Yesterday I wrote that the UK’s hospitality industry was facing a period of fundamental change, with the threat of a significant gap developing in parts of the sector, pushing businesses into questioning their position in it, their own values and value. This morning the focus falls on the value of delivery, technology, experience, property, investment (does private equity have a duty of care?) and protecting your reputation.

The value of delivery

No-one could argue that the arrival of Deliveroo and other third-party food and drink delivery platforms has been a game changer for the eating-out market. Some 85,000 new restaurants and pubs that have not historically delivered food have entered the space, and that number is expected to grow.

As recently flagged up by MCA, while a popular narrative has been that delivery provides operators with an incremental revenue stream, the reality has been less clear-cut, with key questions over the profitability of the current model, and the risk of cannibalising trade. There has also been the question of getting the right balance between in-restaurant sales and those delivered/taken away. This last point will come into greater focus over the coming 12 months as the sector faces further scrutiny from national and local authorities.

Last month, Westminster City Council said it was planning to force restaurants to seek planning permission if their deliveries reach too high a volume. The council said action was necessary to stop disruption to local residents, with cabinet member Daniel Astaire saying the services would lead to “traffic chaos” in London if left unchecked. The council plans to use the volume of deliveries from a particular site to determine if delivery constitutes an incidental use or not. Any restaurants found to be using deliveries as more than an incidental service will have to apply for a change in planning permission and prove that they minimise disruption in local neighbourhoods. The policy will be included in the council’s City Plan next spring.

I expect the more switched on operators to be already looking at how they can dial up their delivery sales percentages across their estates. Take Nando’s, as an example, which last year launched its own delivery function. The data that it is providing the company in terms of where and when delivery is being used will allow it to not only stay inside any guidelines authorities put down – and surely more councils will follow Westminister’s example, especially if there is money to be made – but also redefine where it opens and under what format – for example Tortilla’s new 800sq ft format.

I also expect some reconfiguration to occur when it comes to how the more established operators use Deliveroo Editions, the so-called dark kitchens operating out of industrial estates and carparks. As Adam Walford, a partner at Howard Kennedy, and an expert in commercial property for hospitality, said recently told MCA Editions represented another shift in the dynamics of Deliveroo and its transition into an operator.

“Editions is an interesting move”, he said. “The way I see it is Deliveroo is meant to be a delivery partner and marketing system for restaurants. But as they’ve evolved it, they are almost becoming restaurant operator.”

I understand that some of established operators have quietly pulled back from using Editions, which has always made more sense for fledgling group’s looking to grow without the set up costs. It seems to me that the more established businesses have more to lose in putting their operations, brand and people in the Editions machine, especially if economics don’t add up.

However, delivery will increasingly play a greater role in investment decisions, with more and more investors looking at fledgling brands and asking whether they would make a “great delivery brand”, which will invariably lead to the question of how do you value such businesses?

The value of investment

2017 was a quiet year for M&A activity and more of the same is expected over the course of the next 12 months. Opportunities will arise, some that could be transformational, from the issues of others but consolidation is not always the answer for a company’s or sector’s ills.

Operators that are trading against the tide and showing exceptional growth will be wary of coming on to a market that is not going to reflect true value or provide the optimum number of suitors to start a bidding war. Many that were expected to come to market this year, will now be pencilling in 2019, probably post 29 March, to test the investment waters. They will need their existing private equity investors to bring their exit and growth expectations in line with the current state of the market, which will be a challenge within itself. There will be some interesting board meetings taking place over the coming weeks, as operators seek to put themselves in a good light against the wider market but at the same time reign in expectations that this would be a good time to take advantage of some expansion opportunities. Best to keep the powder dry, make sure the business is robust, trust the management team you backed and then see what comes up as 2018 enters its second half.

And here is where private equity and the investment community needs to provide a duty of care. A woolly point I will give you and not to tar the whole private equity community with the same brush but the collapse of Byron should serve as a warning shot and a clear advertisement on what can go wrong when over-expansion and cost cutting replaces backing entrepreneurship and a laser-like focus on delivering a quality offer. Investment should bring growth opportunities but also the experience to make sure these opportunities are the right ones and taken at the right time.

The value of experience, part 1

Of course this isn’t the first downturn the sector has faced, which means there are plenty in the industry which know which levers need to be pulled to allow businesses the best chance of coming through this one unscathed and stronger. Here is where your non-executive directors and chairman, who have been on the operational side, really should be earning their corn. If there are tough decisions to be made, they should be providing a sense check on them, if there are expectations between operator and investor to be managed they should be in the middle of those discussions. All credit to Steve Holmes and the work he has done at leading Azzurri, one of the most underrated and impressive operators currently in the sector, but I bet he would be the first to pay tribute to the sounding board that his chairman Harvey Smyth provides.

The value of experience, part 2

I would argue that modern society is developing into two consumer group strands. Consumer group one is where people want everything at a click of a button, which taken to an extreme means taking out all human interaction, hence the rise of delivery. All experience is sought online.

The second, and the complete opposite, is the need for being part of or taking part in an experience – going down the pub, visiting the food hall/food market, or trying out the crazy golf or ping pong concept. Here consumer, usually a younger consumer, is crying out for a point of difference. Through social media channels the experience is shared and even those who aren’t there in person, they can engage via these streams, and hopefully stop being consumer group one and become part of consumer group two.

