worked on wafer-thin margins. With increased competition and changing consumer trends, this has driven many outlets from small profits into losses.

“There has been a noticeable recent increase in insolvencies in the restaurant sector and there were some high-profile and well publicised restaurant failures last year.”

John Healy, Kirby Healy

Based on industry analysis, a pub that generates more than 90 per cent of its revenue from drink tends to have an average profit margin of around 25 per cent and above. A gastro pub with a 50/50 split between food and alcohol has an industry margin of between 18 and 20 per cent. Restaurants with 75 per cent of turnover coming from food should return a margin of between 12 and 15 per cent.

Its is a low margin for a staff-heavy business – a pub can trade successfully based on two decent days a week, while a restaurant needs solid trade five days a week to cover costs, according to industry sources.

The trouble, however, is that many restaurants are not achieving double-digit margins. And those restaurants have been worst affected by the decision in 2018 to increase the Vat rate from its reduced level of 9 per cent back to the standard 13.5 per cent.

“In our sector of food and restaurants, our margins are so tight,” said Adrian Cummins, chief executive of the Restaurant Association of Ireland. “Then, if you’re on very low margins, which the average restaurant could be on 6 to 7 per cent, take four and half per cent out of that and you’re in the red-zone. When you are in that zone, the likelihood is you are going to suffer for 2020.”

Faced with declining margins as a result of the Vat increase, many restaurateurs have forgotten one of the golden rules of business; cash is king. Instead of operating from cash flow, industry experts and advisers have noticed a sharp rise in the number of restaurants covering costs from reserves and their bank account.

Furthermore, experts have also noticed a conflation between personal and company funds in a number of struggling restaurants.

Accountancy firm Kirby Healy has worked on dozens of liquidations, receiverships and examinerships of restaurants over the years. “There has been a noticeable recent increase in insolvencies in the restaurant sector and there were some high-profile and well publicised restaurant failures last year,” according to John Healy, a partner in Kirby Healy.

“Given the nature of our work, we have noted that financial mismanagement, the use of company funds for directors’ personal expenditure and unauthorised cash withdrawals all contribute to the insolvency of restaurants. There are of course genuine business failures in this sector. Mismanagement coupled with tougher trading conditions are likely to result in further insolvencies in this sector in 2020.”

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Talk to anyone in the industry and it is not long before the issue of Vat comes up. Padraic O’Kane, the successful restaurateur behind the award-winning Sole and Fire restaurants, says that for the industry, Vat has become akin to water charges. “It is kind of the last straw,” he says.

Deirdre McCafferty, the co-owner of Cornucopia in Dublin, said that the reversal of the special Vat rate had eroded already thin margins.

Aiden Murphy of Crowe Ireland, who has advised pubs and restaurants for more than 25 years, said it was now obvious that the timing of the change was simply “bad policy” and should be relooked at.

The trouble for many is that the policy is about to get real for many restaurateurs. Restaurants typically book 30 per cent of all income in the last two months of the year. For many, the Vat payments for those heady two months is due at the end of this month.

Many outlets opened after the crash when rents were cheap. Those rental deals are now coming to an end, with landlords, buoyed by a frothy commercial property market, looking for heavy increases.

This is expected to lead to a large cash crunch for many outlets, who, in the absence of building up reserves, will struggle to pay the tax from a traditionally sluggish January.

“The full impact of Vat will be felt at the end of January and the buffer of cash that most businesses require to carry them through the lean months of January, February and March will for many not be at a level that is sufficient to meet the obligations of the business,” according to Murphy.

Murphy also highlighted rents as another looming financial pressure. Many outlets opened after the crash when rents were cheap. Those rental deals are now coming to an end, with landlords, buoyed by a frothy commercial property market, looking for heavy increases.

One hospitality veteran who has negotiated a number of recent rent increases says the average rental increase is in the region of 25 per cent.

“The danger, however, is that some business owners, in the anticipation of a good Christmas trade, built up creditors such as rates, Revenue liabilities, rent arrears to a level that is unaffordable and what will be required to if the business is to be saved and reset on a positive course will be a formal restructure and a process such as examinership,” according to Murphy.

It is a sentiment echoed by Cummins, whose organisation has been campaigning for the Vat rate to be reduced once more.

“We are now getting the real effect of it, where Vat increase impacts cashflow. Which means that if cashflow is in decline, you’re in the red zone for the business to close down. You’re not able to trade. You’re not able to operate. Hours have been cut for staff because they’re not able to afford to pay staff hours, so they’ve had to cut staff hours. Everybody loses.”

