Munch crunch: Britain's restaurant crisis

Last month alone, more than 100 British restaurants went out of business. But it's not just the Michelin brigade who are in hot water. Martin Hickman and Tim Walker report on a simmering kitchen nightmare

By the time you find out, it's often too late. You may have visited your favourite local restaurant one Saturday night and commented on how quiet it was, or even thought yourself lucky when you managed to get a table without a booking. But, more likely, the first sign that things are going wrong is a notice plastered to the door. And the notices are starting to look familiar.

Take Pick More Daisies, in Crouch End, north London. You may have a similar joint near you – good burgers, American diner brunches, people flicking through the papers on Sunday mornings, or grabbing a bite to eat with a beer or two in the evenings for less than £20. Nothing too expensive, good food, just the sort of place that would tick over very nicely, even when most people aren't feeling inclined to blow their monthly salary on a meal at a Michelin-starred restaurant.

But one day last month, instead of the usual steady bustle, the notice appeared, Blu-Tacked to the inside of the glass door: "Unfortunately, as with many things in life, there is a fine line between success and failure, and for us that line has been the credit crunch. Whilst we were actively looking for new sites earlier this year, trade has dramatically dropped since the summer and with the economic outlook bleak we have been forced to close our doors for good. It has been a real pleasure serving you and we're so sad that we are unable to continue on our path."

Similar stories are playing out across Britain. In Love's Fish Restaurant in Brighton, customers received a similar message. The restaurant, run by Alan Love, closed at the beginning of January, despite the revitalising efforts of Gordon Ramsay featuring the place on Kitchen Nightmares. "Alan and his staff would like to thank everyone who came to the restaurant in the past two years for their support and best wishes. We were very lucky to have had such a wonderful mixture of people to serve. It's a very sad time for us all..."

For diners, the memories of enjoying food and conversations, of meeting people, of birthdays celebrated and anniversaries toasted may flash through the mind, perhaps followed by a flash of irritation that another venue will need to be found at short notice. But for restaurateurs, the rising tide of closures of restaurants in the recession is an accumulation of individual disasters – that may leave an aftertaste of bad debt, ill-health and depression.

"It's very close to your heart and it's desperate to see that it isn't going to survive," says Tom Sillar, a 43-year-old wine merchant who ran the Comfort Food bistro in Newcastle until its closure in October. "But it wouldn't have been fair to have carried on. We left a number of suppliers with debts. They were all small – say £500 for lots of suppliers – but they were small businesses as well."

After his modern British restaurant closed, Sillar split with his wife and business partner Emily, and blames the stress of trying to save the place for giving him pneumonia; from which he is still recovering.

To patrons who had frequented the restaurant during its four-year life, the inevitable note read: "With effect from October 4, the Comfort Food Co will be closed. Blame the banks. I would like to thank all the customers for their business over the last four years or so, and wish you all the best for the future."

The collapse of Northern Rock in 2007 was the moment millions of Britons realised their life had changed, but at the Comfort Food Co the impact was sudden and dramatic. The bank's managers had taken clients to the restaurant, keen on its local sourcing and bistro dishes such as lamb shanks and locally smoked haddock. When the bank collapsed, heralding the onset of tighter lending, job losses and reduced consumer spending, many of those execs stopped coming. Others went less frequently. "When they did come, the emphasis was on value for money – spending less money, two courses instead of three."

Looking back on the closure of the £40-a-head restaurant, Sillar says he did not have enough capital to see it through dips in turnover. Falling spending power has sent the once-booming restaurant sector into a once-in-a-decade retreat. From the Michelin-starred establishments to the casual dining chains busily promoting two-for-one offers with discount coupons on the internet, almost every restaurant is feeling the squeeze.

Even the big names have had their egos bruised by the worsening trade. Last week, celebrity chef Antony Worrall Thompson was forced to close six of his restaurants and put his company, AWT Restaurants, into administration, with the loss of 60 jobs. Worrall Thompson used £250,000 from his own pocket to preserve two of the restaurants – the Windsor Grill and the Kew Grill – and a shop in Windsor from the adminstrators; but the Notting Grill, AWT's flagship, has closed, taking 23 employees with it. The chef blames the banks for their failure to support his business in its hour of need. Lloyds, he claims, refused to loan him the £200,000 life raft required to keep all six establishments afloat. "I have learnt from these banks that if you owe a couple of hundred thousand like we did, they have got you by the balls," he told the Mail on Sunday. "You owe them £10m and you have them by the balls."

Worrall Thompson's multi-Michelin-starred rival, Gordon Ramsay, may beg to differ. His own global chain of 25 restaurants is trapped in a particularly vivid kitchen nightmare, with a reported business overdraft, from the Royal Bank of Scotland, of £10.5m. Gordon Ramsay Holdings was fined for failing to file accounts on time, and in the past year has closed two of its London restaurants, La Noisette in Knightsbridge, and the Petrus at the Berkeley Hotel.

