Coffee lovers were up in arms this week as yet another coffee shop closed to make way for a pub. Campaigners are furious that a Starbucks in Devonshire Street, in the heart of Sheffield, has been allowed to become a BrewDog bar. Greg Mulholland, the Liberal Democrat MP for Leeds North West, said he would be pressing for changes to give coffee shops more protection in planning law. “Coffee shops can still be sold and closed, including being turned into supermarkets and betting shops, without this even needing planning permission,” Mulholland said. That is simply barmy and some simple, commonsensical changes to the planning system would give thousands of coffee shops the protection they need.

 

Did you see that story? No, you didn’t, of course, because while BrewDog has indeed just opened a new bar in Sheffield in premises formerly occupied by a Starbucks outlet, nobody protested about the loss of a coffee shop, and nobody tried to get the coffee shop declared an “Asset of Community Value”. The quote from Greg Mulholland is genuine – he made it last weekend – except that I have substituted the words “coffee shop” for pub.

 

The Liberal Democrats, according to Mulholland, “have firmly positioned themselves as the pro-pub party in Britain”, their latest policy, passed at the party’s Spring conference in York last weekend under the title “A Better More Sustainable future for British pubs”, proposing to give pub tenants the right to buy their freehold at an independently assessed market value if their pub company puts the site on the market. But “market value” as what? A premises might have a market value of £500,000 as a pub, since the returns on its usage as licensed premises would only support that valuation, but a value of, let’s say, £750,000 as a supermarket, because anyone running it as a grocery store would make 50% more than it would have made remaining in its previous, pub use. If the law the Lib Dems want brought in says the tenant can only buy his pub’s freehold at a price that reflects its higher value as a supermarket, then if he buys it, he is going to struggle to cover his costs trying to run it as a pub. If, on the other hand, under the Lib Dem proposals, he can buy it at its value as a pub, but it is still worth more as a supermarket, the first thing any smart tenant will do is flog the pub to Tesco himself, thus (1) transferring hundreds of thousands of pounds of value from pubco to tenant and (2) still losing the “community” an “asset”. Is this really what the Lib Dems want?

 

The proposal smells once again of a suggestion made by people who either don’t understand how markets work, or who do, but are cynical enough to reckon that enough of the public don’t understand how markets work to be fooled by proposals that would be ineffectual at best, and dangerous at worst. You do not have to believe that there are still too many pubs in Britain to see, surely, that trying to protect the worst from closure will only harm the best, by spreading the available trade about too thinly.

 

The debate about “protecting” pubs from closure is conducted as if there were only a finite number of sites capable of ever being pubs, and every pub that becomes a supermarket, or a private home, or even a coffee bar means a permanent reduction in the number of pubs there could ever be. But this is total nonsense, of course: even in the days when it was much harder to open a new pub than it is now, Tim Martin, to name just one entrepreneur, was putting up his signboards on premises that had all sorts of previous uses: banks, cinemas, shops, post offices and the rest. The same process is still going on, all around the country: the “micropub” movement, for example, has seen pubs open in premises that were formerly, to pick just a few examples at random, a butcher’s shop, an antiques shop, a taxi firm’s offices, a hairdresser’s, a dry cleaner’s, a pharmacy, a tattoo parlour, a kitchen showroom, a bookshop, a launderette, a bakery, a health food shop … you are, I’m sure, getting the picture. There are even a couple of micropubs opened up in premises that had been pubs originally, but which had closed 80 or 100 years ago. If the will, and the demand, is there, pubs can spring into being almost as easily as nail bars and tattoo parlours, kebab outlets and coffee shops.

 

Pubs don’t need their existence protecting by legislation because, as has been demonstrated hundreds of times over the past couple of decades alone, if the demand is there a pub will arise, and if the demand isn’t there, a pub will close. People get emotional when they read headlines that say “Village loses its last pub”, but almost every time the pub is closing because villagers aren’t using it in sufficient numbers – and if there really is genuine demand, there is little or nothing to stop a village entrepreneur opening a new pub, micro or otherwise, to replace the one that is closing.

