Inside Track by Mark Stretton
The high street restaurant market is over-heating, a leading analyst has argued. Douglas Jack, leisure analyst at Panmure Gordon, warned that the sector – “the current vogue area of licence retail” – is experiencing too much expansion. In a warning that will stir uncomfortable memories for high street pub and bar operators – many are still operating through the fallout of over-expansion in the late nineties - Jack said that publicly-quoted restaurant groups faced downgrades due to negative trading and falling expansion rates. He also warned there would be a “supply-side shock” when a smoking ban hits 2,000 high street bars, many of which are expected to place a greater focus on growing food sales to counter anticipated falls in revenues from drink sales. Panmure Gordon expects the branded high street restaurant market to grow by 0.5% in site terms and predicted that a smoking ban would add a further 5% in capacity as bar groups reposition their offers. Jack said restaurant demand growth had slowed from 7% in 1997 to about 4.5% in the last five years, but that this demand growth was weighted away from high streets towards captive markets such as residential areas, leisure parks and airports. He said downbeat figures from Whitbread and Urban Dining, plus news that Pizza Piazza had entered administration were consistent with these concerns. Jack’s views will now doubt be the subject of vigorous discussion at this Wednesday’s Eating Out 2005 conference, organised by M&C Report. But his observations were described as overly simplistic by Greg Feehely, head of research as Altium. Feehely said: “What you’re seeing is vastly contrasting fortunes between companies and stock picking is becoming more crucial as good brands will continue to take market share.” Here perhaps lies the key. The eating out market is becoming increasingly competitive. This will almost certainly intensify with a smoking ban as pub and bar operators look to food for growth. The operators who should perhaps be concerned are those with tired, uninvested, undifferentiated concepts. The Restaurant Group – which has done a great job of repositioning most its business towards growth markets – clearly has an obvious example of such a brand in Caffe Uno. It is the remaining part of the jigsaw management is yet to solve. In its latest results TRG’s high street business (largely Uno and Garfunkel’s) saw profits fall 19%. The division now accounts for just 16% of group profits. Whitbread, which operates TGI Friday’s, Pizza Hut and Costa Coffee, is another group with challenges on the high street. It reported like-for-like sales down 1.7% in its high street restaurant division for the 24 weeks to 18 August. But the concepts these companies operate are hardly setting the pace in eating out and fundamentally the outlook is still strong. Depending on whom you speak to, eating out spend accounts for between 35p and 38p in every pound spent on food in the UK – and the trend continues to grow. It is why private equity is prepared to pay £60m for Strada, £100m for Wagamama, £20m for EAT and a mooted £35m for Loch Fyne The latest subject of private equity interest is Carluccio’s, the Italian restaurant and deli that is currently assessing next phase funding options. Three companies are said to be in talks, trying to dissuade the company from listing on the stock market. They are Legal & General Ventures, which owns Tragus, Phoenix Equity Partners, which used to own the Tootsies burger business, and Graphite Capital, which recently refinanced Wagamama. It is significant that all these private equity houses are experienced in the sector, having banked substantial profits from previous investments. Clearly these firms think there is a long way to go yet. It’s because these concepts – the “New Establishment” of eating out chains – will continue to take market share. The price tag for Carluccio’s, according to reports, has now topped £55m. Competition will continue to intensify (there is also the prospect of a standalone Select Service Partners – it is to be sold by owner Compass – bringing brands such as Upper Crust and Caffe Ritazza on to the high street). We will perhaps start to see a clearer polarisation between winners and losers in this market.