The company is adamant that "business is good", with increased turnover and profit. But Ramsay has closed his Chelsea bistro, Foxtrot Oscar, on Mondays and Tuesdays and in the evenings on Wednesdays and Thursdays, and two more Ramsay enterprises, the Devonshire pub in Chiswick and the private dining rooms that replaced La Noisette, both appeared – mistakenly, it was later explained – in the "for sale" section of a business website. Ramsay and Worrall Thompson's fellow TV chef Jean-Christophe Novelli has been forced to close two gastropubs after his business, Sweet Medicine, went bust.

Meanwhile, the combustible kitchen talent Tom Aikens angered his creditors by popping his flagship eponymous restaurant in Chelsea into pre-pack administration in September, reopening it almost straight away, minus £3m in debts. This left his 160 suppliers, many of them small family firms, with a £1m shortfall, and earned him reams of criticism.

In January, the chef offered a mea culpa in an interview with the London Evening Standard, confessing that he felt "a complete shitbag" for "[taking his] eye off the ball".

Raymond Blanc has had to close one of his restaurants, Brasserie Blanc in Manchester. "Of course I am upset about the closure – I do not like to lose," remarked the Gallic chef, one of the ever-present stars of British cooking.

Alain Ducasse, whose Dorchester Hotel restaurant charges £120 a head, says he has put his global expansion plans on hold because of the downturn. Other top restaurants are having to work harder to gain custom, particularly at lunchtime, where the fall-off in expense account trade has been stark. L'Atelier de Joel Robuchon and Arbutus in London offer lunches for less than £20 per head, while the acclaimed Glasshouse in Kew offers lunch for £11.75.

One London restaurateur, Peter Ilic, this month tore up his prices and asked customers to pay what they liked for his food. "It just seemed the right thing to do with everyone under the cosh and feeling pretty miserable," remarked the proprietor of the Little Bay restaurant in Farringdon, London, who will still charge a set fee for drinks. "We have seen so many more City folk coming into the restaurant lately looking for a better value lunch."

On the high street, Prezzo, Strada and Ask, Gourmet Burger Kitchen, Café Rouge, Caffe Uno and Ha Ha are among the chains that have two-for-one offers.

Across the industry, more and more restaurants are going bust. According to accountants PricewaterhouseCoopers, the number of restaurant companies slipping into insolvency rose from 72 to 92 to 111 in the first three quarters of last year, before easing to 107 in the final three months, when Christmas parties provided a spike in business. Last month, 108 restaurants went under, according to PwC.

Turnover has switched from growth to stagnation. Horizons is a company that monitors restaurant business based on returns from public companies, government data and its own market research.

Managing director Peter Backman says that spending only fell three times in the previous three decades – at the height of the two previous recent recessions, in 1983 and 1992, and in 2001 when the dotcom bubble bust, and Sars and terrorism combined to buck the growth trend.

What will happen this time? "It all depends on what customers and operators do. Demand is undoubtedly weakening," says Backman. "But how much it will weaken we don't know. We are seeing lots of two-for-one offers – what will this do to customers and profits?"

Restaurants have had to battle rising costs, he says. Last year, the two factors that account for two-thirds of restaurant expenses spiked up – the cost of ingredients rose by 8 per cent and labour by 4 per cent.

Margins in the restaurants trade are low – as low as 5 per cent. Industry watchers are surprised that more eateries have not shut, which leads some to believe that the country may be braced for a spate of closures.

"Everyone agrees wine spending is down and that splashing lots of money on a posh bottle has gone... If you are in the restaurant business, there are many reasons to be miserable," says Richard Harden, veteran co-editor of the Harden's restaurant guides.

"But there appears to be a mismatch between the fact that there should be lots of restaurant closures and there aren't. I walked through Soho recently and I couldn't see any sites that were vacant. Everyone is under pressure but it's not yet pushing anyone to breaking point."

What seems to be happening is that in the recession, consumers are shying away from "big ticket" purchases – houses and cars – but are still going out for meals, and still go on holiday. They are, however, going to cheaper places and spending less. Choosing seabass instead of the lobster, spare ribs rather than the T-bone, crème brûlée not the lemon tart, a 2007 beaujolais, not the 1998 claret – the kind of reduced spend that did for Newcastle's Comfort Food and for many of the other 500 closures since the start of 2008.

Enterprising owners will still be seduced by the prospect of opening a restaurant. After years of boom, a growing interest in food, a near constant diet of TV shows – Ramsay's Kitchen Nightmares and Blanc's The Restaurant – there has been no shortage of aspiring restaurateurs, though the overall number of restaurants is almost certain to go down, for now.

"Restaurants are closing all the time, irrespective of recession of not," says Miles Quest, spokesman for the British Hospitality Association.

"It's the most difficult sector of the hospitality industry to raise money for because banks are suspicious of restaurants as so many go bust in the normal course of events. Another thing is that a restaurant may close one day and reopen the next with a different style of food, so one day it might be an Italian, close and then reopen serving Chinese food. There is no doubt that people are eating out less or spending less, but we have no figures to prove that – it's anecdotal evidence."

