Changing Tastes the UK Casual Dining Market September 2017 Contents
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Changing tastes The UK casual dining market September 2017 Contents Outlook for the UK casual dining market 01 Key trends impacting the sector 04 Overview of recent investment activity and potential indicators of distress 09 How we can help 12 Key contacts 15 Changing tastes | The UK casual dining market Outlook for the UK casual dining market We expect challenging times ahead for casual dining operators impacted by cost pressures at the same time as consumers face a squeeze on disposable incomes. However, changes in consumer tastes and the way diners engage with restaurants, alongside increasing use of technology, provide opportunities for growth if properly harnessed The UK casual dining sector is going through a challenging period with margin pressures mounting as a result of higher labour costs, higher business rates and increased food costs. At the same time, consumer confidence is falling, with inflation and sluggish wage growth beginning to squeeze disposable incomes. Notwithstanding the challenges facing the sector, we see some key consumer trends emerging that casual dining operators can capitalise on in order to prosper in the current environment. These include a desire for more healthy eating, informal and experiential dining experiences, as well as increased consumer focus on food provenance and sustainability. Sarah Humphreys Lead Partner, Casual Dining The use of digital technology is also increasingly impacting across the whole of a restaurant’s 020 7303 3617 operations. We believe the “restaurant of the future” will use technology throughout the customer [email protected] journey, whether it be to provide delivery and pre-ordering services, or to connect to consumers in-store to offer customisable menus and dynamic pricing. We look forward to discussing our views on the sector and how we are best placed to assist you. Sarah Humphreys Lead Partner Casual Dining September 2017 01 Changing tastes | The UK casual dining market “ Consumers want to dine on their terms. In light of the current pressures facing the casual dining sector, it's essential that operators optimise location, occasion and channel in a connected and authentic way.“ Nielsen Harrap, Senior Manager, Customer & Channel Analytics Casual Dining Lead 02 Changing tastes | The UK casual dining market Consumer confidence outlook Our analysis shows a fall in consumer confidence in 2017 impacting negatively on consumers’ appetite for discretionary spend. This will directly impact the casual dining sector, which is experiencing a fall in like-for-like sales growth rates Consumer confidence about level of disposable income Net % of UK consumers who said their confidence about their level of disposable income has improved in the past three months • The latest Deloitte Consumer 0% Tracker shows a further fall in -10% consumer confidence in 2017, a sign of rising cost pressures -20% emerging in the consumer -30% Lowest level economy. since Q4 2013 -40% • Since the EU referendum -50% spending has been holding up Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 well, but with inflation rising and nominal wage growth 2011 2012 2013 2014 2015 2016 2017 starting to slow, consumers are Source: Deloitte analysis beginning to feel a squeeze on their disposable income. Monthly like-for-like restaurant sales • Like for like sales growth in restaurants has been declining 4% over the past c.18 months and 2% is running below the rate of cost inflation (currently around 0% c.5% p.a.) -2% Trend line -4% % change vs. Prior year -6% 6 6 6 7 7 Jul-16 Dec-15Jan-1 Feb-16Mar-16Apr-16May-16Jun-1 Aug-1 Sep-16Oct-16 Nov-16Dec-16Jan-1 Feb-17Mar-17Apr-17May-17Jun-1 Source: Coffer Peach Business Tracker Source: Deloitte Consumer Tracker Q2 2017; ONS; Deloitte Analysis 03 Changing tastes | The UK casual dining market Key trends impacting the sector Margin pressures are mounting on casual dining operators largely as a result of rising labour costs, higher business rates and increasing food costs (exacerbated by a weaker pound following the EU referendum) Weakening £ to increase cost of food sourced abroad Business rates revaluation in England and Wales will increase Effective Exchange Rate Index, Pound Origin of food consumed in UK property costs in major cities and London in particular (2015) 1 100 Combined business rates payable • Property by restaurants in London (£m) rates likely 90 19% to increase +33% 269.3 202.0 significantly in 80 London as well 52% 29% as other major 70 cities including Manchester 60 2016 (Pre-rate 2017 (Post-rate and Newcastle. May 2015 May 2016 May 2017 UK EU Other countries revaluation) revaluation) Reliance on offers adds to margin squeeze Possible Labour supply challenges from Brexit % of