Wed 22nd Jul 2015 - Restaurants beating pubs amid 14% annual supply growth Restaurants taking market share from pubs amid 14% per annum supply growth: Leisure analysts at Panmure Gordon have claimed the sector is going through “unprecedented change” with 14% per annum casual dining supply growth, with restaurant operators taking market share from pub operators. A report, authored by Anna Barnfather and Karl Burns, stated: “The sector is going through a period of unprecedented change with robust consumer demand driving increased supply and convergence across categories. Changing consumer preferences are driving market share shifts and a surge in supply is leading to accelerated rent and wage inflation. As we stand, we believe branded restaurants are taking share from pubs and independents and the winners and losers will depend on balancing site expansion with constant menu and brand redevelopment. We expect valuations to diverge recognising those with strong brands, high returns and which can deliver on expansion targets. The latest Coffer Peach Business Tracker data shows restaurant like-for-like sales running at 3.6% and pubs 0.8% to the end of June. Demand remains strong, aided by a favourable macro backdrop, and greater access to capital has enticed many gastro-entrepreneurs to expand with an estimated net 2,000 new restaurants opened in the first quarter of the year alone. Our analysis of pipeline data implies supply growth of circa 14% per annum across prime casual brands alone raising concerns about whether demand is robust enough to absorb it. Competition for space and staff has inevitably led to rent and wage inflation, which threatens investment returns. New announcements on the ‘Living Wage’ add to the pressure. Furthermore, with so much choice, UK consumers are becoming ever more fickle, demanding higher levels of service, quality, value and innovation. Currently, we believe restaurant operators are taking market share from pub operators, with only the most well-positioned and well-invested pub operators likely to outperform. We upgrade Greene King due to potential synergies from the Spirit acquisition, strong cash flow and well-invested estate. We remain buyers of Restaurant Group given its strong pipeline visibility, robust earnings and valuation in line with the sector. We remain buyers of SSP Group due to the structural growth in travel and operating efficiency programs driving double-digit earnings growth over the next three years. We also retain our ‘Buy’ recommendation on Marston’s as it switches from disposal to growth mode. We believe Mitchells & Butlers’ focus on food puts it at risk from the growth of casual dining chains, whilst its rigid financing structure and pension deficit leaves no surplus cash for shareholders. We feel JD Wetherspoon’s value/volume offer is losing traction in the current aspirational consumer climate, whilst Whitbread is too reliant on aggressive, capex heavy expansion and is on too full a valuation.” Key trends: Panmure Gordon said shifts in demographic and consumer preferences combined with changing commercial agreements have blurred the lines between the different segments of the eating and drinking out of home market. Consumers are now able to have breakfast in a pub and dinner and drinks in a coffee shop for example. The increasing internationalising of the eating out ‘scene’ and entrepreneurial nature of the industry has seen a wave of innovation giving ever increasing choice. Below are Panmure Gordon’s key trends:   Premiumisation and customisation: Growing demand for more quality with greater element of service is prevalent across all food types. The most obvious is the premiumisation of burgers (or “better burgers”) and prevalence of artisan/sourdough pizza offerings with counter ordering but table service. At the other end is the ‘polished’ casual trend with Argentinian type steak houses that offer a finer dining experience but without the white table cloths. Convergence and all-day dining: Pubs are open for breakfasts, Starbucks is open for dinner. Many brands and formats are being adapted to extend opening hours, increase covers and maximise returns. While the brassiere concepts were designed to operate in all day parts from inception, other coffee shops and pubs are learning by trial and error. We believe that this trend is here to stay reflecting social as well as financial trends Well-thy eating: Well-thy eating being more health conscious with lower calories, more nutritional information and the addition of superfoods, vitamins and minerals. In our view, this also partially explains the continued decline in drinks led food offerings (pubs) and the shift from volume to quality/provenance. Fast casual: The drive for convenience and speed in made to order food is clearly demonstrated by the growth in Five Guys and other burger brands. This is carving a niche between the casual dining and pub restaurant operates on the one hand and Quick Service Restaurants and ‘grab and go’ retailers on the other. Fourth wave coffee: At one end, coffee is becoming more specialised, with innovative brewing methods and artistic presentations, a wider range of speciality drinks, blends and single-origin coffees. At the other end, it appears everyone is pushing coffee sales from Wetherspoons and McDonalds to M&S and John Lewis. Discovery: The emerging pop-up and street food trends reflects the artisan and exotic trends currently reshaping the restaurant scene providing a sense of discovery craved for by consumers. This could develop into larger brands being views as stale and less edgy and adding additional pressure on constantly refreshing menu designs. This trend is one that a few restaurants are experimenting including SSP which has embraced the concept with its new Junction Urban Street Food offering at London’s Euston Station. Craft beer renaissance: Craft beers and ciders are enjoying a renaissance with a resurgence of brewpubs, wine sales have flattened out and packaged beer and craft beer sales are now growing. As an indication The Society of Independent Brewer reports that production among its members grew to 2,993 thousand HL in 2014 – a 74% increase in five years. BrewDog’s Crowdfunding phenomenon raising £25m and valuing itself at circa £300m (reported in the press to be 100 times earnings), SABMiller’s acquisition of London-based Meantime and Fullers investment in pizza and cider concept, The Stable, are all examples of the trend. Millennials and Discovery: Street food, pop-ups, exotic fusion – the pace of change is swift with the millennial/social media generation preferring newer ‘discovery’ formats and eschewing the old. A development to watch as the younger Generation Y perhaps start to reject the old corporate image in favour of the aspiring independents.