Alasdair Murdoch, chief executive of Pizza Hut, the largest UK dining chain with 700 outlets, believes more restaurants will close. "It's unlikely there will be big-chain casualties, but the small, niche chains will struggle. Either they're up to their ears in debt or they don't offer value for money.

Individual restaurateurs should concentrate on their distinctive local quality, he suggests. "I would play to my cosiness, warmth and hospitality – but I would still try to employ some techniques to drive customers in. You can't compete in price; you shouldn't try. Compete on your strengths, but look at ideas like offering free wine for a next visit."

March is the cruellest month for restaurateurs, when cashflow is at its lowest, says Stephen Broome, director of hospitality and leisure at PricewaterhouseCoopers. "What we have seen are the earliest casualties – businesses that have some flaw – prices or positioning," he says. "I won't be surprised if there are more casualties, but neither am I expecting a flood." At Horizons, Backman says, "We are probably going to see the banks pulling the plug on a lot of companies. Banks let them go through Christmas and New Year to pick up some cash and then they pull the plug."

Has your favourite restaurant closed? Or are you a restaurateur with advice or an experience to share? Then have your say at www.independent.co.uk/restaurantcrisis

How small restaurants can survive and thrive: By Mark Hix

Everyone in the industry is feeling the pinch at the moment, so it's at times like this you have to keep your head down and really keep your customers happy. If they're going to survive, restaurants have got to raise their game, look more closely at what they're doing, and give better value. The most damaging expense for restaurateurs isn't wages, rent or even food – it's losing customers.

Value is key, and that doesn't just mean a cheaper menu, it means being more careful about what you're spending, yet still giving your customers quality food. When I opened my Oyster & Chop House last April, we put lots of lesser-known cuts of meat on the menu. Things like flank cuts, cheeks and shins, which might usually end up in the butcher's mincer but, with skilful cooking, are delicious. Better still, they're cheaper than an expensive fillet that doesn't taste of anything. It's the same with cheaper fish. I'm a big fan of gurnard, herring and mackerel.

You've also got to give your customers choice. A lot of restaurateurs think they have to have every starter under £10 and every main under £20, but it's more sensible to have a range. We might have a mackerel main course on the menu for £10 and then something like a sea bass for £25. If you don't give people the option to spend more, they're not going to.

Wine is always important, and different restaurants mark it up in different ways. You either go big to get maximum profit on each bottle, or you do what we do and give your customers a bit more value on higher end wines to encourage them to buy a second bottle. I've also started putting a few magnums on the menu. They're twice the size of standard bottles and are reasonably priced, from around £40 upwards, but it's also something a bit special for tables to share.

Meat isn't getting any cheaper, nor is fish, but restaurants can't afford to fall out with their suppliers. Too many people take advantage by not paying on time, but the industry needs to tighten up on this. You wouldn't walk into a restaurant as a customer and say, "Do you mind if I pay for my dinner in two months?".

Your suppliers are as important as your staff, and you've got to be able to trust each other, especially when times are tough.

Another big mistake is spending too much on design. The Chop House had a very low budget for refit. We kept a lot of the fixtures and fittings that were in the restaurant that used to be in the building, and kept things simple. You can blow a million pounds on a new restaurant and watch it flop. It comes down to having a good business sense. A lot of restaurants start up without any internal financial knowledge, and can go for months on end without knowing where they are. You can't get away with that – you need to know exactly how much you've made, or lost, from week to week.

Surviving is about the whole package – there isn't any one thing you can do to stay strong, but if you've got good food and a good atmosphere, you're halfway there.

Mark Hix is resident chef for the 'Independent' Magazine. He has two restaurants, Hix Oyster & Chop House in Smithfield, London; and Hix Oyster & Fish House in Lyme Regis, Dorset, and was formerly chef director of the Caprice Group

Balancing the books: The business expert's advice

1. Remember: cash is king. Focus on cash generation, not solely on profit margins. It's better to sell four bottles of wine at £5 per bottle cash profit than one bottle at £7.50 profit, hence the phrase, 'you can't bank percentages'.

2. Re-engineer menus and wine lists to maintain margins. Substitute lower cost alternative products and carefully tinker with ingredients and portion sizes. (But be careful: the public are very astute.)

3. Offer targeted discounts during quiet periods, rather than continuous offers all the time. Review competition and change promotions regularly to prevent boredom.

4. Remove backroom costs. Reduce larger costs first: payroll, energy, laundry. Demand suppliers offer discounts or other support or switch to cheaper suppliers. Identify trading peaks and troughs and adapt staffing, rather than follow historic patterns. Start with a blank sheet of paper and imagine how you would manage costs if you were opening today.

5. Recognise the value of your chefs and waiters – keep the best – and be prepared to lose those who make little contribution.

Stephen Broome is a director of PricewaterhouseCoopers and has 40 years' experience working in hospitality and leisure