The base of this pyramid is open kitchens, live music, cooking and cocktail masterclasses, and sporting events. The next stage is being led by VR concepts and escape rooms, with E-sports coming up on the rails.

This doesn’t just apply to the consumer. Putting on and end of year do for your staff, has been superseded by the need for a “Fest”. Standing in a field or big top, is the new standing out from the crowd in giving something back to your staff. Experience is currently king if you want loyalty from consumers and staff alike.

The value of technology and content

Technological innovation is helping revolutionise the whole of the industry, at a frightening pace. Take delivery as example, the arrival of non-traditional operators is making the market more dynamic and innovative. New technology is also giving consumers new ways to interactive with brands, but it is also making the supply chain more efficient, improving traceability in the process.

The backdrop to this has been the focus on millennials and their needs, but now Generation Z has reached adulthood. These ‘digital natives’ have never experienced a world where the internet and social media wasn’t ever-present. This is leading to operators increasingly needing to create more personalised, interactive experiences that constantly reflect the latest digital advances. Those that don’t adapt risk failing to build relationships with a demographic that holds more buying power than the millennials before them and places greater significance on brands which they can interact with and contribute to. They live online and for what WE ARE Spectacular’s Mark McCulloch’s describes as “thumb-stopping content”, whilst the phrase “instagrammable” has become omnipresent to describe new menus and packaging.

Then there is on-site technology. Pre-order apps; at-table apps; pre-pay apps are all very much part of the eating and drinking out experience. So what is next? At the start of last year, Amazon enabled Alexa devices to reorder from any restaurant signed up to its delivery function. Customers now just need to say, “Alexa, order from Amazon Restaurants,” specify which meal they want and it would be delivered in an hour or less. Plus, delivery is free. The next step would be to put Alexa on a table in a restaurant/bar, take out the need to type an order in and just speak to the device. At the same, time, how about bartenders, waiters and waitress with smartwatches to help identify regular guests across your business to build loyalty and a customization that consumer’s experience. There are operators not struggling from week to week that are already thinking about and gearing up to trial both these innovations.

The value of property

I started this piece (I know a long time ago!) speaking about the closures at Strada. More operators are set to take “their medicine” as Scott Macdonald, managing director at Polpo, described it, and shed unviable sites. This will lead, for a time, to gaps and shutters appearing on UK high streets and shopping schemes. The sector has had “zombie funds” before but now it is faced with “zombie restaurants” – leases that have been signed but sites that have not been opened and are awaiting for new owners. These will become more frequent as the year progresses. Landlords and developers need to future proof their streets and schemes, they need to get realistic on rental levels. F&B operators have saved many a scheme and high street - it’s time for landlords to reward them for it or face consumers staying online or going to a neighbouring town, city or scheme.

The value of a good reputation

I had a discussion with a property advisor around the time of the first signs that showed Byron was in trouble that the media furore around the HMRC sting at a few of the group’s sites in London had not had an impact of its operations outside the capital. I was of the opinion, that in this day at age of social media and “lazy journalism”, the issue would get widespread pick up and comment. The counter argument was that it would blow over and would be of interest, for a short period of time to people in London. Sadly, I was proven right. When I say lazy journalism, what I mean is that a story like this gives local media outlets an easy win, so what became a story centred on restaurants in London, became “burger chain that is set to open in….in immigration scandal”. Negative momentum built up and it is arguable whether this was the beginning of its current situation and whether the brand will ever recover.

People want to know the story behind everything, with the internet they have the means to dig deeper and when they have found something (true or not Donald) to post it far and wide for all to comment on. The same was the case for tipping, and was highlighted over the festive season, by the negative PR faced by The Restaurant Group and Wagamama.

Of course your reputation and the strength of it, plays a vital role to your ability to recruit the right staff – building a reputation as an employer of choice can take years, destroying it in mere seconds.

The value of a good bar/drinks offer

Managed pub and bar companies are now opening new sites at a faster rate than casual dining groups, according to the most recent Coffer Peach Business Tracker. It showed restaurant groups returning to like-for-like sales growth in November – up 1.2% but they were again outperformed by pub and bar groups, which grew collective like-for-like sales by 2.8%.

Growth was being driven by fledgling brands and groups and proving that “you can never write off the pub, because it can always re-invent itself for a new generation”. Drink sales have become a major driver of sales growth again, and that this is true across both pubs and casual dining – hence many operators in the latter are outing increased emphasis on their bar areas.

The value of positive thinking (what after all of the above!)

And what of those companies that are valuing all of the above? Although they don’t give out figures, it is thought that both Nando’s and Pret’s like-for-like sales are tracking at c7% or above; Wagamama’s were at +6.9% in the first half of the year to 5 November; Be At One’s like-for-like sales year to date are tracking at 8.1%; The Alchemist was at +5% for the four weeks to 31st December; as was Hawksmoor; whilst Loungers was a smidge under at +4.8% (against strong comparables the year before).

There is a tough road ahead, with more uncertainty around the corner. Indeed, I wouldn’t want to be a finance director budgeting for the 12 months to 29 March 2019 and beyond. However, the sector remains in good hands, with a robust and impressive set of standard bearers leading the way, with more coming through to evolve it further. Sadly, there will be some casualties, and some will be needed to improve the strength of the sector overall and allow it to move forward. It is time to add more value.