Inside Track by Mark Stretton
Apparently we are all experiencing the “feel-bad factor”. Rising food costs and fuel prices, falling beer volumes, sinking shares, crunching credit, a distinct dearth of restaurant IPOs, inflation, interest rates, Gordon Brown, a soft housing market and a predicted consumer squeeze are just some of the factors conspiring to give us the winter blues. So, is life really that bad? After speaking to a range of operators last week, it is clear that things are undoubtedly harder. It’s heads down, gritted-teeth tough. The world has not ended and there is still plenty of money out there, but the consumer is a little wary and there has been a noticeable softening in the past week or two. A couple commented that November was the “new January”. How much of this is people keeping their powder dry ahead of the festive season and how much of it is a little more material is not clear, but everyone is sweating hard to keep the comparible numbers respectable, and, notwithstanding what will hopefully be a strong Christmas, it feels to many as though this is not going to change for a little while. Many have been pondering what this more challenging environment will mean for the eating and drinking-out market. The biggest theme is the emergence of a clearer gap between the winners and the not-so goods. For many pub groups, as Marston’s said on Friday, it is about driving faster towards food, wine and other income streams to prop up ailing beer, lager and cider volumes, and machines income. As Regent Inns is expected to reveal today, life is clearly challenging for wet-led operators. Regent itself is in a bit of a spot. Pub stocks are also on the floor, relative to the last 24 months, and Regent has been hammered as much as any company – its shares are back to where they were shortly after Bob Ivell and John Leslie were parachuted in. Regent is part of a late-night / entertainment sub-sector that is full of arguably sub-scale companies, such 3D Entertainment, Herald Inns & Bars, Novus Leisure, Tattershall Castle Group and so on. Nightclub groups Brook Leisure and Nexum Leisure are heading for the stock market, according to some interesting reports. With the best will in the world, now is probably not really the right time for wet-led, late-night groups to win support from share-buying institutions, given that some leading restaurant groups have tried and failed. In reality, it would seem these groups are for sale – Brook has been on and off the market for the last 24 months. Other groups, such as Capital Pub Company, Food & Drink Group, and Premium Bars & Restaurants, would seem equally sub-scale. It may be that these tougher times kick-start some corporate activity. Regent for one has head office costs of some £6m and many M&A experts predict that in the absence of top-line growth many companies will come together in the next 12 months in order to keep growing profits. “Head offices are not sacrosanct,” says Mark Jones, chairman of Premium Bars & Restaurants. “Increasingly groups will need to start talking to each other in order to form deals that are to the benefit of their shareholders, be they public or private.” There may also be similar activity amongst the food-led operators. Things will not be as tough – for one eating-out is less discretionary – but costs are rising fast and scale will become an increasingly valuable characteristic. As Clapham House Group has this morning demonstrated, food-led groups will not be immune. Food costs is the big issue. National Farmers’ Union recently warned that “era of cheap food was over” and operators may not be able to absorb all of it, when the impact starts to come through. Simon French, leisure analyst with Numis Securities, says: “Restaurant price inflation could continue to increase faster than average earnings, which will lead eating out spend to fall. We won’t see a drop in frequency, but a drop in spend per head and ancillary revenue on items like wine and desserts.” French said that although sentiment was at a two-year low, the fundamentals of the sector were still sound. He also emphasised that due to the changes in society, where people have been accustomed to eating out, the sector is set to be “far less hit than other leisure sectors”. The stock market has indiscriminately hammered consumer-facing shares – and restaurants have not escaped. Multiples are back to where they were two years ago. Individual Restaurant Company looks particularly cheap. It may be enough to spark some of the larger restaurant and pub groups into action. Long-term, people remain as optimistic as ever, but medium and short-term, it is tin-hats time. And the M&A practitioners predict more deals than ever. Retailers’ Retailer of the Year 2008 Have you had your say in the most influential awards programme in the eating and drinking-out market? If not, you can do it now: visit to put forward your nominations for the Retailers’ Retailer of the Year Awards, organised by M&C Report. Celebrating retailing excellence in the eating and drinking-out market, these awards are unique – the only ones voted for by business leaders and senior executives from the industry itself. The winners will be unveiled at a prestigious dinner in London on March 5, 2008. More details are available on the website.