HALF A DOZEN HOPES AND FEARS FACING OUR INDUSTRY
HALF A DOZEN HOPES AND FEARS FACING OUR INDUSTRY
As we stand at the midpoint of 2015, it now seems timely to reflect on the ‘Hopes and Fears’ facing our industry and what we might expect to see in the latter half of the year.
THE HOPES
1. Savvier consumer base
Consumers are savvier now than they have ever been. The popularity of Brixton Market, Model Market, Street Feast, Maltby Street and Dalston Yard pay testament to this and consumers are increasingly seeking out the new and rejecting brands deemed ‘too corporate’. Whilst this poses a threat to a myriad of branded operators, it is a significant opportunity for those brands that are able to remain nimble, innovate and react to changing consumer needs and market trends.
2. Forward thinking landlords
Back in the olden days, landlords looked for the biggest rents with the best covenants to drive the highest capital value for their assets. Whilst landlords may inherently still be ‘rent conscious’, they are becoming increasingly liberal in their views on tenant mix, and this is undoubtedly providing an opportunity for early stage brands to grow in locations that would have otherwise previously been prohibitive. Westfield led the way in adopting this mind-set in their Stratford development and whilst some commented that there may be an oversupply of F&B within the development, over time it’s proven itself to be a scheme with an excellent mix of both corporate and independent concepts across a diverse mix of categories. Now is the time to challenge and take advantage of this change in mind set and present landlords with innovative and credible concepts for their assets.
3. Corporate shake up
Will we see more corporate activity in the latter half of the year and what will that bring in terms of new site availability? Casual Dining Group (formally Tragus) shed 40 sites last year as part of a Company Voluntary Arrangement. They’re miraculously back on the acquisition trail, looking to acquire 50 sites in the next 5 years, but as we saw with Paramount Restaurants in 2012, corporate restructures can also go wrong. Pub and bar operator, Enjoy Pubs, has recently brought 18 sites to the market, mostly in secondary towns, but they may provide some supply to the more expansive operators. We are starting to see some sites come to the market following the acquisition of Ask and Zizzi and the privatisation of Prezzo. Las Iguanas and La Tasca are currently in play, the latter of which I would suggest will be bought for its sites, rather than a brand, which will very likely lead to some surplus stock and subsequent disposals.
4. Digital and online
One restaurant commentator once said that the sector would not end up in the same state as the retail market because “you can’t get a restaurant experience online”. This is, of course, true, however innovation and technology is becoming more and more prevalent within the restaurant sector and this can only mean more opportunity to drive sales and growth. Be it online loyalty, booking, ordering or faster payment, the industry has seen more technological take up over the last 6-12mths than it has ever seen and as more brands use technology to engage, reward and interact with their customers, digital is set to become a mainstay media within restaurant marketing.
5. Delivery
Anyone who hasn’t tried Deliveroo, or any of the other premium delivery services yet, needs to give it a go. It is life changing. From a customer point of view, you can get a premium, restaurant quality meal, delivered to your door with minimal fuss or effort. From an operator stand point, there’s a customer base that is very low maintenance (other than delivery of excellent food) and is therefore served with very little additional cost. There’s a sense that these deliver-to customers are incremental to dine in resulting in minimal, if any, cannibalisation, driving trial with an audience outside of your core customer base. What’s not to like? At present there are only a handful of premium delivery services available and the lack of competition has meant the fees for such services remain relatively high which quickly erodes margins. Most kitchens are designed to cater for the number of covers within the restaurant; therefore additional orders from off-site sales can put pressure on the kitchen during peak times. One final factor to consider, especially if you’re running this service out of a relatively small restaurant space is the presence and frequency of delivery drivers and the impact they may have on the experience of the eat in customer. None of these issues are insurmountable so watch this space as additional operators enter the market.