A glut of supply, a dearth of staff

The troubles facing the industry have not dissuaded a host of potential new entrants. In the 178 months from the start of 2018 to the middle of 2019, Dublin City Council granted planning permission for more than 70 restaurants. Of those, some 40 per cent were in buildings previously used for retail.

Yes, the restaurant industry has a high attrition rate. But, spurred in part by a fawning food press and ambitious young chefs, there is also a high entry rate. The RAI says that there were over 7 per cent more restaurant alcohol licences granted in Dublin in 2018 than the year before.

“There has been a move from retail to food uses which means there are more outlets with a focus on food.”

Aiden Murphy, Crowe Ireland

Take the case of 76 Camden Street, a building in the city centre operated by the rapidly expanding Press Up group. The planning process was salutary as it highlighted the surge of new restaurant openings in the area, with residents objecting on the transfer from retail to restaurant usage on the basis that the neighbourhood was already saturated with night-time venues.

Planning documents lodged as part of the objection show that 40 per cent of 109 nearby businesses were either restaurants or bars. Despite stating it was to the detriment of “vitality and viability” of the area, the planning board inspector granted permission.

Converting retail premises to restaurants is a growing trend.

“There has been a move from retail to food uses, which means there are more outlets with a focus on food as landlords in traditional retail areas and shopping centres have allocated and targeted more space for food and coffee type uses, in order to create as busy a thoroughfare as possible,” says Aiden Murphy.

“Also we have seen that bars are changing their target customers mix and, to survive and drive footfall throughout the day, have now a greater focus on food, have a greater variety of menus and have updated their internal layouts to be more suitable for food service as opposed to more traditional bar type outlets.

“So, all of this leads to more business outlets chasing what is still a growing sector but where turnover for individual units can be significantly impacted by greater and new competition in their immediate area.”

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Padraic O’Kane has seen the rise in competition firsthand.

When he opened the Fire restaurant in the Mansion House in Dublin 15 years ago, he says there were 600 restaurants in Dublin on TripAdvisor. Now, he says there are more than 2,000.

One of the impacts of the increased competition, he says, is the battle for staff, particularly chefs. “Labour, particularly in the Dublin market, has gone through the roof,” says O’Kane, who also operates the trendy and upmarket Sole fish restaurant in the city.

“And then the lack of supply of qualified staff. This means we have the additional cost of training as well. Now we have a rate increase coming at us as well from the city council, and the general overhead.”

Wage inflation has been sluggish in the sector, with the CSO showing that workers in the accommodation and food sector industries had the lowest pay in the economy. Most waiting and kitchen staff are paid the minimum wage; some slightly above.  

But the arrival of so many new entrants, in particular those being rolled out by the Press Up group, has driven wage inflation over the past year, according to those operating in the sector. And, with margins tight, this adds another layer of cost pressure.

According to O’Kane, the issue for operators in Dublin is not sales as the Eurostat data on Irish consumption patterns shows, but cost inflation – from wages to insurance to rent.

“In a sector that is already paying 23 per cent on beverage, and that’s forgotten on a lot of people at times, it makes up around 30 and 40 per cent of the bill as well,” says O’Kane. “So that’s 23 per cent of Vat paid and we’re up to 13.5 per cent on food.

“It’s just an ever-increasing cost base. Unless you’re doing volume, it’s going to be very hard for a lot of restaurants to survive.”

Bucking the trend: How Cornucopia continues to enjoy healthy success

Cornucopia, a vegetarian restaurant on Wicklow Street in Dublin, thrived in the boom and also during the bust when many other restaurants did not.

“I managed my finances very efficiently, I wouldn’t be here if I didn’t,” says owner Deirdre McCafferty. “I have some very good people and a very good financial manager who helps me manage the cash flow, makes sure all the taxes are paid.

“Because there’s a lot of cash coming in but there could be more going out.”

However, McCafferty says that margins in the restaurant business are generally tight.

“Somebody said to a friend of mine recently, ‘sure four and a half per cent, you should easily be able to absorb that?’ And my friend said, ‘what kind of margins do you think restaurants make?’ And he thought it was 15 per cent. People are naive. Restaurants run on very tight margins by the time everybody’s paid. The landlords, the rates, the rent, the utilities, the food, the staff, upgrade the equipment and if you have any loans to be paid,” adds McCafferty.

