Fears over a downturn on the back of the EU referendum decision is already leading to some operators reassessing their expansion plans. Could a combination of this, the ongoing soft trading seen since the turn of the year and over supply provide a catalyst for what many believe is a much needed recalibration of the sector’s property market?
Earlier this week we heard of the first example of a company blaming Brexit for a deal falling through, when Revolution Bars Group pulled the plug on its proposed c£16m acquisition of four bars in Edinburgh. To be fair to Revolution it had flagged up that the decision to leave Europe could impact said deal when it announced it was in talks on the portfolio last Friday, however some sceptics were still not convinced that using the Brexit line wasn’t a smokescreen for other reasons for the deal going south.
Whatever the real reason behind the collapse of the deal, the fallout out from last week’s momentous decision is already starting to impact the thinking of leading operators, with expansion plans coming under intense scrutiny. Speaking to a number of operators three schools of thought are already emerging, alongside one overriding theme – the need for a recalibration of the property market and the relationship between operator and landlord.
The first school of thought is to carry on as normal. As one put it: “It certainly is rocky in the world at the moment nobody really knows what to expect in the months ahead but it is important we stay positive and stick to the plans we have for now.”
As Greene King chief executive Rooney Anand pointed out yesterday: “I think it’s very important to look beyond whatever turbulence is created by last week’s decision. We are competing in a market that is growing. The UK eating and drinking out market has been looking very healthy and we are well placed to make the most of that.”
Others see it as a time to stabilise operations, the customer experience and sales at existing sites rather than go “all out on the new ones”. One said: “What we continue to find difficult – and this was happening pre-Brexit although Brexit and the potential economic challenges will only amplify this – are the spiralling opening costs of sites. Landlords are getting greedier and greedier and this is the challenge.
“So we’re saying no to central London opportunities with rents that just aren’t justifiable or sustainable and trying to unearth gems in surrounding London and across the UK. I think this will naturally slow our pipeline down a little but we’ve never opened a site just to tick a box and satisfy a number in forecasts and we especially won’t do that at the moment.”
Then there is the school of thought that where there is risk there is also opportunity, with some suggesting they would accelerate their expansion plans to take advantage while others pull back.
Although no one wants to talks the country into a recession, many believe that is now sadly inevitable. A survey by Bloomberg this week found that a large majority of economists expect the UK economy to fall into a recession for the first time since 2009 before the end of the year. Twenty four of the 34 economists the financial news wire questioned said they expected two quarters of contracting output.
Some operators have already moved into recession planning mode, reducing and delaying investment on expansion and refurbishments. Others have started a period of pipeline assessment, with sites that they are not legally committed to and where they feel there is a degree of risk around property costs, Capex or potentially trade set to be dropped. One said: “Sites that we believe have a full rent and/or that are likely to be Capexheavy will be heavily scrutinised and in most cases they will be binned. We will not open less sites this year or next but we will replace sites in our pipeline that we feel are too expensive and potentially too risky.”
The message from the majority is that marginal sites are coming under even greater scrutiny and that with increased short term pressure on sales and costs, landlords would have to be prepared to share some of the risk. More than ever there is an expectation that rents will drop and some operators said they were already seeing agent/landlord’s stance change this week from last as they look to shore up deals. As one put it: “Our plans will have to change unless we can get the landlord to shift on rent or provide larger capital contributions.”
Many were more nervous about the impact of Brexit on London’s property market, stating that the capital’s market has needed to recalibrate on rates for a while – “London needed a re-rating and this could be the catalyst”. At the same time, they believe that “consumers in the regions will continue regardless for the time being”.
As I have said before the challenge for landlords is not to kill the golden goose that food & drink has become in keeping shopping schemes or the high street thriving. Only this week it was confirmed that five more restaurants would be opening in Bromley this weekend. So excuse the back of a fag packet working out, but say those five generate a combined £135k a week in sales, that’s around £7m a year in sales, where does that come from? It used to be that traditionally sales would be transferred from the independent operator base in the area, now it is being fed by rival branded operations. Six months into soft trading, the fickle consumer is now faced with too much choice, loyalty is taking a back seat again.
Unsurprisingly a nervousness is being felt across the sector, a mood that has been building since the start of the year. In spite of income and confidence strengthening on the surface, consumers have been affected by the uncertainty of Brexit.
However, there will always be people who want to eat and drink out – as with last recession, they’ll be more savvy about where and how they spend their money. Whilst the economy could fall into recession, we mustn’t forget that the eating out market is performing well ahead of other sectors. It’s a challenging time but we’ve had them before and the sensible, and again well-run business will come out the other side. This sector has helped landlords anchor and drive schemes and redevelopments to new levels over the last few years as the retail sector has declined and online shopping has boomed. It is now time for landlords to do their bit and repay those leaps of faith.
We recognise that insight into market conditions is critical at this time, so we will be writing to you shortly with news of further insight that we’ll be adding to our news service to keep you abreast of consumer behaviour.