Prezzo needed a pick up earlier

Last summer, and nine months on from his appointment as chief executive of Prezzo, Jon Hendry-Pickup admitted to MCA that he was still reeling from the breakneck pace of his role and the sector he is working in. The former Travelodge chief operating officer had been faced with building a head-office team essentially from scratch and dealing with a period of intense uncertainty. Then there was the challenge of re-invigorating one of his brands (Chimichanga) and creating a new one from scratch (MexiCo).

It is no wonder that the former operations director for Tesco described process as “trying to tune the engine while you’re still driving the car”. He was speaking as the company was celebrating opening its 300^th site. Not expectedly, he said he was surprised at the pace at which competition grows in the sector but agreed there had never been a “better time to be a UK customer wanting to dine out”.

He said: “Obviously that means we have to continually up our game. Those core elements of value, quality and an environment where people want to spend time – those have always been the fundamentals, but the benchmark is so much higher than it was. Combine that with the challenges we are all facing – everything from rents to National Living Wage, to the growth of home eating – and it means you have to be absolutely on your game.”

There is a sense that Hendry-Pickup has only recently got to a point where he had a chance to make sure Prezzo is still match fit and able to stay in the game – a situation that goes back to when TPG Capital acquired the then c250-strong company at the start of 2015. Hendry-Pickup didn’t come on board until June 2016 adding to sense of momentum lost, especially for a business that at the time of its acquisition was in healthy like-for-like growth territory. As one rival operator has put it Prezzo was “average mainstream fair done reasonable well”.

At the back end of 2014 it was certainly attracting a fair portion of interest. That July, rival PizzaExpress had been acquired by the China-based investment fund Hony Capital for c£900m. Both TPG and Advent International had been suitors for the business and now immediately turned their gaze to Prezzo to assuage their appetite for a foothold in the UK’s casual dining sector. Here was another mid-market Italian brand with the potential for further growth, a possible international play, and a sub brand to play with.

The listed Prezzo, with the Kaye family as its majority shareholders, let the City know of the two bids, and subsequently its preference for the 126.5p a share bid from TPG, which valued the business at c£304m. It led to Nick Batram, analyst at the time at Peel Hunt to state: “In our opinion, the agreed bid of 126.5p fundamentally undervalues a business with an impressive track record and exciting prospects. We appreciate the risks of the family exiting and TPG have been very cute and picked up a good business at an attractive price.” How times change.

The sale price was 9.2 times Prezzo’s reported adjusted EBITDA of £31m for the twelve months ended 29 June 2014, which stacked up well against the 9.5 times achieved by PizzaExpress earlier in the year in its sale to Hony. By June 2015, chief executive Jonathan Kaye moved to a non-executive role, before leaving altogether to become chief executive of Richoux. The search for his successor intensified, with TPG appointing one of its own operating partners Dirk Eller, as interim chief executive. It would take another year for the company to appoint Hendry-Pickup, by that point it had opened a further c30 sites, including announcing in October 2015, that it would open 11 restaurants in the period up to end of that year.

On top of the obvious sector-wide issues, I would argue this gap in appointing a management team that has hampered Prezzo being able to continue its momentum or stop it from now having to explore a CVA that will see it shed 94 sites, including its entire Chimichanga brand. At the time of the TPG deal, the core brand was working, it was proven success in market towns and there were more locations to go after. You can understand why TPG wanted to keep the pedal down on expansion, but to do so without a management team does seem strange.

It was also the last major deal to be done in the sector since the current challenging period kicked in, placing a significant debt pile on a business, that had been, under the Kaye’s, debt adverse.

Being a Kaye family-controlled business it was also thin on management, thin on central overheads and central costs. Arguably, you had a £300m business without the corporate structure you would imagine that would entail. So I imagine one of the key opportunities that suitors saw was “imagine what you could do with this business if you put some corporate structure in and incorporated some KPI’s etc”. However, that doesn’t seem to have happened quick enough.

