Slowing like-for-like sales, a heated property market, the continuing impact of the National Living Wage and the growing importance/influence of delivery meant the UK’s eating and drinking-out sector was already facing a challenging period before the uncertainty caused by Friday’s EU referendum decision. The sector has reset to its default position of “keep calm and carry on”, but it finds itself in a state of flux, which the decision to Brexit has only thrown into sharper focus.
“How are other people (businesses) finding it?” is a question I have been asked a lot over the last three months by a number of operators from companies with a national presence to those with a handful of sites. Those questions intensified near the end of May and tipped over into June, and although the conversations they were part of varied, the theme was roughly the same, “April was ok, but May has been really tough and we/I can’t put my figure on why?”
Some put forward the uncertainty over the EU, others the impact of delivery or the imbalance between supply and demand – it seems in the battle of brand to brand combat, the sector is fighting itself to a standstill. The latest CGA Peach figures made sober, if not unsurprising reading, with the 1.4% like-for-like decline in sales in May representing the biggest one-month decrease in well over two years and follows an 0.8% drop in April.
There is growing speculation that many businesses are only seeing like-for-like growth thanks to delivery, with Deliveroo, for one, believed to be driving a 5% uplift for some operators. At the same time, my inbox has noticed an uptick in the number of sector-focused offers (discounts and vouchers) over the last quarter.
It seems appropriate then that as a country which will now have to look more inwardly for growth opportunities, that the sector will also have to do the same over the next 12-18 months to find a way of moving forward. Paul Newman, head of leisure and hospitality at RSM, said: “In an ever more crowded market place, our conversations with operators are now shifting in focus from estate growth and rollout to driving gross margins and controlling cost inflation with major concerns around rent reviews, the NLW and next year’s rating revaluation.”
How many groups are now looking at their roll out plans and recalculating their capex, reducing their expansion targets and shifting more investment towards staff recruitment/retention and refurbishments? PizzaExpress for one is set to pull back on its openings programme this year and is already looking at cost efficiencies, with the consolidation of a number of operational roles.
This is not the time, when is there a good one, to have an estate with a long tail or a tired looking concept. Earlier this spring, Mitchells & Butlers (M&B) announced that it was to move its pub refurbishment cycle to every five to six years, compared with every 11 years at present, suggesting that it will complete 300 to 350 projects a year. Investment this year will be about £180m, rising to £200m next year. For a company of its size, c1,700 sites, you can understand it is hard to keep painting that tanker at a quicker rate, but for other businesses, say with over 200 sites, I wonder whether up against nimbler operators they can afford a refurbishment cycle that goes beyond two years.
Inevitably, whilst some companies will look inward, others will take advantage to grow their own estates, with a number of new developments set to come to the market over the next 18 months – for example WestQuay Watermark. However, I wonder if some will follow James Horler’s lead and leave the squabble over a decreasing slice of the cake in shopping schemes and high streets to target more rural and suburban areas. The 3Sixty Restaurants chief executive told me earlier this year: “Why battle with six or seven other concepts, when I can open a pub with its own catchment area that can also do around £30k a week?” With some concepts believed to be nudging just over £10k a week in some city centre schemes, you can see his point.
There has certainly been the feeling of a logjam when it comes to site deals being done over the last month so. It is questionable whether that will now ease after Friday’s decision, although news that Shake Shack is willing to pay £2.5m for the Canteen site in Canary Wharf highlights that prices in London will not be recalibrating soon, although an increase in businesses failures in central London may take place (Morden & Lea, Delancey & Co and Bunnychow, to name a few over the last month). The future make-up of regional retail and leisure parks is also taking shape, with the names of MOD Pizza, Five Guys and Smashburger set to increasingly take space.
M&A activity has been subdued over the last six months, some would argue it has been that way for even longer. It is hard to see what big ticket deals will get done over the remainder of the year. A process for Gourmet Burger Kitchen still feels like a fishing trip by Capricorn Ventures, whilst it increasingly looks like Bill’s, Be At One and Loungers will look to 2017 to make decisions on future their respective future ownership. In terms of valuations, it seems that private equity has a new ceiling of a seven times multiple, and only truly exceptional businesses – such as the New World Trading Company, will push it above that mark. Strategic partnerships/investments will become more prevalent.
Entering the second half of the year, the issue of tipping still hangs over the sector, with the Government consultation set to end today. It is hoped that more transparency will be called for but without the need for further regulation/red tape. Markets will certainly be volatile as the implications of the referendum result are digested, which will impact share prices, although the fact that the Comptoir Group has made a confident start to listed life should provide some comfort to others looking to make that step.
So all that is left is that great intangible – consumer confidence, which unfortunately will probably be impacted by the continued uncertainty surrounding Brexit. Although it is hard to disagree with Marston’s chief executive Ralph Findlay that a “good summer weather and progress in Euro 2016 (crossed fingers) are likely to be of much greater immediate relevance to us”, certainly in the short-term.
There will be some positives – perhaps a new era of collaboration between government and business – but there still needs to be answers on big questions — from the timeline of our departure from the EU to the practicalities of trade, customs and hiring — that affect their everyday operations.
If there is one thing that stands out across our sector is that businesses within it are resilient. They will adapt to any new landscape. Business as usual - for a sector always battling against ever shifting sands, that is the usual.