The vegetarian and vegan trend is continually growing, which is good news for McCafferty. Despite her continuing success, she compares running a restaurant business in Ireland today to a fairytale.

McCafferty says that more and more obstacles seem to be getting in the way of running a successful independent restaurant; from the cost of rents, to keeping staff employed due to the minimum wage increase, the cost of insurance and the reversal of the Vat rate from nine per cent to what it was during the Celtic Tiger (13.5 per cent).

“I was a bit shocked last year when the Vat went up, even though I knew it was going to happen,” says McCafferty.

However, when it comes to the minimum wage increase, McCafferty says: “I never resent money to staff. I don’t resent the minimum wage going up.”

“People are unaware that you pay for more than a food cost when you sit in a restaurant. They just see the food cost. They don’t see all the other costs and taxes. You’re really paying for the seat and the staff member to serve you and their holiday pay and their employer’s PRSI,” she says.

McCafferty opened Cornucopia in Dublin in 1986 with her late husband. She now runs the business with her daughter Dairíne. Turnover by the end of 2018 reached €2.6 million, which is up from €2.5 million in 2017.

How Press Up is changing the economics of eateries

It is difficult to exaggerate the impact that the sprawling, expansionary Press Up hospitality group has had on the economics of eateries across Dublin. The sheer pace of the group’s growth, and the diversification of its offering, has been a strikingly disruptive force to the traditional restaurant landscape.

Dublin previously had a smattering of smaller mid-market chains – most grew to no bigger than a handful of outlets and tended to operate under the one brand. In the mid-market, the British pizza chain Milano’s and the Italian group Little Caesars are the most visible examples.

Press Up, however, shredded the rule book. Today there are 46 restaurants bars and hotels in the group, employing 1,700. There is chatter of 15 more openings in the coming year and international expansion – although an aborted float and partial sale may yet impact that. Crucially, most of the outlets are operating under standalone brands, with the fast-food chain Wow Burger something of an obvious outlier.

From Indian outlets to Italian cuisine, Press Up is attempting to corner all aspects of the market. It is a bold play for its founders Paddy McKillen Jr and Matt Ryan, and has led some to question the sustainability of future growth in a relatively small market.

But the march of Press Up has distorted the rest of the industry for a variety of reasons. First, the sheer volume of the new eateries that have opened in the past two years has flooded certain areas of Dublin – the vast majority of Press Up outlets are located with a three-mile circle across Dublin 2 and 6.

This has drawn trade from existing restaurants in the area, further eroding revenues and therefore profits. Plus, the explosion of new Press Up eateries has escalated the battle for staff. One restaurateur said that the group was responsible for significant wage inflation in the city centre, with staff mobility increasing.

Among publicly traded restaurants, the median net income margin in 2017 was 5.7 per cent. The top quartile made 7.8 per cent. Press Up’s net income margin, by comparison, was 1.2 per cent.

But not even Press Up is immune to the wider malaise and underlying economic trends within the industry. Press Up made €844,000 profit in 2018, the most recent year for which we have figures. 2019 was tough however – the company lined up a stock market flotation, only to pull the IPO. A plan to raise €50 million through selling a minority stake was also abandoned.

Revenues increased 11 per cent in 2018 to €70.9 million, while Ebitda, a measure of profit which excludes depreciation, interest payments and tax, was up 61 per cent to €12 million. However, there are longstanding questions as to whether Ebitda is the right measure of Press Up’s profitability. After depreciation, interest, exceptional items and tax, that €12 million figure shrinks right down to €844,000.

Among publicly traded restaurants, the median net income margin in 2017 was 5.7 per cent. The top quartile made 7.8 per cent. Press Up’s net income margin, by comparison, was 1.2 per cent.

It also spends heavily on capital expenditure – industry sources say a spend of €150-200 per square foot would be normal for the industry, whereas Press Up spends €200-250. As of now, however, the company continues to grow and grow.

And the more it grows, the more it distorts the rest of the industry.

Insolvent, but oozing with quality

If you are looking for a real-life case in the vagaries of the restaurant sector, look no further than PBR Restaurants, a group of fashionable fish restaurants with outlets in Dalkey, Sandycove and the city centre.

Veteran restaurateur Padraic Hanley carefully built up a group of eateries across fashionable areas of Dublin, opening its first location called Ouzos in Dalkey in November 2008. The Irish Times described the restaurant as “oozing with quality” when the paper reviewed it about four months after it opened. PBR was a joint venture Hanley, accountant William Quane and chef Raouf Djeffal.

