Millennials are a fickle bunch, especially when it comes to food. They want more natural options and healthier ranges. They want to know where their ingredients come from. They want their meal to be an "experience". But it can’t be from a chain, because that wouldn’t make the Instagram picture very unique. The government isn’t serving up any relief either. Business rates and increasing rents are making it more expensive for restaurants to hang on to prime locations in bustling cities, and the new national minimum wage has made hiring new staff more of a financial challenge.
The younger generation is more unpredictable than its predecessors. Analysts at Deloitte have dubbed this trend “consumer promiscuity” – the lack of brand loyalty and willingness to experiment with alternative cuisines. This leaves restaurants in constant need of keeping customers’ attention and leaving them wanting more. It's also likely these millennials will decide the future of the restaurant trade, as younger people eat out more than their older counterparts.
If most millennials had their way, Britain wouldn't leave the EU. But vote 'Leave' we did, which sent the value of the pound plummeting against other currencies. Unfortunately for many restaurants, ingredients and other costs are often denominated in foreign coinage, and so this has become more expensive. And just in case paying people higher wages wasn't enough of a burden, future restrictions on immigration may mean there aren't as many people seeking employment as before. Followed to its logical conclusion, this supply squeeze in the labour market could mean higher pay for domestic workers.
It seems people – of any age – just don’t want to go out as much as they used to. Social media allows us to keep in touch with friends and family without actually meeting up in person, and a cosy night in has been made more appealing by the rise of delivery services such as Just Eat (JE.) and Deliveroo. Customers ordering a takeaway might seem like the least of restaurant companies' worries, but people tend not to order high-margin products such as beverages, while delivery services represent an additional cost.
The Coffer Peach Business Tracker for January 2018 found that sales across restaurants in the UK rose just 1 per cent in London, and fell 0.3 per cent outside the capital. Drink-led businesses fared better, perhaps as people prioritised smaller luxuries like a pint as incomes remain under pressure.
But casual dining businesses should brace themselves ahead of “challenging times”, says Sarah Humphreys, lead partner for casual dining at Deloitte, as cost pressures mount and consumers manage squeezed household budgets. That said, changing consumer tastes and the way people dine out, along with an emphasis on technology, could provide opportunities for growth if properly taken advantage of.
Trimming the fat
Added costs have forced restaurant businesses to figure out how to make their money go further. Restaurant Group (RTN) boss Andy McCue is on a mission to build a “leaner, faster and more focused organisation”.The aim is to save £10m by the end of the financial year through a combination of cutting back on staff and refocusing the marketing strategy to target lapsed customers.
When Mr McCue took over as chief executive in 2016 he inherited a business devoid of value. His predecessors tried to make Restaurant Group’s chains, including Frankie & Benny’s and Chiquito, more upmarket than their reputations would allow. The new strategy includes cutting prices and offering promotions to draw customers back in. Providing cheaper options might seem like a counterintuitive way to make money, but the idea is to increase customer numbers. It's a volume strategy: more people spending a bit less might be better than a higher spend across fewer heads.
Franco Manca and The Real Greek owner Fulham Shore (FUL) is facing up to the painful reality that fast growth isn’t always a good thing. The company’s rapid expansion appears to have surpassed its sustainable growth rate. It's selling off its only Bukowski Grill location in London’s Soho to focus on its two core brands, and has been more selective about new sites, asking landlords for more favourable terms to keep costs down. Chairman David Page blamed the slowdown in the UK retail and restaurant sector on rising inflation, poor consumer confidence and a weakening economy. These combined factors means cash profits for the current financial year will fall short of market expectations. Even so, the business is ploughing ahead with new openings despite "expected [sales] cannibalisation" from those restaurants in nearby locations.
Taking away
The proliferation of food delivery services suggests hungry consumers are choosing takeaways over visiting restaurants in person. Analysts at Deloitte estimate home delivery in Britain is growing 10 times faster than the wider eating-out market. This means brands have had to step up their use of technology to allow for online reviews, digital menus and pre-ordering.
Online takeaway service Just Eat knows this market well. At the third-quarter update, total orders were up by a third to 43.1m, over half of which came from the UK. It’s become a leading force in the takeaway market during its three years as a listed company, putting it in a position to take out rivals. In November the Competition and Markets Authority (CMA) approved Just Eat’s acquisition of Hungry House. The company’s interim chairman, Andrew Griffith, said the combined businesses will improve the service and choices offered to customers.
Another company that’s no stranger to the takeaway market is Domino's Pizza (DOM). Bosses believe London is still an underserved market, and last August paid £24m for a majority stake in a company whose assets consist of 25 locations across the capital. But the number of restaurants appearing – sometimes 'popping up' – around London has made for fierce competition, as have services like Just Eat. Among investors, there seems to be growing scepticism over traditional expansion plans.