6. Crowdfunding
In the absence of traditional funding many brands, especially those in the early stages of development, are increasingly turning to Crowdfunding in order to raise equity, at very favourable valuations. I fully expect this trend will continue to grow as new concepts engage customers to support their unique proposition. Equity fundraisers in the sector include Pizza Rossa (£1.4m valuation), The Rushmore Group (£10m valuation), The Good Egg (40% overfunded on a valuation of £800k) and more recently BrewDog raising £25m in return for 8% valuing the company at an eye watering £300m. And it is not just reserved for equity fundraising. There has also been significant growth in the peer to peer bond market, with brands tapping up a large part of their customer base to raise finance. Chilango recently raised £1m with their Burrito Bond, Taylor St Baristas raised £3m with their coffee bond and Hugh Fearnley-Whittingstall recently raised £1m for the growth of his River Cottage Canteen & Deli concept. Grind Espresso and Cocktail bars are fundraising as I write, aiming to raise £750,000 in return for 8% interest plus a multitude of additional, non-cash benefits. Many seasoned investors have been sceptical about the role of crowdfunding since it has not yet returned money to equity holders through an exit or refinance, but this does not seem to be deterring would-be fundraisers or investors just yet.
THE FEARS
1. Availability of good sites
This is not a new phenomenon and I fear the lack of supply of sites will continue into the foreseeable future. Unless, of course, you have very deep pockets, in which case supply isn’t necessarily an issue, it’s a case of deciding on where to locate and how much you are prepared to pay. There are still a number of brands who are willing and able to raise the bar in terms of rents and premiums in a clamber to gain market share, but I question how sustainable this approach is and the knock on effect on the remainder of the marketplace.
2. Availability of good people
Hand in hand with finding sites is the search for good people. If you believe what you read, between Nando’s, Cote, Bills, Byron, Tragus, The Restaurant Group, GBK and 5 Guys there will be approximately 185 new restaurants opening next year. To service this they will need 185 general managers, 185 head chefs, 740 assistant managers and supervisors and approximately 3,700 other staff members. That’s a total of 4,810 positions across only 8 brands, not including other chains or independents that are growing at an equally steady pace. A great story for unemployment figures and the general economic recovery, but with a limited pool of labour to pull from, recruiting and retaining great staff is going to become an increasingly difficult problem.
3. Oversupply of offer
As demand for premium sites in major towns and cities increases, I believe more and more operators will start considering the ‘less obvious’ locations to fulfil their growth requirements. Turtle Bay, Loungers and Prezzo have done it for years, forging profitable businesses as a result, and Nando’s and Pizza Express are at a size where growth is dependent on acquiring new sites in smaller, less densely populated locations. But as more and more brands cotton on to this as a development avenue, will these markets quickly become saturated? Every market has supply equilibrium, where the number of branded operators matches the size of the market, but as pressure to fill a pipeline grows there is a risk this balance will edge closer to over-supply. This is great for customers in terms of a wide choice of offer, but not so good for operators who have invested huge capex and are locked into long leases.
4. Impact of international brands
I was probably the first to roll my eyes at the relentless PR over Five Guys and Shake Shack arriving in the UK from ‘across the pond’ but fast forward two years and I fear my scepticism was only half justified! Five Guys are now up to 27 sites within 24 months and I suspect they have many more in the pipeline, investing a significant amount in the process. Conversely, Shake Shack took a more cautious approach having just opened their second site in Westfield Stratford with a few additional sites in the pipeline, one of which is believed to be St David’s Centre, Cardiff. Vapiano, Sticks n Sushi, Goodmans, Burger & Lobster and Chiptole have all successfully penetrated the UK market and these early successes indicate there are likely to be more brands eyeing the UK for international expansion. Smashburger are desperately trying to secure their first site having narrowly missed out on two shopping centre opportunities. This foreign demand will only serve to put additional pressure on finding sites and people.
5. Allergen and other red tape
On 13 December 2014, the EU Food Information for Consumers Regulation came into force which requires food businesses to provide allergy information on food sold unpackaged. Since the new legislation, there has been one high profile breach (resulting in a customer’s death) which few argue is enough to justify the new laws, but many tops chefs have criticised the legislation as bureaucratic and ‘reducing the spontaneity, creativity and innovation within the industry’. Europe is a big talking point in politics at the moment and David Cameron’s current EU negotiation and the forthcoming EU referendum will decide whether we’ll see more red tape like this in the future.
6. Government and the Economy
The UK has fared better than most in economic recovery, but there is still some way to go to reduce the deficit. How this is best achieved split the parties during the recent general election. The Conservative Party majority was a big surprise and the party now has free reign to push for deeper cuts than those made during the last coalition government. These cuts will affect people in different ways, but any change in policy will undeniably result in a shift in consumer confidence and behaviour. Both the Greek debt situation (which may or may not be solved by the time this goes to press) and pending EU referendum may also have an adverse effect on the economy, the latter of which may only escalate the closer we get to polling day.