The UK restaurant market

Published on 4 September 2018
Edison-Explains

What is the outlook for the restaurant market?

In the UK, restaurants are a £95bn market that has generated strong growth in recent years. That said, what was once a well-defined market has fragmented under lifestyle changes and cost pressures. Today it is split into three distinct categories: dine-in restaurants, food-to-go and delivery. Of these three sub-segments, the macroeconomic pressures of the UK consumer market have damaged dine-in restaurants.

Yet food-to-go and delivery have done well, servicing an increasingly time-poor and highly networked consumer base. It is these two invigorated subsectors that are generating strong growth, while sit-down models suffer from stressful economic conditions.

What threats do traditional restaurants face?

Traditional restaurants face the same market conditions as the rest of the UK retail sector, as depressed disposable incomes and weak consumer confidence hit sales growth while costs increase.

Low disposable income is a result of cyclical weakness manifesting in slow wage growth, inflationary pressures and rising interest rates. In addition, Brexit uncertainty and the threat of further interest rate rises have damaged consumer confidence.

Restaurants are also suffering heavily under higher food costs due to the weakness of the pound, increased labour costs as a result of minimum wage hikes and rising establishment costs such as business rates. In the aftermath of market pressures, consultancy MCA reports 2017 market growth in sit-down restaurants was at their lowest levels since 2013, at just 1.5%.

How have food-to-go outlets reacted to market pressures?

Food-to-go, defined by operators such as Pret a Manger, EAT and Greggs, has performed well in a weakened market. Spending at these types of restaurants grew to £9.9bn in 2016, up 34% from 2009, and is forecast to grow at a CAGR of 2.6% to 2021.

This growth rate is partly attributable to a cultural shift towards food eaten regularly throughout the day, and partly to supermarkets increasing their food-to-go offerings, coffee shops expanding their ranges and a new customer base of time-poor, convenience-focused millennials maturing into high income consumers.

How have delivery companies thrived in the current market?

Food delivery outlets can be defined under two umbrella designations: aggregators and traditionalists. It is the aggregators whose low-margin, asset-light model brings together capital-intensive restaurants and a network of couriers who have thrived.

For example, Domino’s Pizza, a traditional service relying on kitchens, did well in 2017, posting like-for-like sales growth of 4.8%. By comparison, the aggregator Just Eat posted revenue growth of 45% for the first six months of 2018.

This trend, although not always an accurate representation, is a fair approximation of the market. Traditional outlets that have focused heavily on delivery are doing well enough in a dispirited sector, but aggregators are expanding their market share rapidly.

How are large restaurant chains reacting in this environment?

As expected, restaurants have not fared well in the current environment. For example, Jamie Oliver’s restaurants and Byron have both had to restructure, closing 20 and 12 outlets, respectively. At 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.

y 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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