Peter Backman, managing director of food service consultancy Horizons, examines the major trends in the eating out sector in the second quarter of 2011 and offers predictions for the remainder of the year. As we move into September and beyond it is now a good time to reflect on how trading has fared for the eating out sector throughout the second quarter of 2011. And it’s certainly a mixed message. On a positive note it seems that people are still eating out. Our recent QuickBite survey found that 71% of adults had eaten out at least once in the past week. And they are spending more when they do eat out – up 9% year-on-year. But frequency of eating out has fallen – and quite considerably too. The QuickBite survey, undertaken by YouGov, showed that people ate out on average 2.02 times in the past two weeks, compared with 2.73 in June 2010 and 3.09 in June 2009. The survey, carried out in July 2011, ties in with our feedback on trading throughout the second quarter of this year. Consumer expenditure on eating out was up in this quarter, but meal numbers and food purchases were down. A rise in spend can be attributed to the VAT increase at the beginning of the year and some positive year-on-year comparisons are due to the impact of the World Cup in June 2010, which kept many people away from pubs and restaurants. Unusual trading patterns in April have also boosted Q2 results. The long Easter break and the royal wedding, coupled with some unseasonably good weather, meant that consumers were drawn to restaurants and pubs, particularly those with outdoor dining facilities. But the harsh reality was that in May consumer expenditure on the high street fell by -1.6%. And while June saw a slight upturn, it was insufficient to overcome the fall the previous month. The experience of the UK’s eating out market has echoes of the retail sector. Retail volumes have been broadly flat for the past year – and much of the sales achieved have been driven by discounting across sectors such as electricals and fashion. Retail food volumes have also fallen – largely due to the high and increasing rate of food inflation, which reached 7.3% in June, according to ONS. The non-commercial sector of the foodservice sector also continues to suffer cutbacks with reductions in local authority expenditure on long-stay care apparent since the exposure of shortcomings in the business model at Southern Cross. The tenanted pub sector also continues to struggle, with on-going restructuring at Punch Taverns including the splitting off of the Spirit managed estate and plans to reduce the tenanted estate as well. In other pub sectors, food continues to become increasingly important. JD Wetherspoon and Greene King now report that food accounts for well over 40% of their sales – with Mitchells & Butlers reporting that it now accounts for over 50%. It’s certainly the larger companies, with purchasing and marketing power that are proving the most resilient. Branded managed restaurant chains – both quick service and full service – are outperforming their peers as consumers opt for what they know and trust. QuickBite’s respondents cited Nando’s, Café Rouge, Pizza Hut, Pizza Express, ASK, Zizzi’s and Domino’s as the place they had gone to most recently for a meal out. The pub sector may have undergone considerable change over the past decade, but the British still love going to the pub. This was evident in QuickBite’s finding that almost a fifth of all eating out occurs in pub restaurants. Some 17% of eating out takes place in a pub restaurant, with 27% of the over 55s choosing to eat out in pubs. The brands mentioned most often in our survey were Wetherspoons, Harvester, Toby, Beefeater and Brewer’s Fayre. But what we are facing now, and have since at least the middle of May, is declining consumer confidence. Retail expenditure is becoming more focused on necessities and less on discretionary spend. Budget austerity has also started to become noticeable in local government expenditure, while the national Government releases further details of proposed cutbacks. To persuade consumers to spend, the retail sector, as well as restaurant operators, are relying on price to attract custom, evident in the continuing use of discount vouchers – although the actual number of offers fell in the Q2, the numbers of operators offering vouchers stayed much the same. QuickBite’s findings that 31% of consumers choose where they intend to eat out based on habit – and no doubt proximity too – should come as a warning to operators caught in a spiraling price war of discounts and offers. The YouGov survey reports that the majority of people choose restaurants out of habit, while for 22% their choice is spontaneous. Only 11% of people said their choice was dependent on having money-off vouchers or special offers. So what is the eating out market likely to look like as we move towards the end of the summer and head for Christmas? Realistically, we are unlikely to see it pick up substantially over the coming months. We have seen a worsening in the state of the foodservice market in terms of meal numbers and food purchases by operators although consumers have been spending more because inflation and VAT have raised the cost of meals provided to consumers. Even though inflation is expected to fall over the next six months it is still expected to be high in recent historical terms. The VAT effect will continue until the end of the year when it will fall out of the comparisons and year-on-year measures. On current trends this will translate as an apparent fall in sales to consumers from January 2012. We are fairly pessimistic, but this pessimism should be seen in context. While the economy has been taking a battering generally, spending on eating out has risen. This resilience augurs well for the sector and we expect that once the current tough conditions are overcome, real growth will return. In the short term, however, meal numbers and purchases will continue downwards – driven by lowish levels of consumer confidence and reduced levels of government spending. At the same time prices are being driven upwards by VAT and inflation and downwards by discounting. Another downward driver to reducing average prices results from consumers who switch to lower cost alternatives – either on the plate or by choosing to eat at cheaper outlets. The second half of last year was generally weak; consequently this year’s comparisons will have a slightly lower hurdle to climb merely to appear acceptable.