MCA’s latest FD Leaders event on 29 November featured Graeme Smith, MD, AlixPartners, discussing the state of the economy as well as current trends in hospitality and their implications for consumer behaviour and M&A activity.

Alongside fellow speaker Alex White, partner, Flint Global, Smith spoke about the trends in consumer spend and the strengths of the sector despite economic uncertainty.

“The customer so far has proven to be quite resilient,” he said. “Revenues have been increasing; we’re starting to see some softening of volumes but there’s still net growth.”

While revenues have been unable to entirely offset rising costs for operators, government intervention on energy has relieved pressure on margins to an extent, Smith said.

“People value the experience of being out, and that seems to be something they’re willing to protect at the moment as their disposable incomes get squeezed – which is encouraging for the sector.”

Smith went on to discuss the evolution of markets post-pandemic, pointing to a “permanent structural shift” towards delivery despite delivery volumes falling from their Covid peak. Another positive is the spreading out of demand away from solely larger towns and cities, which has made more locations around the country economically vuable.

“From an M&A perspective, undoubtedly deal volumes have come off, which is linked to wider concerns about the economy as well as the increasing cost of finance,” he said.

Within the M&A sphere, certain types of deals have nevertheless held up through the year, particularly “high growth deals” involving smaller businesses that have significant white space to expand into. Newer parts of the market have also experienced strong growth, such as competitive socialising.

“Looking at a market that’s not growing in aggregate, to grow you have to either take market share or find a new niche,” Smith said. “Taking share is more difficult for mature businesses.”

US funds have helped support the freehold pub sector as well, due to the security of freehold real estate, while more businesses are also buying other businesses.

“We’ve seen the serial return of the trade buyer,” Smith added, pointing to benefits such as cost synergies and growth.

Another key trend is the adoption of increasingly omnichannel approaches. While businesses were more likely to focus on growing their estates through bricks and mortar pre-Covid, they are increasingly looking at retail, delivery, multiple brands, and franchising to access new markets, particularly overseas.

“Now it’s more about the other revenue channels the business can grow through.”

While there are concerns surrounding refinancing, Smith encouraged operators to begin the process early and speak to a broader range of debt providers.

“Banks and lenders are still supportive at the moment, but they want to see support also coming from the shareholder,” he continued. “With financing costs going up and profits decreasing, the debt capacity of the business may be less.

“Refinancing processes will take longer. Banks will step back in scenarios of economic difficulty almost unilaterally, but debt and credit funds step forward to fill that gap.

“They provide more flexibility and can move more quickly, although this tends to be at a higher cost than traditional lending banks.”

Smith highlighted two positive implications for the sector: the decline in demand for sites, and the prospect of improved margins following the recession.

“Consumer expectations of how much they pay will be permanently elevated,” he said. “Some inflationary pressures on cost will fall back and give headroom to flex pricing.”