Richard Negus Asks 'Is the Restaurant Market Nearing Saturation?' in the Spring Edition of Propel Quarterly.
There are set to be hundreds more multiple-owned restaurants on the high streets of Britain by the end of this year. Richard Negus asks if we have room for them all...
With the leading 20 multiple restaurateurs proposing to open more than five new restaurants every week in 2014, how long can the restaurant groups continue with their expansion plans before the market becomes saturated?
The following analysis takes a look from a property perspective at the potential for market saturation, the obstacles to expansion, the winners and losers, the historic lessons to be learnt from the pub market and, finally, the future.
Allegra Strategies confirms that there are some 326,000 outlets contributing to the UK food service and hospitality market. The number of full service restaurants (FSRs) in the UK ranges between 28,000 and 34,000, depending on which source you believe. The discrepancy in the number of FSRs is because, no doubt, of a “blurring” of the boundaries between restaurants, pubs, cafes, coffee shops, delis, sandwich shops, takeaway restaurants, drive-through restaurants and quick service restaurants.
All, to varying degrees, provide food that can be eaten on the premises. For the purpose of this article, the focus is on FSRs falling within Planning Use Class A3, providing cooked food and waitress service, and in premises licensed to sell alcohol.
Growth in UK eating out market
It will come as no surprise that eating out in the UK has been growing for many years and, moreover, is forecast to continue growing over the next five years. Restaurant brands such as PizzaExpress, Frankie & Benny’s, Prezzo and Nando’s have been expanding their stores to capitalise on the increased demand and are reaping the benefits. However, it is not all good news for the sector. The FSR industry has endured a difficult time during the economic downturn, with consumers cutting back on discretionary spending and trading down to cheaper takeaway options. Accordingly, competition has been fierce, with many of the larger brands relying on discounting and/or internet marketing promotions to capture business, to the detriment of a large number of independent restaurants and smaller restaurant groups.
Not all of the multiple FSRs have benefited during the past fiverestaurateurs – La Tasca had to restructure its business in 2012 with a Creditors Voluntary Arrangement, and Paramount Restaurants, operator of Chez Gerard, went into administration in 2011.
It is worth making the point that the restaurant market in Greater London has largely been unaffected by the economic downturn, with restaurant rents and premiums (for leasehold interests and their trade contents) continuing to increase because of strong operator demand, particularly from new entrants to the sector, emerging brands and established foreign restaurateurs seeking a London presence. As a result, London is far from being saturated with restaurants. The concern is on the High Streets of towns across the country, where restaurant numbers have increased exponentially, often in one go as part of a leisure scheme.
As the retail market has suffered during the recession and the eating-out market continues to grow, landlords have been keen to let their empty shop premises to, or replace weak retail tenants with, comparatively stronger restaurant tenants, thus creating more opportunities for restaurateurs to expand. The longer leases required by restaurateurs (compared to retailers) to depreciate their comparatively (again to retailers) higher fit-out costs can produce attractive investments for landlords and enhance asset values, thus providing a further reason for landlords to welcome restaurateurs. Similarly, within shopping centres landlords have been keen to develop their centres by improving and extending the food and beverage offers to complement and enhance their customers’ retail experience.
The UK’s FSR chains account for approximately one in eight, or 12% of full service restaurants (circa 3,700), with Gondola being the leading player, having nearly 700 restaurants, including PizzaExpress, Zizzi, ASK and, until recently, Byron, in its brand portfolio. Other key groups are the Restaurant Group (circa 400 restaurants, including Frankie & Benny’s, Chiquito’s, Garfunkel’s and Coast to Coast), Nando’s (320 restaurants), Tragus (295 restaurants, including Café Rouge, Strada and Bella Italia) and Prezzo (circa 200 restaurants, including Prezzo, Chimichanga and Cleaver). The Restaurant Group is planning to open 50 new sites in 2014, with Gondola looking to open around 35 and Prezzo a similar number.
The proposed expansion by the FSR chains amounts to an increase of circa 7% (by numbers) but in reality represents a much greater increase in the contribution by FSRs to the eating-out market, as each restaurant will be expecting to trade at circa £1m annual sales, a sum significantly above the typical independent restaurant. This extra trade requires a considerable increase in consumer expenditure, which cannot be satisfied entirely by growing demand and has to be at the expense of another part of the eating-out market.
