The first half of this year has underlined the feeling that the UK’s eating and drinking-out sector is slowly, but surely pulling itself out of the downturn. Vibrancy has returned to the market, while even pub groups are looking at entering the fast casual market, but will the next six months and beyond cement this position?
There are many words that could be used to describe the first half of 2014 – cautious optimism would be two of the most common, but mine would be pent up demand from operators, employers, investors and consumers.
For me the last six months have felt slightly forced. Yes, the economy is in recovery, a slow one, which could still be painful at times, but it has felt for some that any sign of an uplift in spending/performance should straightaway lead to an uptick in growth and M&A activity. Both have been held back by a lack of supply.
Now that is not to say that some brands have not kicked on, but Bill’s, Cote, Greene King, JD Wetherspoon, TRG and Loungers, to name a few, were putting down some impressive roll out figures during the last knockings of the downturn.
What we have continued to see is the migration of established and fledgling brands away from London, and the lack of supply against rising premiums, into the regions, quicker and in greater numbers than may be some had planned.
In terms of M&A activity, private equity has kept its powder dry, with the exception of serial investor Luke Johnson, and it has been left to trade buyers to so far pick up the investment slack. It has already been a busy year for Johnson, see Patisserie Valerie and Laine Pub Company (formerly InnBrighton), but that has not stopped him being linked to the process for the rump of the Strada estate. He will not be quiet over the remainder of the year, and I understand that he is running the rule over at least one more London-based bar and restaurant group, while also exploring the possibility of crystalizing one of his existing investments.
Greene King may have missing out on Orchid to Mitchells & Butlers (M&B), but its sale of 275 pubs to Hawthorn Leisure and new five-year strategy plan should continue to see it at the forefront of any consolidation over the coming years. This should see a further blurring of the lines between pub and restaurants, especially as the Rooney Anand-led group has made it clear that it may even skip the casual dining arena for its next acquisition/investment and dive straight into the fast-growing and increasingly influential fast-casual market. It will be interesting to see if has learnt the lessons from its acquisition of Loch Fyne, a brand that in terms of roll out has been treading water for too long.
The emergence of Hawthorn, and its subsequent acquisition of 88 former R&L Properties pubs, has added further impetus to the tenanted pub sector. Too long in the doldrums, the sector has seen a pickup in performance and in innovation of format, further blurring the lines between the managed and leased operations, highlighted by the first managed site opening by Enterprise Inns. Only Government intervention could threatened to nip this momentum in the bud…oh wait.
Soft branding will increasingly play a significant role in companies’ acquisition and roll out strategies. You could argue that pubs lead the way here, see Greene King’s acquisition of Realpubs and Capital Pub Company, while Fuller’s investment in The Stable Group is the latest example of this. M&B has traditionally been very strong in this regard and should benefit from being able to fit Orchid’s Pizza Kitchen Bar and All Inns format in to a number of its Heartland sites.
A number of operators already hit the sweet spot of soft branding with an all-day dining offer. For example Loungers and Bill’s can expect suitors from both the private equity and pub sector when they are eventually brought to the market.
In terms of M&A activity over the next six months, the big ticket deal this summer will be the breakup of Gondola, and while it looks like PizzaExpress will be acquired by a Chinese-led joint venture, similar in some respects to Landmark’s acquisition of Carluccio’s, where franchisee turns owner, it will be the futures of sister brands ASK and Zizzi which should provide the most interest.
The strength of the management team will play a key role in the future ownership of both brands. Will private equity back the Stephen Holmes-led business? It would surely have a better chance if Harvey Smyth stays on, say in a chairman role.
In many respects, the process currently going on for Strada should give some pointers for ASK and Zizzi. Here private equity has the opportunity to back a relatively in-experienced management team. However, like Paramount Restaurants before it, it seems that a trade buyer is the package’s more likely destination, which would put into question of the future of a brand that has gone unloved for too long.
As with Paramount it has allowed a number of operators to opportunistically reach or top up their acquisition targets for the year, while allowing new concepts to make their London debuts.
September should see the process for YO! Sushi start in earnest, while the turn of the year should bring into focus the future ownership of TCG, Ed’s Easy Diner, Gaucho, Bill’s, Stonegate and Busaba Eathai.
One of the key strands of the year so far has been people movement, with the last six months seeing a number of high profile roles change hands, as employers start to loosen the purse strings on wages. More should follow with the businesses and the sector as a whole hopefully set to benefit from a fresh pair of eyes and more impetus.
What the last six months has hardened is the belief that the UK’s eating and drinking-out sector is continuing to shift into two categories driven by the subtle change in the demographics of the UK as a whole.
On the one hand, we have an ageing and leisure-focused population of “baby boomers”, with more free time and disposable income available to them. It is no surprise that they’re willing to spend more and want to have a leisurely meal as part of their lifestyle. On the other hand, “generation Y”, a much younger demographic are short on time are being well served by the growing number of fast-casual operators.
The best operators are managing to appeal to both these groups. Expect more to adapt to this trend, either through evolution or acquisition, over the coming six months.
