Steady as she goes

RBS economist Ross Walker stressed to CGA Peach's 2020 Conference the need for caution in 2016. Here are five of his predictions for the year ahead

1 Economic growth will be modest
After projected full-year growth of 2.3% this year, Walker predicts a figure of around 2% in 2016. That would be a fair achievement, he said. “It’s by no means a disaster… it means the UK will still be one of the fastest growing developed economies.” But the economy will be running into some strong headwinds in 2016, Walker added. One is the global slowdown, centred in Asia and affecting UK exports and manufacturing, and another is the ‘Brexit’ issue, with some major spending projects on hold until after the vote on the UK’s membership of the European Union. Add in the tightening of government fiscal policy in the wake of the General Election and it is clear that any economic growth will be hard won in 2016.

2 Jobs growth will stay sluggish
The government has been trumpeting employment statistics as evidence of economic recovery, but Walker pointed out that job creation has slowed in 2015, and that many of the new jobs have been part-time or self-employed ones. “Scratch beneath the surface and cracks in the labour market begin to appear.” It is another reason to be cautious about prospects for 2016.

3 Inflation and interest rates are going to stay low
Walker said one of the biggest economic surprises of the year has been inflation levels, which are now close to zero. That means interest rates have been held down too, and both trends are set to continue into 2016. Interest rate rises are unlikely before August at the earliest, he suggested—and even then they will be modest. 

4 The Living Wage won’t raise spending power
Nor will the forthcoming National Living Wage be the spur to economic growth that some have claimed. Walker calculates that the NLW will put an extra £1.5bn into the nation’s pre-tax income—but cuts to tax credits and welfare spending will take another £7bn out. “It’s going to squeeze disposable income… it’ll result in quite a big income hit for a number of lower income households.” That could result in a double whammy for operators: higher wages for their staff and lower spending power for many of their customers. 

5 Pricing is going to get harder
Walker predicts real terms growth for the eating and drinking out sector of around 2% in 2016, in keeping with the economy as a whole. “It’ll be steady growth, but not spectacular.” Over-supply is a risk, and operations will have to manage their costs carefully he added. “Pricing conditions in the sector could get a lot tougher,” he said. “There’s a sense that we’re beginning to lose a little bit of momentum in the sector—but in absolute terms it still looks OK.” 

Competition and confidence
Competition among brands is stronger than ever before—but so too is investor confidence. Those were among the messages from the 2020 Conference co-chairs, CGA Peach vice president Peter Martin and CGA Strategy chief executive Phil Tate.

Street food, pop-ups, travel hubs and dynamic new entrants are all adding to the competition for established brands, Martin said. “It’s not getting any easier out there… competition is coming from every angle at the moment.” Tate added: “It really is brand to brand combat out there—it’s a market share game and the consumer has the whip hand.”

The latest Market Growth Monitor from CGA Peach and AlixPartners charts around 1,300 new restaurant openings over the 12 months to September. But Coffer Peach Business Tracker data for the same period shows only 1.3% like for like growth, half the rate at this point last year. Put together, those data sets suggest that many operators are largely depending on new openings for their sales growth—and that prompts fears that the market is getting saturated. “Reliance on openings is leading us, I think, into a period of potential over-supply,” said Martin. It undoubtedly means concepts have to be distinctive, added Tate. “The one-size-fits-all concept will no longer cut it, unless it’s finely attuned to the consumer’s ever increasing demands.”

But if there is anxiety about the future, no one has told the investors. This year has seen a flood of acquisitions in the eating and drinking out sectors, with more set to follow in 2016. As Martin pointed out: “There is no shortage of confidence or investment out there in the market, and that’s especially true of young, ambitious and diverse businesses.”