As we move into the final quarter of the year, there is a sense that operators across the sector are having to reassess the levels they have set on their respective “business graphic equalisers” to match the increasing headwinds. The majority are being faced with the questions of do you dial down investment on marketing and expansion whilst fading up funding on recruitment/training and maintenance capex? Easier said than done for the bigger, more established brands or those with private equity backers gearing up for an exit, but some have already started to spread the risk to give them a better chance of success. At the same, we look at whether we can expect Prezzo Mark II with Jonathan Kaye at the helm of Richoux.

MCA’s recent, comprehensive Restaurant Report highlighted that the competitive landscape is marked by three key current trends: fault lines emerging in the establishment, growing dynamism from small brands expanding rapidly, and a shift from value to premium in the pub and, to an extent, fast food space.

It is expected these trends will accelerate over the next few years, resulting in a more fragmented, more competitive and, ultimately, more diverse marketplace, where physical expansion will increasingly involve brands growing at the expense of each other, rather than alongside each other.

As I have argued before growing costs are going to force operators to swap looking out (expansion) for looking in (price and wage rises, refurbishments). With sterling having fallen sharply in the wake of the Brexit vote in June, uncertainty over both pricing and availability is expected to be a factor in the supply chain throughout the rest of the year and into 2017. Then there is the added, and ongoing, factoring in of the national living wage. All against a backdrop of a trading environment that has been progressively getting stickier since the start of the year.

Last week, leading analyst Karl Burns at Investec said that due to increasing competition and a more demanding consumer, particularly Millennials, he believed like-for-like sales growth across the sector will be driven by increasing capital investment moving forward, as “operators reinvent concepts, branding and menus in order to stay ahead of the competition and attempt to drive slowing like-for-like sales growth”.

He said: “Taking total cumulative maintenance capex and expansionary capex per pub for Greene King, Marston’s, M&B, JD Wetherspoon and Restaurant Group over the last five years, it has risen from under £500k in 2011 to near £600k in 2016E (+4% pa) based on our estimates, as operators are forced to spend more on their estate to keep up with the competition. As a result, capex cycles are becoming shorter, with M&B most recently moving from a 10-year capex cycle to 5-6 years.

“Recently, we believe this has been putting pressure on ROCE within the sector, with a steady upwards trajectory now beginning to decline as operators see some margin pressure, compounded by increasing capex requirements

Our own research highlighted that brands with less than 100 outlets are set to grow turnover and outlets by 10.0% and 7.8% on average, respectively, compared with an average of 5.8% and 3.5% for all leading brands in the market. In contrast, brands with over 200 outlets are in line to grow by 4.2% and 2.0% for turnover and outlets, respectively. This is resulting in growing dynamism in the restaurant market, with a number of newer brands expanding rapidly while the establishment is slowing down. The research found that brands appealing to millennial consumers by offering ethnic cuisine or specialisation are seeing the most robust growth.

Burns also asked whether this is this the end of big branded restaurant groups. He said: “With increasing pressure on brands to reinvent themselves contributing to rising capex requirements, we wonder whether the large branded pub and restaurant groups are efficient enough to continually innovate and adapt to keep up with the fast changing consumer environment.

“Both M&B (16 brands) and Restaurant Group (7 brands) have struggled to adapt to the increasingly competitive environment, resulting in accelerating like-for-like sales declines. However, seemingly smaller, more entrepreneurial brands have begun to outperform such as Byron, Wagamama, Côte and, until recently, Bill’s. Greene King, which recently bought Spirit Pub Company, is planning to shrink its brand portfolio from 20 to just 5 main core brands, as the business looks to refocus and build around individual brands.” Of course as the bigger groups look to shrink it will provide others with the opportunity to pick up sites and in some cases consolidate brands and operations.

One group operating a number of brands is nothing new in the sector, but it seems more are looking to adapt this model with tweaks to spread the risk so to speak to match the economic landscape and the changing consumer profile.

The Azzurri Group, the Stephen Holmes-led, ASK Italian and Zizzi operator, is a case in point. Whilst its two core casual-dining brands remain cash-generative, it has been willing to tap further into faster-growing, fast-casual market, first with the acquisition of Coco Di Mama and now with the backing of new pizza concept Radio Alice. As Holmes told me: “Radio Alice complements our existing business. Radio Alice will appeal to all the things that today’s customers are looking as well as having original founders, a proper background and a real story.

