Along with the rest of the team at Horizons I have been uncharacteristically bullish about the prospects for the eating-out market for the year ahead. We feel that in 2014, for the first time since the downturn in 2008, the market is likely to experience some real growth. It won’t be much, but it will be growth as consumers slowly regain confidence in the economy and start to spend more of their disposable income.
What makes us positive is a range of indicators that are starting to suggest that the foodservice market is about to see a turnaround. For a start, the economy is improving. GDP figures, for example, were up 0.7% in the second quarter of last year, and up 0.8% in the third quarter.
Official statistics show that unemployment expectations have plummeted, from 15.3% to 10.3%, while consumer confidence is up from -2.5% to 0.3%. This is the first time this figure has been positive since 2006 and should boost the foodservice sector.
Fragile recovery
Last year we forecast that sales would stay fairly flat in UK foodservice. And so they were. As costs continued to edge upwards, 2013 proved a year of winners and losers. Hot weather in July meant that any outlets with outside eating areas did well, particularly pubs. Restaurants, however, were hit as fewer diners opted to be inside.
Last year was also notable for the demise of money-off vouchers and deals. Horizons’ Voucher Tracker survey saw the number of vouchers offered fall from month to month as operators used them far less to drive business in favour of a more strategic view on pricing.
This was good news for a sector that had become trapped by discount deals that were difficult to give up. The continued use of social media to reach customers means operators can build a more personal relationship with loyal clientele, targeting offers more specifically and boosting loyalty.
Against a backdrop of the summer heatwave the economy grew 1.5% in June 2013, compared with the previous year. The number of unemployed in the UK fell by 4,000 to the end of June, and the number of UK households without any wage earners fell from 17.9% to 17.1%. In the June to August quarter UK GDP rose 0.9%, the fastest growth seen for more than three years.
Tourism also saw a fillip last year. The number of global tourists rose by 4.3% in the first three months of 2013, visits to Europe rose 5% and international air traffic rose by 6%. Not only that, but 7% more Brits travelled abroad in May compared with a year earlier, while in-bound visitors to the UK rose 4% in the year to the end of July, compared with the same period in 2012.
Insolvencies in the leisure sector fell from 151 in May 2012 to 111 in May 2013, while mergers and acquisitions in the sector were 22% lower in the first six months of 2013, compared with the same period in 2012.
And while all this sounds positive, we mustn’t forget that the recovery is still fragile. Consumers are fickle – and what may seem like signs of a recovery one month can just as easily start to look like the opposite the following month if conditions aren’t right.
The spectre of inflation
Inflation is the other spectre on the horizon. At the end of September 2013 food inflation was running at 3.9%, having been at 4.2% in August, and 3.5% in July. As a result operators’ selling prices increased by 2.8% over the last quarter. The net result of these changes to input (food and beverage) costs and a more realistic selling price (through less discounting) is that the squeeze on operator’s margins continued and, although it abated slightly in September, the quarterly trend was slightly down. In other words, operators are seeing ongoing pressure on financial resources and are continuing to account for price rises – either by absorbing increases, re-sourcing their products or modifying menus.
Having said that, one of the key reasons we expect to see growth in 2014 is due to the effort many foodservice operators have made to keep consumers eating out even though they are watching their spending. Menu innovation, extended opening hours and a flexible approach to offering whatever the consumer wants has meant eating-out establishments have moved with the consumer zeitgeist. Today’s consumer wants to eat out wherever they are, at whatever time of day. Operators that have spotted this trend – and adapted – will be the winners in 2014.
An improvement in the quality of food, careful sourcing of ingredients and renewed emphasis on service levels have also meant that many establishments have matched the demands of a more discerning consumer.
But having predicted growth for 2014, we are also certain that it will be slow, and only initially be seen in casual-dining outlets and coffee shops. Casual dining in restaurants and pubs has been the most successful in the high street at maintaining customer throughput levels. Operators in this sector have adjusted their product, run effective price promotions and developed stronger links with their customers. This success is likely to translate into improved sales ahead of the rest of the market.
The onward march of the coffee chains is also set to continue and sales are likely to see further growth, particularly as consumers feel more inclined to treat themselves to a coffee more often. But while we accept this, we have also put a caveat on this prediction as we are certain there is a limit to how much more growth this market can sustain as it seems perilously close to saturation point in the UK. Expansion overseas will offer respite for the chains, but in the UK one of the outcomes will be that, instead of adding further outlets, leading operators could look to boost their profitability by improving their food offer – one way they can continue to grow sales per square foot.
Much has also been made of our belief that the coffee market could see a price war. The fact is that consumers are still price-conscious and discounting is one way the chains could easily gain market share. With the market now dominated by three key players, rather like the food retail market has been, a price war is a possible outcome as they fight for market share. Waitrose already kicked this off last year with its free coffee for loyalty cardholders, and we believe other chains – particularly supermarkets keen to expand their foodservice market share – will enter the fray.
Discerning customers
The coffee chains must also be aware that artisan chains, many of which sell a better quality coffee, are also developing their brands with a higher standard of food offer. As we see growth among names such as SOHO Coffee Co, Gail’s and Le Pain Quotidien, the big three coffee operators could start to see their stranglehold on the market weakened by operators concentrating on the premium end of the market.
But the UK foodservice market has been unusually volatile since the start of the recession and overall sales growth cannot be guaranteed. The number of people choosing to eat out is as much dependent on the weather or the day of the week, as the wider economic picture.
On the plus side, foodservice operators have ensured that eating out is now a way of life, rather than a treat. A takeout coffee is as necessary as buying a newspaper – the habit is now ingrained and operators can only benefit from that when growth comes.
The year ahead will be an interesting one for the foodservice sector. Some recovery in sales is likely, but consumers are now constantly seeking value-for-money, good-quality food and high service levels. This means those operators who don’t match up will lose out to outlets that do. We are now dealing with a much tougher, more discerning customer.
Peter Backman is managing director of Horizons, the analyst and specialist information consultant for the foodservice and hospitality sector. See www.hrzns.com for details
