MCA’s Peter Linden looks backs on a year of disruption in the eating out sector and ahead to prospects for the sector in 2017.
The year of 2016 will surely go down as one shock after another. It began with a series of horrific terror attacks, the halfway point was marked by the black swan that was Brexit and political pundits were once again left open-mouthed last month by the unlikeliest of victories in Donald Trump securing the keys to the White House.
And before we can finally close the books on 2016, we have the fallout of yesterday’s vote in Italy against a constitutional referendum, which some believe could trigger the collapse of the Euro currency, sending markets into freefall and investors to hide away and await brighter days.
While the eating out market might seem tame in comparison to the wider world, we have seen a number of disruptions that have the potential to fundamentally change key aspects of the market. Back in January, we did our annual industry executive survey, Top of Mind. The no.1 most important business challenge, highlighted by 43% of respondents, was attracting and retaining high quality shop floor staff. While, attracting talented staff has long been a key challenge the vote to leave the EU has multiplied these concerns. Restrictions on access to this workforce would be “absolutely devastating” to the country, according to British Hospitality Association chief executive Ufi Ibrahim.
In February, our Food To Go (FTG) conference explored how food bought on the move was expected to grow to a value of £20.2bn in 2016, disrupting the wider eating out market with an annual growth rate of 5.2%, compared with, at the time, a forecast rate of 2.8% for the wider market. Strong performers in the FTG world were effectively tapping into key consumer trends around convenience, freshness and adventurousness. In 2016 FTG has truly come into the spotlight, not only through the rapid expansion of FTG-focused contemporary fast food brands, but also through investments from the established industry giants – Whitbread’s investment into Pure, Coco di Mama’s expansion under parent company Azzurri, and Aramark’s investment in Freshii being just three examples.
As we entered the second quarter, the National Living Wage (NLW) was the hot topic. Our Menu & Food Trends report, released in April, revealed a significant acceleration in menu prices, typically by c.4% across mains, starters, sides and desserts, fuelled by rising cost pressures, not least the NLW. Indeed, our industry research at the time showed that roughly three-quarters of operators expected to increase menu prices following the introduction of NLW. Our more recent pricing analysis has further confirmed an inflative trend. With the NLW expected to result in an annual wage increase of 6-7% between 2016-2020, its introduction this year will surely be remembered as a monumental change in the industry.
In June we released our annual Pub Market Report. This is a market that has seen its fair share of disruptions in recent years, and our analysis showed how in 2016 the pub market was embarking on a new era of dynamism, professionalism and relevance. We forecast that turnover growth would increase from a virtually flat 0.1% in 2015 to 1.0% in 2016, the first time the market has seen notable positive turnover growth since we started tracking it in 2008. The Market Rent Only (MRO) option had emerged as an additional disruptor, triggering pubcos to accelerate conversions of tenanted pubs into managed, franchised or retail pubs, and to offload sites to be snatched up by independent operators. The other disruptor was food, with 23% of publicans surveyed saying food made up over 50% of their sales, up from 12% in 2015. An improved food offering was also highlighted as the main driver of turnover growth over the past year, cited by 19% of respondents.
July saw us reveal the findings from our annual Eating Out report. This was our first major piece of market analysis post-Brexit, and showed us downgrading growth forecasts for the next three years.
Our reading of the market in the immediate post-Brexit aftermath was that the vote to leave the EU would depress market growth, and sharpen focus on affordable quality, consumer convenience and engaging experience. After several years of incremental growth, the eating out market would be hit by weakening consumer confidence, slowing real wage growth and rising prices, which would combine to soften consumer demand and reduce business expansion confidence. Yet, we also predicted, as has proven to be the case, that the market would continue to grow, buoyed by a consumer base that is resilient in its demand for the regular, affordable luxury that is eating out. Though clearly, certain operators would be better-placed to attract those consumers and weather the storm than others.
This ‘challenge to the old guard’ was one of our key themes in our flagship Restaurant Report, released in September. Our central message from the report was around the ‘road to growth changing lanes from expansion to contemporary experiences and execution’. Growth would continue for the branded restaurant market, but at slowing rates of physical expansion, indicating the ‘space race’ of previous years had peaked. A number of established players – Café Rouge, Frankie & Benny’s and Harvester – were the focus of estate rationalisation. The ‘space race’ – the competition to secure a site before your competitor does – had reached a high-water mark in 2015, one that we do not expect the market to return to for at least another three years. In 2016 the onus is on operators to contemporise and better manage their offers to drive same-store like-for-likes, and rely less on expansion.
In November, our Hotel Restaurant Report identified an attractive new for food & beverage operators and suppliers. This year hotel operators have begun to show a greater appreciation of the benefits of utilising High Street brands and specialist operators to drive food & beverage footfall. Examples include Carluccio’s at the Marriott, opened in May 2016, Gusto at Grand Hotel in Birmingham (September 2016) and Belgo at Crowne Plaza Bloomsbury, set to open in December 2016.
Looking back at 2016 then, it is clear it has been a year of disruptions – from the NLW to the MRO, and from fears of Brexit’s impact on staff attraction to the space race having peaked. Throw into this mix the rapid growth of FTG formats and home delivery – not least UberEATS and Amazon launching in the UK this year – and you have a market that looks very different from even three years ago. The question that remains is, who will benefit from all this change? It certainly looks like this rapidly-changing sector has become the consumer’s market, and operators must move quickly to keep up with changing demands and preferences. As we approach the end of this turbulent year, and look ahead to a new one marked with heightened uncertainty, it is important to remember the merits and strengths of this industry. As long as operators are willing to invest and develop, consumers will come and spend, and the market will continue to grow.
Peter Linden is market analysis manager for MCA