In respect of the chains’ target locations, these will be a mixture of High Streets of reasonably affluent towns with populations in excess of 15,000, urban shopping centres, out-of-town leisure centres (often built around a multi-screen cinema), and major railway and airport hubs. Location and building configuration are key and, perhaps unlike with retail, the character and configuration of the property can be just as important (and some would argue more) than location – certainly the likes of PizzaExpress, Prezzo and Café Rouge have made a success of converting attractive character buildings into restaurants. The multiple restaurant operators are typically looking for 3,500 sq ft of floor space with at least 2,000 sq ft on the ground floor, to provide around 100 to 120 covers.
In a town local to me (with a population of around 20,000), ASK opened a branded Italian restaurant (with circa 100 covers), converting an empty Woolworths’ store about two years ago to form the first multiple operator restaurant in the town. During the past six months, Prezzo converted a former public house (with circa 100 covers) to become the second branded restaurant in the town. I understand that Prezzo’s opening had virtually no impact on ASK’s takings and that both restaurants are trading successfully, with a combined annual turnover believed to be in the region of approximately £2.7m. This is a considerable sum of money in a town which previously had only six independent restaurants.
This scenario is quite typical of towns across the country. But there has to come a point when a new restaurant opening starts to dilute the pot of trade in a town. This has been the case in towns where some six or seven restaurants have opened and the resulting competition has caused even some of the successful national restaurateurs to sell up or contemplate reinvestment.
Towns and cities such as Walton on Thames, Horsham, Halifax and parts of Milton Keynes are examples of this. While some restaurants are succeeding in these locations, the fierce competition has diluted some restaurants’ profits.
Growth through expansion
There is a mixture among ownership of the key multiple restaurant groups, with some being publicly quoted, but probably the majority being owned by venture capitalists/private equity. In pretty much all of the FSR chains, the focus is on growth through expansion, and thus there is pressure on operators to find new sites, resulting in strong competition for the best locations, which is forcing rents and premiums to record levels.
Needless to say, and regardless of whether the new restaurants are successful, the resulting increased rents affect all local restaurants. With upwards-only leases, tenants have no opportunity for redress until the respective lease expiry – which can be as long as 20 or 25 years. This situation is in many ways similar to the pub/bar market in the 1990s, when operations such as Slug & Lettuce, All Bar One, Walkabout, Ale Cafe, Toad, Bar Excellence, Square, Goose, Chicago Rock, Yates, Bar Med, Pitcher & Piano and Fine Line aggressively competed to take leases of High Street properties to develop new bars, mainly from shell.
To a point, the increased demand was caused by government interference, with the mixed implementation of the 1989 Monopolies and Mergers Commission Report encouraging the large brewers to sell off thousands of tenanted pubs and reinvest the proceeds into new managed pubs. Many new and initially successful brands emerged on the High Street, but simply became unsustainable as competition increased, with more and more operators opening. Many of these brands have now disappeared from our High Streets and some only exist today after a series of company restructures or administration.
The restaurant market does, however, seem to be more sophisticated than the 1990s bar market, with restaurant brands providing quite distinct offers of menus, ambience and value. The FSR expansion also seems to have been more gradual, taking place over a longer time and during a period when the eatingout market continues to grow. Hence one would hope that expansion is more likely to be sustainable. Perhaps worth noting is that restaurants are generally much smaller than the bars of the 1990s and, as a result, it could be argued that restaurateurs are less exposed to market fluctuations, because of the lower financial investment and rents (pro rata) involved. Nevertheless, there is much for the FSRs to learn from the 1990s. Survival for today’s restaurateurs is about differentiation – offering something truly exceptional in terms of location, menu, service, value and ambience or a combination of some or all of these.
A promising future
As the economy recovers and consumers begin to trade up from the cheaper quick service restaurants, the future for the FSRs is promising and already some of the chains are moving away from discounting. In towns where market saturation may have occurred there will no doubt be corrections – already this has been the case in some towns, as failing restaurants have been converted to estate agents, convenience stores, betting shops and even banks.
Continued expansion by the FSR companies will occur, provided operators remain confident in their brands, a confidence that only comes from continued strong trading.
Provided that the multiple operators continue to be successful, they will look for new opportunities to expand their businesses and, having survived the worst economic climate of our lifetimes, there is little currently on the horizon to prevent the multiple FSRs from continuing to grow.
While the introduction of this article talks about the chains opening five new FSRs every week, this should be considered in the context of some 30 public houses that are currently closing every week (although it is fair to say that the impact of the loss of 30 pubs, mainly wet-led, will be negligible on the eating-out market.
As someone who specialises in restaurant acquisitions, sales and valuations, I am pleased to conclude that there is still much activity in the market to keep me busy for the foreseeable future.
Richard Negus is a director of AG&G, chartered surveyors specialising in the valuation and sale of restaurants and pubs, and has over 25 years’ experience dealing with restaurants.