A second Ouzos outlet came in November 2010 in nearby Blackrock, another prosperous outpost. Five years later, in March 2015, PBR opened its first Fish Shack branded restaurant. Four months later, PBR opened a Fish Shack Cafe in Sandycove.

In March 2017 PBR opened a second Fish Shack on Parliament Street in Dublin 2, followed by a third unit in Malahide in north Dublin. Between them, the group invested almost €400,000 to serve up to 140 customers. This type of expenditure was typical for the industry.

Investing in new outlets and repaying debts associated with old ones put pressure on cash flow. Short-term finance was not enough.

To secure its supply of fish, Hanley personally leased a unit in Kilkeel, Co Down. While Fish Shack performed strongly, the initial outlets were struggling. To tackle this, PBR had closed Ouzos in Blackrock, which it turned into a gastropub called Kelly and Coopers.

Investing in new outlets and repaying debts associated with old ones put pressure on cash flow. Short-term finance was not enough. By last year, the company was insolvent and forced to seek bankruptcy protection from its creditors. An examiner was appointed, granted 100 days to save the business.

That is what happened, but it required new owners and significant haircuts for creditors. As part of the plan, Esprit Investments, owned by Swiss-based Irish millionaire Eric Kinsella, bought the high-profile Ouzos Restaurant in Dalkey Dublin, with chef and existing shareholder Raouf Djeffal. Other backers are bailing out Fish Shack.

In a deal approved by the High Court, suppliers and other unsecured creditors will get 17.5 per cent of the €700,000 that they were due – a total of €122,500.

Ultimately, the group struggled to maintain the cost of investment, and grappled with a mix of profitable outlets and loss-making outposts. New entrants drove down revenues and trade. In the end, the cash simply dried up.

It was ultimately saved. Others have not been so lucky.

Drones, dark kitchens and consolidation

As restaurants grapple to brings customers through the door, another major trend is emerging – home delivery and dark kitchens. The growth of companies such as Just Eat and Deliveroo has disrupted the industry further, offering consumers the capacity to eat from a top class restaurant in their own home.  

It does not end there; Irish drone-based food delivery service Manna is gearing up to launch in Ireland. Its founder Bobby Healy plans to take the business global.

Restaurants still benefit from selling the food but the economics are problematic. First, the restaurants miss out on the lucrative alcohol slice of the bill. Plus, they still need to fully staff the restaurant for actual customers.

In response, a number of so-called dark kitchens have emerged – outlets preparing restaurant foods in a restaurant-quality kitchen, but without the restaurant. A number of players are eyeing up properties for dark kitchens along the M50, giving easy access to the whole city.

“So, you’re looking at restaurants closing two days a week and operating a five-day operation for their business.”

Adrian Cummins

Having studied the sector for a quarter of a decade, Aiden Murphy also has his own views on the future.

“Local unbranded outlets are the ones that might be more reliant on the local market and, because of their stand-alone nature, they have less ability to negotiate down costs in terms of buying power or rents by showing ability to close one outlet. Yet they have the ability to continue to trade, as they have other outlets which are more viable,” he says.

“Another cohort will be individual restaurants that have become tired in terms of décor and appearance and where the operators do not have the resources to re-invest and re-energize the business. A pathway to closure looks the likely future for such outlets.

“The upshot is that some consolidation and focus on larger-format branded outlets offering a mid-price value in well-fitted restaurants will utilize scale and inbuilt efficiencies to take a greater share of the sector, and smaller local restaurants will be less prevalent on our streets.”

It is an interesting point, and one that is made by a number of other operators who spoke to The Currency. Providing the debt level is sustainable, groups with several outlets have the back office and purchasing scale to absorb more costs than standalone outlets.

For many in the latter category, the only options are to restructure or close.

“They need to go back and look at their business model and they’re going to have to look at where do they shed cost,” says Cummins of the RAI. “If you shed cost, you have more cushion around margin at the end of the day. Maybe you have to close two days a week. That doesn’t help the local economy, it doesn’t help tourism as well.

“So, you’re looking at restaurants closing two days a week and operating a five-day operation for their business.”

Dig deeper

Pubs, property and Press Up: Unlocking the real business model of the ubiquitous hospitality group

Oozing with quality, but out of cash: how a coastal restaurant chain came unstuck