Famous Brands, the South African-based company, which acquired GBK for £120m in September 2016, said the better burger chain’s trading position declined year-on-year with like-for-like sales down c12.6% over two years, and down c8.2% year to date, as it initiated a Company Voluntary Agreement (CVA) process for the struggling business.

In documents seen by MCA, Famous Brands said it had identified 46 trading restaurants out of the brand’s 85-strong estate that are either loss-making, are over rented and/or which do not add strategic value to the company going forward, and have been identified as being subject to rent concessions and/or revised lease terms over a 36 month period.

The current forecast is that there will be a substantial cash shortfall in the company during November. With GBK’s management team identifying a working capital/funding need of £2.2m.

Famous Brands, which has already injected c£9.5m into the business since acquisition, has agreed to inject a further £2.2m of working capital funding into the company provided that the CVA is approved.

The majority of the distressed sites identified in this CVA Proposal and earmarked for closure or rent reductions, are relatively new sites having opened between 12 and 24 months ago.

The company states that on review, the new business strategy during this time was flawed and driven by a race to market in areas not traditionally identified as GBK “heartland”.

It said that compounding the under-performance in these areas was “poor brand recognition in the north, trading formats that were not adapted to the market, and pricing and menus that were London centric”.

The company states that a number of these new shopping schemes also struggled to attract retail customers in sufficient numbers from a restaurant perspective.

It stated: “Many of these schemes are over-traded in food and beverage. The rapid shift to online retail has also had the effect that the traditional anchor tenants have not been able to attract the kind of footfall they traditionally have relied on.”

The company’s annualised rental bill is approximately £10m. A review by property firm CBRE has identified that in aggregate the company’s property portfolio is substantially over-rented.

In view of its stated financial position, in the medium and longer-term, the company said that this position was “unsustainable and needs to be addressed”.

The directors have implemented a turnaround strategy with a view to returning the business to its previously proven and successful operating model, involving amongst others an operational restructure of the business.

Famous Brands said that the CVA is key to facilitating the turnaround of the business and enabling the company to carry on trading in the ordinary course.

If the CVA is not approved, or is otherwise not implemented, the Working Capital Package (and the Refurbishment Support) will not be provided, leading to the company no longer being able to trade as a going concern and ultimately needing to be placed into administration or liquidation in the short term.

In order to facilitate the turnaround strategy to date, Famous Brands has provided funding to the company. In 2018, Famous Brands provided the company with £3.5m by way of debt funding. This is in addition to the amount of £6m which was provided by way of debt funding injected into the business in 2017.

The business has also undertaken a rebrand and shopfront facelift of 30 restaurants during June and July 2018.

The company said: “The objective of this investment has been to elevate the kerbside image of the brand and to bring some consistency to the signage and branding recognition across the estate, which had become increasingly fragmented in a visually cluttered marketplace.”

As a collective, these sites have seen like-for-like growth of 2.6% since completion versus the balance of the portfolio over the same period.

The company said it had identified the refurbishment requirements to ensure the on-going refreshment of the restaurant estate.

It said: “Assuming the business continues to trade as a going concern and contingent on the CVA being approved, this programme will see circa eight refurbishments concluded each year (circa. one restaurant per month between March and October (inclusive) costing £150k per restaurant) and will conclude with the estate entirely refreshed over the next three to four years.

Famous Brands has agreed to provide support in respect of this refurbishment programme provided that the CVA is approved.

The business said it had also developed and rolled-out customer facing technology designed to enhance the experience of ordering and paying “at table” via a mobile application.

It said: “As consumers shift towards convenience and online ordering for delivery, there has been an acute focus on the delivery channel which has seen significant double digit growth in this area of the business.”

The current exclusive contract with the company’s delivery partner Deliveroo will change from 1 November 2018 and the business is on track to launch a further two delivery vendors into the business from this date.

The company said: “Based on our current growth rate in this area, the management team are confident that the business will be well positioned to capitalise on this growing consumer segment and project a doubling of delivery turnover over the next 12 months.”

To support the implementation of the additional two delivery vendors, the company said it had secured a marketing support package from these vendors, which will fund a marketing programme to ensure the successful launch of the new platforms.

Leases category

Where restaurants are performing adequately or, in a small number of cases, are otherwise valuable to the company from a strategic perspective, they will be kept without rent reduction but move to monthly rent payments for 36 months. For the purpose of the CVA, these will be Category A Leases.

Where restaurants are underperforming by virtue of being marginally profitable (before absorbing their share of overhead costs) and/or where property costs are above market and an immediate rent reduction is necessary to re-align rent payable with the market value and/or to restore the medium to long term viability of these restaurants, these Leases will be Category B1Leases. A rent reduction of 20% will be applied for 36 months and the company will pay 5% of passing rent in lieu of dilapidations.

For Category B2 Leases, a rent reduction of 40% will be applied for 36 months and the Company will pay 5% of passing rent in lieu of dilapidations.

Where restaurants are unviable even after a rent reduction, these Leases will be

Category C Leases: They will have a rent reduction applied on the same basis as Category B2 Leases but only until the date being months after the Effective Date.

This category includes sites in London’s Soho, Bristol’s Park Street, Swindon, Leicester, Fulham, Bedford, Milton Keynes, Glasgow Fort, Norwich, Newport and Sheffield’s Meadowhall.

Yesterday, GBK announced it was to initiate a CVA process, with the assistance of Grant Thornton, which could lead to the closure of 17 of its restaurants.

Under the terms of the CVA, GBK has earmarked 17 of its restaurants for potential closure, with would impact c250 staff, however the company said every effort will be made to relocate them. Its other 68 restaurants would continue to trade as normal.

A creditors meeting will be held on 9 November. Matthew Richards and Daniel Smith from Grant Thornton UK LLP, the business advisory firm, have been appointed as Joint Nominees to the CVA.

Derrian Nadauld, managing director of GBK, said: “Given the challenging UK casual dining environment and over-rented UK restaurant estate, we are having to take tough but necessary actions to reduce our fixed cost base and restore long-term profitability.

“We have held constructive discussions with our key landlords and strategic partners and will now seek creditor approval on our CVA proposal. This will provide greater security for our staff, suppliers, landlords and customers. GBK is a fantastic brand and with the strength of our core estate, we are confident the Company will emerge stronger from this process.”