As with any of their other businesses, while there wasn’t much of a corporate structure, there was huge loyalty to the Kaye family, so any new investor/management team would have had to tread carefully in putting across their own ideas/ways of working. Now unlike other examples of Kaye’s leaving a business, not everyone loyal to them left immediately at Prezzo. However, it is thought that the transition of the business in a people perspective didn’t go as well as it could have, with suggestions that maybe too much “corporate science” was put forward to soon for the existing team.

An experienced chairman was also sought but still as yet been hired, whilst it is thought that the main protagonists from TPG, who oversaw and drove through the deal, have since moved on.

As I wrote last March, the one area that Prezzo had expanded strongly into – market towns - are no longer a secret anymore. From being one of three or four restaurants in town centres , Prezzo is being joined by five or more operators. The cake (population/spend) remains roughly the same, but the slice is increasingly shrinking. New variants on traditional cuisines and an expanding consumer palettes are also now reaching regions coupled with newly invested and up-to-date concept designs.

Businesses such as Loungers, Bill’s and Giggling Squid have prospered expanding into them over the last few years, others have followed, put off by London’s high rental levels. Prezzo has, in places gone from having the best site in town, to being left out of new eating and drinking-out circuits.

Although a couple of sites are said to be strong performers, I doubt there will be few tears shed if as thought the Chimichanga brand disappears through the CVA process. It never felt like the Tex-Mex concept had the full trust of Jonathan Kaye, although at one point he did suggest it was ready for an increased rollout. It has recently been superseded in the wider business’s focus by new concept, MexiCo, which is currently three-strong. However, this fledgling concept is also set to be jettisoned by the CVA process.

The company had appointed Morag Freathy, formerly of Compass, as managing director of Chimichanga, as it looked to reposition the 38-strong brand as the leading Mexican dining concept in the UK. Freathy left after less than a year with the business, followed by the brand’s operations director Paul Hunter. The Restaurant Group is working hard to make its own Tex-Mex brand Chiquito more relevant, and it is a discussion for another time, but I wonder whether the UK consumer has recently stepped back from Mexican cuisine for the time being.

It is thought that of the 94 sites that are due to come on to the market through the proposed CVA, the majority have been offered to other operators over the course of the last 18 months. Of the 27 placed on the market last year, over a half have been sold to existing operators or new entrants, including sites in Moseley, Derby and London’s Haymarket – highlight the mix of locations Prezzo trades from. And although these sites will provide some operators the chance to cherry pick some new locations, the last thing the market needs is another c100 units for sale on top of what is already out there, which now includes 31 Loch Fyne sites. I would imagine small packages from Carluccio’s and CAU will follow, once there new chief executives have carried out their respective estate reviews.

So can Prezzo survive and possible thrive again after the CVA. Analysis of the core Prezzo brand through MCA’s authoritative Eating Out panel offers little cause for immediate comfort. Its NPS scores were trailing the wider chain restaurants market in December 2016 and the gap has only widened over the past year.

Hendy-Pickup knows he has a challenge on his hands but it thought that trial of a new look and new menu, currently across 12 sites, has brought an immediate positive response. It is a small sample but a start. With the sole concentration for the business after the CVA set to be its eponymous brand, he will hope to get the chance to increase that sample number and make sure that uptick is robust and sustainable. He says Prezzo’s core business today is fundamentally strong and has fantastic potential, and that a remaining 208-strong group will have a “bright future”. Time will tell if the CVA process will be transformative and take the hand brake off to allow it to build momentum to back up that statement.

Talk before the end of the year, what that the Casual Dining Group was looking at the business, something both CDG and Prezzo denied at the time. It is hard to see CDG having the appetite or backing from its main investor Apollo to take on another high street brand that is currently in a “turnaround scenario”, the same applies of any speculated interest from TRG.

It is questionable that anyone could have stopped the business going from a position of healthy like-for-like sales to what is thought to be a more recent c-7% decline in sales, especially if you take into account some of the above factors, but it is possible that if the current management team (or any management team) had been in place earlier, it may possibly have been averted.