Edison Explains

The UK restaurant market How are UK restaurants adapting to weak consumer confidence and a distressed market?

What is the outlook for How have food-to-go outlets reacted to the restaurant market? market pressures? In the UK, restaurants are a £95bn Food-to-go, defined by operators such as Pret a Manger, market that has generated strong EAT and Greggs, has performed well in a weakened growth in recent years. That said, market. Spending at these types of restaurants grew to what was once a well-defined market has fragmented £9.9bn in 2016, up 34% from 2009, and is forecast to under lifestyle changes and cost pressures. Today it is grow at a CAGR of 2.6% to 2021. split into three distinct categories: dine-in restaurants, This growth rate is partly attributable to a cultural shift food-to-go and delivery. towards food eaten regularly throughout the day, and Of these three sub-segments, the macroeconomic partly to supermarkets increasing their food-to-go pressures of the UK consumer market have damaged offerings, coffee shops expanding their ranges and a new dine-in restaurants. Yet food-to-go and delivery have done customer base of time-poor, convenience-focused well, servicing an increasingly time-poor and highly millennials maturing into high income consumers. networked consumer base. How have delivery companies thrived in the It is these two invigorated subsectors that are generating current market? strong growth, while sit-down models suffer from stressful economic conditions. Food delivery outlets can be defined under two umbrella designations: aggregators and traditionalists. It is the What threats do traditional restaurants aggregators whose low-margin, asset-light model brings face? together capital-intensive restaurants and a network of couriers who have thrived. Traditional restaurants face the same market conditions as the rest of the UK retail sector, as depressed For example, Domino’s Pizza, a traditional service relying disposable incomes and weak consumer on kitchens, did well in 2017, posting like- confidence hit sales growth while costs Edison’s Insight for-like sales growth of 4.8%. By increase. comparison, the aggregator Just Eat posted revenue growth of 45% for the first Low disposable income is a result of cyclical “This is not a time for six months of 2018. weakness manifesting in slow wage growth, investors to rely on inflationary pressures and rising interest models that have This trend, although not always an worked in the past. rates. In addition, Brexit uncertainty and the accurate representation, is a fair threat of further interest rate rises have Given generalised consumer weakness approximation of the market. Traditional damaged consumer confidence. combined with social outlets that have focused heavily on Restaurants are also suffering heavily under change, it is essential to delivery are doing well enough in a higher food costs due to the weakness of the identify independent dispirited sector, but aggregators are pound, increased labour costs as a result of growth prospects. The expanding their market share rapidly. minimum wage hikes and rising challenge for investors is How are large restaurant chains establishment costs such as business rates. to find such reacting in this environment? opportunities at a In the aftermath of market pressures, reasonable price.” As expected, restaurants have not fared consultancy MCA reports 2017 market Paul Hickman, head of well in the current environment. For growth in sit-down restaurants was at their research, Consumer example, Jamie Oliver’s restaurants and lowest levels since 2013, at just 1.5%. Byron have both had to restructure, closing 20 and 12 outlets, respectively. At

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the same time, Carluccio’s is having to close 30 restaurants and Prezzo 100 in the wake of an uptake in restructuring deals over the last two years. By comparison, the food-to-go space has done well, with Greggs growing its revenues from £842m in 2016 to £960m in 2017, following its rebranding from a high street baker to a food-to-go operation. In addition, sushi and bento seller Wasabi has secured £30m in investment for expansion over the next two years. Pret a Manger was recently sold for £1.5bn to the Reinmann family, as the German-based group tries to challenge Nestlé. And delivery service Uber Eats did well as the fastest-growing delivery aggregator. What is the future of the restaurant market? Following Brexit, immigration reforms could increase labour costs as the UK falls out of the European labour market and commodity prices could move further against the sector as new tariffs are levied on European food. Until then, as the macro cycle starts to top out and Brexit negotiations continue to provide little clarification on the UK’s place outside the EU, stresses on consumer confidence are unlikely to abate and the value of the pound may continue to decline. Even without the pressures of Brexit, social changes are imposing permanent effects on the eating-out market. Terrestrial models are becoming secondary to the online market as consumers change both their shopping and eating habits. This is lowering footfall on high streets, moving the focus of consumption either to residential neighbourhoods or indeed back into the home. Internationalisation is another theme that, as in other industries, is gaining ground. Just Eat is a global brand, operating in 13 countries, while Costa Coffee has recently been sold at a 16.4x EBIDA multiple to Coca-Cola, which has clearly stated its international ambitions for the brand.

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