Costs rise but opportunities knock

CGA Peach’s 2017 Future of Finance & Development seminar delivered numerous insights into a market that is challenging but still full of potential. Here are just ten of the takeaways

1. Flat is the new up…

CGA Peach’s Peter Martin set the scene for the seminar with some analysis of CGA’s latest Quarterly Confidence Monitor. It reveals stalling confidence among business leaders—not surprising given pressures on the costs of food, property and people, patchy consumer confidence and the risk of saturation. He also pointed to CGA figures revealing little growth in the market. “To state the blindingly obvious, it’s very tough out there… flat is the new up,” Martin said.

But he saw some positive signs too. With 31% of 18 to 34 year-olds planning to increase their spend on eating and drinking out over the next six months— compared to only 15% of 35 to 54 year-olds and 10% of those aged 55 or over—it is clear that Millennials are the crucial segment for operators seeking to unlock growth.

2 … And uncertainty is the new normal

Business confidence hasn’t been helped by the outcome of the General Election. Kate Nicholls of the ALMR told the seminar that predicting what the next few years will mean for business—especially around Brexit—was very hard. “It’s the most unpredictable period I’ve ever known… uncertainty is the new normal.”

With the government’s advantage in parliament so thin, there will at least be a little stability for the next couple of years, Nicholls suggested, with major changes to legislation unlikely. She was also optimistic that the sector might soon get some positive news about freedom of movement for EU citizens in the UK—a big concern for hospitality businesses post-Brexit.

3. Managed groups are taking independents’ share

The latest edition of the AlixPartners CGA Peach Market Growth Monitor reveals a 1.2% fall in the number of licensed premises in Britain in the 12 months to March, said CGA’s Naveed Bhatti in a session. The decline is mostly a result of closures of drink-led pubs and independent restaurants. But Bhatti also flagged up the Monitor’s positive messages, like the continued expansion of managed groups and thriving cities like Newcastle, which has seen a 9% increase in food-led licensed premises in the last year alone. CGA’s consumer segmentation tools add to the Market Growth Monitor’s insights by showing which demographics are driving the growth in cities like Newcastle. “We’ve reached a bit of a saturation point, but that doesn’t mean that there aren’t opportunities out there,” Bhatti concluded.

4. Premiums might be softening, but rents and rates are not

Rents continue to rise in London and other big cities, and with the political situation uncertain rates are not going to ease anytime soon either, said Davis Coffer Lyons’ Trevor Watson in a session about property trends. But there might be some relief in premiums. “There’s definitely a feeling that premiums are softening… it’s a supply and demand situation.”

He added that “the hotspots are still hot,” but weakening demand means that some secondary locations might start to offer better value. The danger of saturation means that expanding brands might be getting more cautious about their new openings, and seeking locations that carry less of a risk.

5. Investors are cautious but still confident

Despite the many input cost pressures on the eating and drinking out sector, investors continue to see good returns, a panel of deal experts said. Douglas Jack of Peel Hunt said there had been 15 IPOs in the sector in the last four years, though some had been more successful than others. “It’s a mixed bag, but the market is open for good businesses who want to float.” Another panel member, Darrel Connell of Imbiba Partners, said his company was continuing to invest in growing businesses, but that it would be looking beyond “very, very expensive” London for its next opportunities.

6. Operators need to stay agile on locations

With rents and rates going up, the UK high street is a tough place to trade, said YO! Sushi’s Robin Rowland in a head-to-head with Peter Martin. Smart operators have answered that challenge by making their concepts work in different areas of the market, like travel hubs and shopping centres. “To be really successful you need to have more than one strategy,” he said. ‘YO! Sushi is very agile… if you can’t make your brand work in different sorts of locations you’re likely to be stuffed.”

The importance of this kind of flexibility will increase, he added. “Any business that is slow and fat and clumsy is going to have a big problem… people are going to get more demanding.”

7. Smart pricing can unlock sales

Rising food costs are hitting operators hard, CGA’s Jamie Campbell told the event. The CGA Prestige Foodservice Price Index has recorded inflation of 5.8% in the last 12 months—more than double the rate of inflation in the Consumer Price Index. Eating-out brands are usually reckoned to have two choices in response: absorb the extra costs as best they can or pass them on to customers.

But Campbell suggested that a third option is to get more sophisticated in the use of pricing. There is a complex inter-dependency between menu pricing and perceptions of value, and blanket price rises shouldn’t be the automatic response, he suggested. A new app from CGA can help, by monitoring competitors’ pricing and identifying menu items with prices that are below consumers’ expectations and could be raised. “They might be small wins in the grand scheme of things… but they add up.”

8. It’s getting harder to do deals

Paul Newman of RSM told the seminar that only four private equity deals had been completed in the sector so far this year, compared to 17 in 2016—partly because buyers are becoming much more demanding in their due diligence. “There’s a definite slowdown in investment appetite,” he said. “Getting deals done is becoming much harder… We’re seeing investors taking a steadier view of returns and growth.”

YO! Sushi’s Robin Rowland echoed that view, warning that a sale process takes its toll on a business’ leaders. ‘Due diligence is very rigorous now… your business need to be Teflon coated, and you often need to start talking to potential buyers years in advance.”

9. British brands are going global

A leaders panel to wrap up the seminar revealed how leading brands remain in expansion mode—though they are treading increasingly carefully and going further afield for opportunities. Leon’s John Upton said as well as opening “five to ten” new restaurants a year in the UK, the business had also lined up its first two openings in the US. Tara O’Neill of the Jamie Oliver Group added that after closing six UK restaurants earlier this year, the focus for new openings would be overseas, as well as on new concepts and non-high street locations like airports and cruise ships. “The opportunities are in international markets… the [UK] high street is still a big part of our business, but it’s tough work.”

10. Experience is king

Speakers on the leaders’ panel agreed that the experience of restaurants is now at least as important as the food on the plate. “The experiential aspect of eating and drinking out is vital,” said finance director and turnaround specialist Paul Viner.

Sarah Weir of Albion & East agreed that experiences can set operators apart from the crowd. “I’m still convinced that if you give consumers a great experience they’ll come back… for good businesses, there are still great opportunities.” Operators need to be opinionated too, she added, especially if they are to attract young professionals. “You have to have an opinion… but you have to be single-minded and genuine. If you do something just to tick a box the millennials will see through you in an instant.”

CGA Peach’s Future of Finance & Development seminar was supported by Barclaycard, CPL Online, Fourth, The Coffer Group, RSM and Zonal.