visits involving deals & UK food and beverage service activities • Diners expect offers in UK by sector (2016)3 workforce by nationality (2015)2 some kind of • UK restaurant ‘deal‘ from operators are 38% restaurants, Squeezed 28% heavily reliant on particularly migrant workers 26% during weekday margins (especially from lunch service the EU). Tighter and other 72% Foreign-born immigration rules quieter periods UK National will make it harder of day. for operators to hire staff. Casual dining Foodservice F&B service activities workforce split Increase in labour costs Key market saturation concerns Index of labour costs/hr in UK • National Living Wage % change in visits to casual dining restaurants (hotels and and foodservice) Currently £7.50/hour by area (in the year ended March 2017) • Operators are 4.7% struggling to expand in 180 but projected to rise to at least £9/hour by London and other key 2020. UK cities due a crowded 170 market and an increase • Apprenticeship Levy in available delivery 160 0.5% tax introduced options (eg Deliveroo) in April 2017 on and are seeking growth 150 companies with a wage 0.2% from other regional UK Q4 Q2 Q4 Q2 Q4 bill of over £3m. locations. 2014 2015 2015 2016 2016 London Outside London Source: ONS; NPD; Mintel; FDF; DEFRA; CVS; Telegraph; The Migration Observatory; ‘UK food industry fears Brexit exodus of EU workers‘, FT (February 2017) Note: 1) Combined business rates payable for 2017 is based on average combined business rate payable by 7,105 restaurants operating in London during 2017; 2) Based on 2015 Labour Force Survey published by ONS; 3). Based on a Mintel survey of 1,840 internet users, aged 16+, who eat at casual restaurants. 04 Changing tastes | The UK casual dining market Key consumer trends Casual dining operators are having to react to long-term consumer trends that are being driven by younger age groups who eat out-of-home most frequently Key long-term consumer trends: Healthy eating Use of digital Home delivery Low calorie options, technology Value scrutiny “Premium-isation“ Home delivery in vegetarian and vegan Online reviews, pre- Value for money, set- Gourmet fast food and Britain growing 10x diets, allergen-aware ordering, digital menus menus, instant rewards indulgence trends faster than the total dishes (eg gluten free) eating-out market Informality Consumer Experience- driven Using restaurants Provenance promiscuity behaviour as a place to socialise, Increased consumer Lack of brand loyalty Desire for ‘unique‘ and on-the-go lifestyles focus on provenance and willingness to immersive experiences requiring grab-and- and sustainability experiment with go options alternative cuisines … driven by changing demographics: UK out-of-home eating frequency by age group (2016) Visits per month 28.3 The future landscape of the 24.1 22.5 restaurant industry 11.8 will be shaped by 20.4 millennials (those 9.9 17.9 born between 9.1 1982 and 1996) 15.1 8.0 14.8 and Generation Z 4.5 7.2 12.5 (those born from 5.9 3.7 3.4 5.4 10.4 1997 onwards), due 3.0 4.5 2.7 8.4 to their frequency 7.8 2.2 3.8 6.8 2.0 6.4 6.1 and spend on eating 6.1 6.0 2.0 3.0 1.7 2.4 out-of-home. 5.2 4.8 2.2 4.5 4.1 1.5 3.5 1.3 1.2 4.2 4.1 3.9 2.9 2.3 2.3 3.4 2.8 2.4 2.1 1.9 1.4 1.00.8 0.6 UK average 18-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70+ Snack Dinner Lunch Breakfast Source: MCA 05 Changing tastes | The UK casual dining market The “restaurant of the future“ Increasing use of digital technology is providing challenges and opportunities to casual dining operators, impacting the full "customer journey" as well as business operations Awareness and customer Reservations and delivery Staffing and In-restaurant experience engagement operations Channel visibility Reservations and ordering Flexible staffing Dynamic menus • Need for visibility in location • Third party booking • Opportunities for more • Develop customisable enabled searches (eg Google platforms influence on flexible staffing models in menus and implement maps visibility). reservation volumes. the ‘gig economy‘ (eg online dynamic pricing. shift planning). Digital marketing Delivery and collection Mobile on-boarding and Mobile payments • Importance of visibility • New delivery and pre- training • Ability to split the bill on booking websites ordering services providing • Opportunity to enhance between friends and offer and favourable reviews revenue growth opportunities employee engagement faster payment services (eg (OpenTable, Square Meal, and pressure on kitchen with a variety of training Apple pay, Splitwise, Venmo). Tripadvisor etc). capacity (eg Deliveroo, techniques. uberEATS, Mealpal). Personalised Automation Supply chain management Internet of Things recommendations • Potential for self-service • Use of enhanced integrated Technology • Ability to offer tailored ordering and payment.