Having once gorged themselves on its promises and prospects, investors are now merely nibbling at the edges of the restaurant sector.

This approach makes sense because, aside from the general financial turmoil (the overall 'leisure and entertainment' index has followed the market down 11 per cent in the past 12 months), restaurants are having to deal with a full course of industry problems.

The first is size. Many deem the sector somewhat bloated (following a good few years of swift expansion) and foresee it shrinking as competitive pressures mount.

According to one analyst: 'There are too many high-street restaurants... with fairly indifferent quality offerings.'

There is also a wider competition issue, as restaurants are competing with (gastronomically improved) pub chains.

One restaurant group director who preferred to remain anonymous is in no doubt about the problems suffered by the sector: 'The stock market has fallen out of love with the restaurant sector, and there is a lack of investor demand. Institutions run a mile [from them] nowadays.

'The City expects [us] to open new venues all the time, but opening a restaurant is a very tricky thing. Once it's open, you can't move it, you're committed.'

Allied to the indifference of City investors is a poor trading environment. The usual suspects have been cited for the downturn: the foot-and-mouth crisis, 11 September and the resulting lack of tourists and a general belt-tightening by consumers. There has also been a shift from eating out to eating in. The fallout from all of this has been hard to avoid.

In mid-July trendy London-based Fish, operator of the Fish! outlets, fell into administrative receivership after appearing to over-estimate the public's appetite for its products.

Hartford, the chic operator for the in-crowd allied with British artist Damien Hirst, has not delivered. It is now undergoing a much-needed rebirth.

Former sector darling PizzaExpress has seen its share price fall – by nearly 50 per cent in six months. The latest indignity for the group was a profits warning in late June which said like-for-like sales were 1 per cent lower than the previous year. On that day the shares shed 27 per cent to 450p.

One other lacklustre performer has been Bank, the London-based chain with outlets in Aldwych, Birmingham and Westminster.

Its shares have plummeted from a launch price of 20p to 4.5p (capitalising the business at a paltry £1.9 million) after dour interim results. The group witnessed its sales dip below last year's levels and is struggling with debt. House broker Beeson Gregory admits investors 'could lose all their money'.

Bid premiums?

If consolidation occurs, the prospect of pocketing a bid premium from a wave of takeovers and buy-outs is a serious consideration.

Groupe Chez Gerard, which trades under the Chez Gerard, Livebait and Bertorelli's brand-names, is a fancied candidate. The firm has had its fair share of problems (it had to start selling sites in a bid to cut soaring debt) but a turnaround of sorts has been achieved. In the year to June 2001, sales were stable at £32.3 million, while losses of £2.6 million were turned into a profit of £2 million.

At £16.2 million and with a prospective p/e of 24.5, the stock still looks overvalued though. It also has debts of over £8 million.

Two to take away

If you are seeking a more solid, long-term opportunity, there are still a few attractive operators worth backing.

City Centre Restaurants, which operates the Garfunkels, Est Est Est and Frankie & Benny's chains, is a company on the move.

Its central London restaurants have suffered recently as tourists stayed away, prompting the management to focus on food and beverage outlets at leisure parks and concessions at airports.

It has also sold two underperforming brands: Wok Wok and Deep Pan Pizza.

According to chief executive Andrew Guy, the company is now operating in a market segment with high barriers to entry and captive customers. 'Concessions in airports and leisure parks fill both of these criteria, especially in light of the forecast growth in low-cost air travel.'

Teather & Greenwood's Nigel Popham is a fan: 'CCR is being managed well. It has recovered from its period of over-expansion in the late 1990s and has got a good spread of locations.'

Paul Hickman of KBC Peel Hunt cites CCR's recovery potential.

The group's most recent full-year results show turnover up 5 per cent to £228 million and losses trimmed from £5.6 million to £1.9 million.

For the year ahead, CCR is expected to post pre-exceptional profits of £16.9 million on sales of £207 million.

Another stock worth picking up is pizza/pasta venture ASK Central, one of a small band that has been a sure-fire stock market success.

Since listing on Aim in October 1995 at 35p, the shares have risen consistently to 150p.

In the year to December 2001 sales rose 29 per cent to £78.9 million, with profits climbing 31 per cent to £13.6 million.

Beeson Gregory says: 'It is a tremendous company. It is in the right sector of the market, has strong management and its site selection is superb. We are expecting 20 per cent growth this year.

'It is a fairly safe bet at current levels.'

Hickman believes ASK is well-managed, offers sustainable growth, is not overly focused on London. It also has a strong second brand in the form of 'authentic' Italian restaurants business Zizzi. 'The company has been a great success,' he says.