Expert Commentary

Mamma Mia! Deflation Pans Pizzas

Jamie Oliver, the famously Italian loving cook, made his name by appearing in a television show called The Naked Chef. He probably didn't realize, almost twenty years on, how appropriate that term would be.

A symptom of the positive trend in social mood that made quantitative easing seem like a good idea has been the excessive liquidity available to investors. Governments propped up the banks by creating money out of thin air and that money (it's more like an accounting entry) has pretty much stayed in the financial markets. Private equity groups, in particular, have benefited as funds increased, but also the ability to borrow freely became easy. And, over the last few years, private equity has had a frenzy of borrowing and investing in casual-dining chains in Great Britain — lured by the seemingly magic elixir of positive cash-flow. Like all excessive debt expansions (inflation), it doesn't end well and the UK's restaurant industry is now feeling the devastation of debt deflation.

Curiously, the debt-fueled expansion in the UK restaurant industry over the last few years has been concentrated in Italian-style restaurants, especially mid-market pizza chains (for decades the favorite British cuisine has been…Indian). But now the glut of similar restaurants and higher costs are impacting profitability. That would be manageable were it not for the extent of borrowings, estimated by Deloitte at between 3.5 to 4.5 times earnings.

Deflating dough - MG Prezzo Holdings Chart

Cue debt deflation. The chart above shows that the debt of pizza chain Prezzo maturing in 2021 has deflated dramatically over the last few weeks from 93 to 66 pence in the pound. The bonds of Pizza Express maturing in 2022 have fallen from par (100) last summer to around 84 now. A Financial Time article states that "some 117 restaurants across the UK are set to close", and even Jamie's Italian, owned by "naked chef" Jamie Oliver, has shut down operations.

The timeless old adage used about leverage is that "when the tide goes out, you can see who has been swimming naked." In the current UK restaurant industry, there are many naked chefs.

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