A new year finds the UK’s eating and drinking-out sector coming under pressure from a number of different angles, but as sure as day follows night, a challenge for one business is an opportunity for another. As many companies take time to put their “foot on the ball” and assess pipelines and offers, others will be pushing ahead with expansion plans, technology upgrades, the evolution of their delivery offer and securing new investment.
Let’s get the obvious out of the way first, 2017 will be a tougher year. The headwinds that were developing last year – slowing consumer spending; the impact of the national living wage; business rates increases and the rising costs of ingredients, will be fully felt this year, and that is before you add in the weakness of sterling and the continued uncertainty surrounding how Brexit is achieved, soft or hard.
Many operators have already spoken about cooling their jets, putting their foot on the ball and consolidating what they already have, especially over the first have of the year. For those in the mid-market casual dining sector, the squeeze on trading felt from the start of last year is only going to get more intense. Although many won’t fall as far as Ed’s Easy Diner or The Restaurant Group, the demise of the former and the issues faced by the latter will have sent a shiver down the backs of some established operators. The proposed shuttering of six Jamie’s Italian sites and issues currently being dealt with at Burger & Lobster only feel like the start of some pruning by a number of groups and some open and frank discussions with their banks for others. What is for sure is that Oliver isn’t the only one looking to consolidate his estate at present.
Some operators have already cut their cloth accordingly to the more austere environment, restructuring head offices or operational structures – for example PizzaExpress shedding a layer of its operational team.
It was also noticeable at the end of last year, that speculation that the banks were starting to pull back from the sector increased. Some have already started talking about “critical lists”, with a number of operations currently under the microscope.
In terms of M&A, as we have flagged up before it seems we are entering a period of big deals and big synergies, led by Patron/Heineken’s proposed acquisition of Punch. In his excellent piece for MCA’s January issue, leading analyst Simon French puts forward a number of consolidation proposals led in the majority by the larger listed pub companies. Indeed, those companies, such as Greene King and M&B remain in the best position to consolidate, not just the pub market but also some of the casual dining market. Could we see the development of the next Whitbread by the year’s end? And who will look to take The Restaurant Group private? Finally, will Wagamama’s initial success in New York, on top of its continues success here, prompted backers Duke Street Capital to bring it to market before performance begins to plateau? If that goes for a good price, it will undoubtedly help the wider industry and underline that good multiples are still being paid post Brexit vote.
In the middle to lower-size tier, the sector will expect to see the likes of the D&D London, the Thai Leisure Group, Brasserie Blanc and the Individual Restaurant Group explore options this year. Whilst it made a tentative move toward reviewing its options last year, Be At One is expected to firm up its intentions over the coming 12 months, which could lead to a number of bar groups assessing their finding options. I expect both ETM Group and Drake & Morgan to have appointed advisors by the end of the year. City Pub Company and h has been vocal in their intentions to float by the end of this year, whilst the Deltic Group has also previously earmarked the end of 2017 for a possible IPO. Both in some respects will depend on how investors view their respect history, the former helped by the success of Capital Pub Co, the latter hindered by the fall of Luminar.
The listed Revolution Bars Group has put a lot effort into moving away from its vodka bar roots over the last two years, but there is a sense it may have to go further down the casual dining route to move its share price higher and drive growth. It will not be alone in looking at Turtle Bay and Franco Manca, the sector’s two meteor brands at present, as opportunities to do just that.
Private equity thirst for smaller, nimbler operators remains unquenched judging by deals that happened at the end of last year and the start of this one, including Alcuin taking a stake in Koh Thai; Provenance Investment putting funding into Hubbox and Mobeus investing in Tapas Revolution’s next stage of growth. Expect a few more of these over the coming few months.
As for trends in the restaurants market, I expect the rise of contemporary Mexican and Indian concepts to continue. There will also be more collaborations, both within the sector but also with the fashion and retail markets – through jointly branded offers and unique openings.
Whilst the casual dining market continues to look overcrowded, the aspirational pub space looks less affected by the perceived saturation in the market. Group’s such as the aforementioned City Pub Company, Coaching Inns Group, Draft House, Oakman Inns, Cirrus Inns and Enterprise Inns’ growing “managed expert” division will continue to pick up opportunities for further growth.
Earlier this year, we reported that Sir Charles Dunstone was eyeing a third concept to back and expand in the UK. After burgers (Five Guys) and pizzas (MOD), it is thought that a chicken-led format is on his radar. Whatever, he decides to invest in next – domestic or international, one thing is for sure, after the success of Five Guys, he has become to go to man in the eyes of many US concepts looking to enter our market, he will not want for options.
US concepts and chefs will continue to make overtures to launch here, PF Chang’s being the latest, but 2017 will also is a number of UK operators take the trip the other way. Hawksmoor is scheduled to make its international debut in New York later this year, whilst D&D London has mooted the city as a destination for its Bluebird Café format. Both Wagamama and YO! Sushi are putting down stronger foundations in the US and it’s hoped others will follow. The sector will also come under increased interest from Far East investment firms, looking to take more Western brands east, following PizzaExpress.
Delivery has been the major disruptors across the sector over the last two years, with Deliveroo becoming its most significant player. However, it feels like a recalibration of this segment is due, with operators looking to wrestle back control. Indeed, I understand that a number of operators held talks regarding launching a joint organisation to look into agreeing better terms around delivery options, although this has drifted as other headwinds have increased. The development of the group’s Roobox concept will be watched with interest, especially by the more established groups, with some concerned that Deliveroo maybe biting off the hand that feeds with its new pet project.
One significant operator move in this segment this year could see Nando’s finally push the button on delivery. At present, it runs delivery out off 12 of its sites through Deliveroo. What would the reaction be and impact of it launching its own delivery scheme across its entire near 400-strong estate? Surely, even the machine-like Domino’s would have to sit up and take notice.
The “wall of costs”, as flagged up recently by Casual Dining Group’s Steve Richards, will mean private equity and management teams will have to recalibrate their thinking in terms of investment landscapes and for the latter how long they stay with a business. The way the market is going, some businesses will emerge as consolidators, whilst others will change hands and management teams will shuffle.
There is a sense that the sector (mirroring the wider social and economic environments) is ready for a period of significant change and that by the end of the next 18-24 months, some companies and segments will look very different than they do now. As always it will be an interesting journey from here to there, one MCA looks forward to taking with you.