 

If a pub is truly an “Asset of Community Value”, as defined by the Localism Act of 2011, then the community will be showing how much it values that asset by walking through the door and spending enough money every week to dissuade any pub owner from closing it. Thriving pubs don’t need protection. It will be argued that many pubs would thrive without the overheads of the pubco on their backs: but this ignores the very considerable support, visible and invisible, the pub receives from the pubco, and the fact that any tenant buying a pub from a pubco will now have the overheads of his new mortgage-provider on his back instead. The only results of the Liberal Democrats’ new policy would be either to persuade pub tenants to try to keep unviable pubs going at their own expense, with every likelihood of failure, or to rob pub owners of much of the value of their pubs and hand it to tenants for nothing, while still ending up with a closed pub.

 

Over the last six weeks we have won quite a few new briefs from existing clients and a lot of briefs from brand new clients across the whole mix of the hospitality sector including hotels, leisure clubs, restaurants, suppliers, distributors, pubs, late night venues and restaurants. They have come from start-ups, from small groups and from very large corporates. It has been a fabulous mix

 

What has been interesting is to stand back and analyse the key themes behind these briefs. I suppose the overarching key theme is the increasing optimism across the sector as a whole. There is a real sense of positivity, of entrepreneurship and of hope

 

Digging deeper, the themes that have emerged have been pretty consistent. They include:

 

• Women: I would not say there has been a revolution in the appreciation of how and why women choose to eat and drink out but I do think there has been a marked increase in operators wanting to understanding - and asking us to help develop that understanding. Interestingly, some operators who have been successful in attracting a female audience want to know why women like their brand so much, so that they can ensure they continue to appeal to women. I have run four women-only focus groups in the past ten days, and they have been extraordinarily illuminating on how operators can increase their brand’s appeal to women.

 

• On-site messaging: As the market continues to become more and more competitive, operators are wanting to know how they can effectively “drive” (for want of a better word), customers over their threshold, particularly in retail environments. How can they make sure they win their share (or better) of those wanting to eat out? How can they make their brand more attractive externally than their competitors? Then, once customers are inside, how can they communicate with them so they do not feel overwhelmed by brand messages yet pick up the key ones?

 

• Future trends: There has been a massive increase in the number of clients across the spectrum wanting to know what the key trends are in the future and then wanting to work with us to exploit these trends. I think, for the past few years, that clients have been more inward-looking – less willing to raise their heads and look into the long-distance future. Their attention has been on the now, on cutting costs, on delivering the P&L day in, day out, and putting measures in place very quickly to address loss of sales or loss of profit. It is almost as though they have not had the headspace to think. Now they have, and they want to know what is happening and going to happen.

 

• Competitive understanding: Aligned with the above has been a call from clients to better understand what their competitors are up to, again, I think, part of a “heads up” rather than “heads down” approach. They want to know what competitors are doing in terms of customer communication, brand development, menu offering and pricing, in particular. This does not mean, necessarily, that they want to copy them, but they are more curious about the impact of competitors on their business than they were a few years ago.

 

• All things digital: We are continuously approached by all types of client to look at their digital communication with customers, and in particular to review the effectiveness of their website in attracting customers (and in many instances, employees) to their business. It is not only, though, how to get customers to their site, but how to then encourage them to book or apply or email. In other words clients are wanting to know how to maximise their digital asset as well as their physical assets

 

• TripAdvisor and LinkedIn: TripAdvisor is the most powerful marketing tool for most hotels, restaurants and pubs, and some clients really want to know how to exploit the opportunities it affords. They know the basics but they do not always know the intricacies. Similarly, suppliers want to know how to use LinkedIn to contact potential clients, to attract them to their website and to encourage recommendations

• Delivering an experience: This is not about service or hospitality. It is about how brands can deliver a really brilliant holistic experience to their customers which every member of their team wants to be part of. These operators know that experience is king, and want to know how they can create magical experiences for their customers (sometimes translated into “content” for their customers to communicate to their friends) to remember and revisit.

It is a truly exciting time at the moment to be an agency.

 

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, no doubt, because 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.

 

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 five years and there have been a few casualties. While many of the multiple operators will have sold off the odd failing restaurant – I have sold nearly 200 during the past five years, mainly to other restaurateurs – 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 Cafe 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.

 

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 eating-out market continues to grow. Hence one would hope that expansion is more likely to be sustainable. It is perhaps worth noting 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.

 

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 chains are 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.