“The other main reason we are excited about Radio Alice, is that it will work out of 1,500 sq ft units – it is A3 but could be half of the size of a usual ASK or Zizzi site. It is a fast casual pizzeria concept, with limited menus and very high-quality ingredients. There is lots of growth still available for ASK and Zizzi but what this does is balance our portfolio nicely and gives us further access to some fast-growing markets.”

Again it comes back to that graphic equaliser approach, but here it is fading up one brand, whilst subtly dialling down another. Easier said than done when you are dealing with a number of fledgling concepts, than with three or more brands already established and all within need of attention, that lack a founder’s touch. More will certainly look to follow Azzurri’s lead or indeed that of Fuller’s with The Stable and Whitbread with Pure. Some will look to spread the risk even further with multiple, smaller concepts, across multiple investment, a la David Page, either through his Fulham Shore vehicle or personal investments in the likes of MEATliquor or upcoming concept FIXED.

It is the latter model, someone like Ennismore is looking to explore. Its Graham Hall-led restaurant operation is set to be a mixture of company-reared formats, the first being the upcoming Tandoor, and fledgling concepts backed under a joint venture, such as street food-scene darlings Breddos Tacos. This new breed of umbrella vehicles, even has its own Paul Campbell-figure in Chris Miller. The ex-Soho House commercial director’s White Rabbit Fund has taken early positions in start-ups such as Kricket and Island Poke, with more to follow, although M iller has a way to go to match the former Clapham House chief executive’s investment record, which includes Hawksmoor and Tortilla.

There is a sense that this current quarter of trading is a significant one for the sector to provide some needed respite from the rollercoaster it currently finds itself riding and to jump start momentum going into the new calendar year. It feels like a time for minimising risk, looking carefully at what’s coming down the road, for becoming even more selective in terms of pipeline, for challenging costs and working all the tricks in the book to deliver performance. It feels like the time to set new levels and in terms of growth opportunities spreading that risk.

Can the Kaye’s do it again?

He has not even started work properly yet, but the announcement that Jonathan Kaye, the founder and former chief executive of Prezzo, was, subject to shareholder approval, going to become the new chief executive of the AIM-list Richoux Group, already had an immediate positive impact on the company’s share price, shooting up 42% to 30.5p. The share price would reach as high as 34.5p before settling at just under 30p, significant for a group that for many had been quietly going about its business but hardly setting the world on fire through its Dean’s Diner, Villagio and eponymous brands.

Kaye, who joins up with his uncle Phillip, the group’s major shareholder, has been quick to add long-time Prezzo operations director Mehdi Gashi to his management team, and it wouldn’t be a total surprise if Alan Millar, his ex-company’s finance director, also follows him. It is obvious that Kaye believes there is value to be unlocked from the business, as does its existing board who have put forward a significant share options package for Kaye. It will be interesting to see what incentives are included in this package, especially in terms of performance targets, but Kaye’s track record at Prezzo and that of the wider Kaye family, suggest this should be a win-win situation for all involved.

He will obviously take his time to assess the current 23-strong business, but his background is pizza and pasta, meaning the current eight-strong Villagio brand maybe used a staging post for further growth, although not necessarily in its current form. Similar, the group’s eponymous cafes have been seen for a long time as having untapped potential for expansion in a similar vein as rival Patisserie Valerie. It is currently growth brand, Dean’s Diner, which may be the least interesting to Kaye, especially following the recent travails of similar concept Ed’s.

Kaye’s extensive knowledge of and contacts in the property market will also come into play. He, along with other members of the Kaye family, own a number of well-located freeholds, the All Bar One in Richmond for example, which can be unlocked at the right time and for the right concept, to provide momentum for his new business.

Kaye, who is currently a non-executive director at Comptoir Group, stepped down from Prezzo last year after 14 years with the company after it was acquired by US-based private equity firm, TPG Capital, for £303.7m. It could be argued that he didn’t need to step back into the sector’s firing line, but I’m sure Kaye will want to prove that he can generate the same success he had with Prezzo again, in an even more competitive marketplace. It will be good to have him back.