Average prices for restaurant sites grew by 14.1% in 2016 while the value of pubs grew 4.4% in the same period, according to Christie & Co’s Business Outlook report.
Last year’s figures were in contrast with 2015 when average price growth at pubs outstripped restaurants with a 10.1% and 9.9% increase respectively.
The report warns 2017 may be the year when pressure of rising costs starts to impact on the casual dining sector, while established brands are also likely to face stiff competition. In the pub sector, Christie & Co is predicting a more active 2017 in terms of M&A activity but with increasing cost pressures also leading to some distress.
Neil Morgan, Christie & Co’s managing director of pubs & restaurants, said he is also anticipating further interest from pubcos in the food sector, following Fuller’s success with the Stable.
He said: “It wouldn’t be a surprise if one of the regional brewers bought out one of the food groups, and ran them as standalone businesses using the venues they already have.”
Meanwhile, head of restaurants, Simon Chaplin, said he expected the axe to fall on one or perhaps even two chains in 2017.
He also said he expected more rationalisation within the restaurant sector, with operators looking at their estates and engaging with landlords over an exit.
He said: “If the market becomes tight and the Brexit effect hits hard, could we see those towns that have been “revived” by restaurant chains suddenly experiencing empty patches as operators leave and others fall out as the circuit becomes less attractive and loses footfall? Only time will tell, but it is a definite possibility.”
Christie & Co saw a 94% increase in restaurants for sale in 2016 with the total value of businesses advised on, valued or sold, at £88.3m.
Chaplin said branding would continue to be vital, adding: “As Bella Italia, who have had to reinvent the brand, and The Restaurant Group, now selling 30+ sites including some Frankie & Benny’s, have recently found, unless you frequently refresh your brand, customers will get bored.
“We have reached a situation where companies have to think about factoring refurbishment costs into their valuations, and with only marginal increase in consumer spend, and costs rising, the additional costs of brand reinvention are surely going to impact on the market.
“It is clear that customers are looking for the latest, fast, fashion food, and with the Instagram generation seeking the hottest flash brands, the new kids in town no longer have to offer discounts or concession to pull in customers – interest in the brand, being on trend, or starting a new one and a good social media presence will drive the footfall.
“Although activity in the branded sector has declined slightly over the last year, fast-growing brands have continued to attract private equity investment over the last four years in order to finance expansion. In 2016, we have seen private equity invest in a number of smaller brands as they look to find the next big thing. This is likely to continue in 2017.”
In the pub sector 7,029 pubs were advised on, valued and sold in 2016, worth a combined £5.7bn. Morgan said 2017 would likely see a number of larger companies examining their estates and either rebranding or realigning some of their sites to fit with modern customer demands, with some divestments possible.
On sector growth, he said: “New builds by the larger pubcos will make a significant contribution to the estates of some operators, who see them as offering better returns than existing sites. We are likely to see others picking up smaller multiple operators. The franchise model may replace some marginal managed houses, as rising operating costs make managed houses more expensive in the long term.
“We’re expecting to see a further contraction in lease assignment transactions on the basis that there is uncertainty as to what will happen near the end of the lease term. MRO might, however, have the reverse effect as operators have to sell now to release value rather than let the lease term run down and see the pubco take it back.”
