Leading analyst and sector investor Mark Brumby takes a closer look at the UK’s eating and drinking-out market. He says that any backsliding in the market is likely to be short-lived (and may indeed be over, particularly with regard to food) and that growth opportunities remain significant.
Mitchells & Butlers (M&B) recently gave a Market Insight presentation in which the company illustrated how it segmented the customer market and then focused particularly on its Toby Carvery business by way of a case study.
The group maintains that, after several decades of above-GDP growth, the recent advance in eating and drinking out spend has been ‘in line with consumer expenditure. The group maintained further that ‘there was no structural growth’ and that spending was now ‘in line’.
The company also says that a ‘weak economy = low consumer spending = flat market’ and concludes ‘so this is a share stealing game’ where one must ‘pinch someone else’s lunch’. The quick but perhaps incorrect conclusion: The take-away from these comments may be that the market is no longer growing. This clearly would have implications for all of the players but the initial takeaway may be somewhat misleading.
Analysing the ‘recession years’ may mislead: Between 2008 and 2011 it may well be that the proportion of disposable income spent on eating and drinking out of the home has not risen. This has led a number of observers to rein in their forecasts for food/drink spending from perhaps 2.5% per annum to nearer 1%
There is some haziness as to whether we are talking about real or nominal numbers here. Real spend could still rise:M&B’s own comments are not inconsistent with a growth in real spend but perhaps only with an ever-increasing increase in the share of disposable income spent on hospitality services. If GDP growth attained 2.5% to 3.0% per annum and food/drink spend rose by a similar amount in real terms, this would arguably be seen as a ‘good result’ by the on-trade
Some areas of even a flat market could perform strongly:Certain parts of the market could grow strongly. M&B suggests that carveries offer a ‘market growth opportunity’ – this is not inconsistent with saying that the market is ex-growth (which M&B is in any case not saying) but it does give a different nuance.
Other areas such as South Asian, better burgers, ethically sourced foods etc. could be in strong growth even if the pie & chips market is in decline. Pubs could outperform (and are outperforming) restaurants, units within the M25 could trade more strongly than those in the provinces etc. In some areas (casual dining in London), competition could be brutal due to new openings even if the market is growing. Supply side issues could become problematic, while casual diners could outperform full service restaurants.
Premium dining may be flat but footfall could increase across value-for-money estates such that spend across the industry does not rise but in certain areas it certainly does. Opening up various day-parts (such as breakfasts) could widen the market, coffee, smoothies, take-away products, iced yoghurt and the rest could also provide growth
A closer look at the figures
A somewhat closer look at the figures suggests opportunity: Whilst the halcyon days during which the British public discovered the joys of not having to do the washing up may be over, a closer look at M&B’s rationale does throw some light on the situation. From this point, much is down to an interpretation of the figures.
UK spend is relatively high already:M&B reports that only the Irish spend more in Europe on eating and drinking out of the home than do the British – and the Irish market is essentially wet-led.
The swing from drink to food has been material:Taking data between 1997 and 2011, M&B suggests that spending on out of home food has risen from 4.1% of disposable income to 4.5% whilst the spend on drink has contracted from 4.1% to 2.9%.
The situation in the US: The US consumer spends (2011 data) around 5.3% of disposable income on eating out of the home – but less than 1% is spent on drink due to a variety of social and geographical issues such as the distances involved, the need to drive to venues and the general lack of a ‘pub culture’.
The Bulls’ view: The most optimistic, and perhaps the most accurate, interpretation of the above might lead observers to conclude that UK spend on food will rise from 4.5% and perhaps approach 5% on, say, a decade view whilst the spend on drink is likely to fall further.
And taking market share is not to be sniffed at: It’s true that absolute revenue and profit numbers are what provide cash-flow and hence dividends etc. and this can be arrived at via a number of routes.
A fragmented industry:M&B is the largest player in the market, with a c2% share, suggesting that, even if the market did not grow, which we believe to be unlikely, changes in market share could have a very material impact on trading for any individual operator.
Brands could grow in importance: It may be the case that the more sluggish is growth, the more important is branding. Here the large operators could aspire to take share from smaller players.
Food v Drink, the Wider Challenge:
There are grounds to believe that there is growth in food, but drink could be a challenge:The trends referred to above (food up, drink down over the last 15 years) may well be set to continue. Health issues and cost may depress drink spending whilst secular changes, higher numbers of working women and a general reluctance to switch the dishwasher on may help food spending and this has implications for the industry’s major operators.
Don’t start from here: This is the least helpful advice when asking directions and, thankfully, most operators spent 2003-2007 selling their tail end units. Most fervently wish that they had sold more.
Tails may get fatter rather than longer:Operators would rather have more good units and fewer bad ones. This means they will focus on food and sell wet led units where possible.
A more buoyant property market should help disposals: If it becomes possible to sell tail end units for alternative uses, then one should expect to see the continued sale of more wet-led pubs.
A Tentative Conclusion:
Growth has at least ‘paused’ during, and in the aftermath of, the recession. Brands have come to the fore. Growth could slow to approach GDP growth going forward – but data on food (rather than drink) spend in the US suggests we could expand further.
Even if this did not happen, with the largest operator (M&B) having only around 2% of the market, market share changes could lead to significant growth for some players. Operators with a mix of wet and food-led units are likely to continue to favour the latter.
A more buoyant property market could herald a pickup in the rate of disposals (whilst for some – Enterprise post its bond issue and perhaps Punch), disposals could even slow if finances become available for refurbishment.
Overall, any backsliding in the market is likely to be short-lived (and may indeed be over, particularly with regard to food) and growth opportunities remain significant.
