So, it seems peculiar that industry analysts feign surprise when a restaurant chain goes to the wall. A certain rate of attrition is to be expected given that casual dining brands have grown at a phenomenal clip, with the number of managed restaurants up by 27.3 per cent over the past five years. If restaurateurs have been seeking to propagate the myth in a bid to discourage potential competition, they aren’t making a very good job of it.
Activity and aggregate demand within the hospitality industry will always wax and wane in tandem with the credit cycle and – by extension – levels of discretionary spending. Sales of ‘lifestyle products’ – a key indicator of discretionary spending – have been flat since the first quarter of 2018. It follows, therefore, that casual diners will be feeling the pinch. Some commentators, rather lazily, put the blame squarely on anxieties over Brexit. It’s true that the cost of imported foodstuffs has increased due to sterling devaluation, but how often have you cancelled your evening out at The Moghul Palace because you were fretting over the removal of the common external tariff?
The reality is that restaurants are simply operating at the wrong end of the consumer credit cycle, a point borne out by the last edition of the Market Growth Monitor from CGA and AlixPartners, which indicated that UK restaurant numbers had fallen for a sixth successive quarter by the end of June. It chimes with analysis from UHY Hacker Young, showing that the number of restaurants falling into insolvency in the year to June increased by 25 per cent over the comparable period last year. The figures also show that the UK’s top 100 restaurants made a £93m loss in Q3, down from a profit of £37m a year earlier.
Times might be tough, but the sector tends to attract column inches because of its very familiarity. People who wouldn’t normally concern themselves with corporate failures pay attention to the closure of restaurant chains for no other reason than they probably dined in them at some point. Even though the accommodation and food services industries reported the largest increase in underlying insolvency volumes in 12 months to the end of September, the construction industry suffered the highest number of new underlying insolvencies – it’s just not as newsworthy (at least to the dailies).
The likes of Byron, Strada and Prezzo have had to drastically cut back the size of their chains, while Jamie Oliver’s Italian hogged the headlines after it collapsed into administration. And the free publicity generated by the unexpected intervention by the Duke of York mightn’t be enough to prop up Pizza Express as it struggles under a mountain of debt.
At any rate, the Market Growth Monitor shows that family-owned, independent restaurants have been closing at a faster rate than the high street chains. And there has been a marked switch in diner preferences, with familiar cuisines such as Chinese and Indian giving way to other Asian flavours, most notably Thai. This could help to explain why Restaurant Group (RTN) snapped up Wagamama last year in the face of a major shareholder rebellion. The pan-Asian chain delivered 6.3 per cent like-for-like sales growth in the 13 weeks to 29 September, well up on the industry average, though it represents a significant slowdown on the growth rate achieved in the first three months of the year.
Family-owned independent restaurants don’t possess the same buying power or economies of scale as the chains and you suspect that they’re disproportionately impacted by rising business rates. But it may be that some chains have an effective half-life, at least those which come into being in response to short-term consumer trends, or where arm’s length management doesn’t deliver a pleasurable – or commercially viable – dining experience (think Jamie’s Italian).
The likes of Pret a Manger and Greggs (GRG) have proved successful – and long-lasting – because, amongst other factors, they have a clear idea of which consumers they’re targeting. But, above all, the business models are readily scalable, a prerequisite for success given they’re both engaged in volume trading.
