From a mergers and acquisitions (M&A) perspective, the past 12 months have definitely represented a game of two halves. From this time last year, up to and including the late summer and early autumn, there were clearly some seismic business challenges in play within hospitality and leisure, not least supply chain, staffing and energy costs. Yet from a transacting standpoint, these headwinds represented challenges that could be navigated and overcome, and therefore were not necessarily barriers to deals, allowing some management teams and investors to start contemplating refinancing or possible exits. 

However, come the autumn, the market was derailed due to changed economic conditions triggered by the market fallout from the mini-Budget, which sparked rising interest rates, a softening of the debt market and the devaluation of sterling. There was a severe reduction in the availability and an increase in the cost of debt finance, which meant valuation expectations were unachievable and transaction activity stalled. 

If the ensuing winter weather (has it stopped raining since November?) helped to capture the prevailing mood for the sector’s dealmakers, the question is: will the eventual arrival of spring give way to new beginnings and a rebirth of activity? The reality is that despite the aforementioned challenges, and temporary hiatus, M&A activity and investment has and will continue, with some notable themes emerging. 

We have seen the return of the trade buyer, with examples including: Greene King’s acquisition of Hickory’s; Big Table Group’s capture of Banana Tree; and The Restaurant Group’s deal for Barburrito. At the same time, growth capital raises, the expansion of competitive socialising concepts and the roll out of franchising models and quick service restaurants (QSR) have continued (witness Chopstix and Tortilla alongside the big international players). 

Buyers in the marketplace also include operational real estate funds (such as Alchemy Partners with its investment in Brasserie Bar Co) and specialist private equity firms, which are long-term investors in the sector; the likes of Imbiba, Piper and TriSpan, the latter of which recently put the finishing touches on its deal for Mowgli. What we haven’t seen yet, and what we need to see to get the deal market back to previous levels of activity, is the return of mainstream private equity. This becomes more likely as the debt market recovers. 

Clearly, on a three-year view, a whirling maelstrom has enveloped the marketplace, creating change, challenge and also opportunity. If anything, this flux has accelerated in the past 12 months. These dynamics, which include unprecedented cost-base inflation as well as evolving consumer behaviour, such as new working patterns, mean that site economics have fundamentally changed. Business plans will need to reflect this new normal and operators, if they haven’t already, will be urgently assessing the potential to convert or dispose of marginal sites and any locations rendered unviable, which will drive further estate consolidation and churn.

With the current market uncertainty and volatility in mind, investors are increasingly seeking solace in robust data – supporting evidence is more important than ever when engaging with potential new backers. Front of mind is how does the business stack up to relevant, prevailing trends? Is the business providing both hospitality and an experience; is it getting ahead of the environmental, social and governance and responsible business agenda; is it a progressive employer with a coherent wellness and well-being strategy; is it tech-enabled and does it show up well online – does it “bang” on Instagram, and has it built a meaningful digital audience? 

Operationally, are the fundamentals credible and can the offer translate to different formats and channels? Financially, can projected business growth be backed up by data; and what is the profile of margin recovery, management’s understanding of its energy position, its debt position, its staff recruitment and retention plans, and the robustness of its supply chain? You get the idea.

Looking forward, we expect to see sustained investment in growth concepts, as highlighted by the recommended cash offer from Japan’s Toridoll for Fulham Shore, the Franco Manca and The Real Greek operator. The outlook will also likely include further strategic trade acquisitions, the continued expansion of QSR brands – both here and internationally – the participation of operational real estate investors in the sector plus the churn of larger company estates, more refinancing deals and (inevitably) restructuring-led transactions. 

The cadence of activity, though, will hinge on a recovery of the debt market, a concerted return of private equity to the sector more broadly (beyond the sector specialists), businesses being able to generate consistent profitability with growth, and some visibility on the inflationary outlook. 

With all this in mind, we believe there are four key areas of focus for operators this year. The first is the ability to evolve from a state of survival to one focused on growth and thriving in the new sector landscape; this will involve finding the inflection point in margins, the ability and readiness to capture market share following local closures, a continual focus on pricing and the flexibility to trial new ideas. 

Second, management teams must bring a determination to focus on growth, whether that is new sites, new channels, exploring franchise models, new brands or formats, or new territories – either regionally or internationally. 

Third, new opportunities can emerge from the creative use of real estate. Landlords are facing a challenge to repurpose their space away from retail and one of the growth areas for the use of space is leisure – see the growth of competitive socialising and activity concepts (like the backing of Gravity by the investment fund Sculptor). Operators can take advantage of this and secure attractive deals from landlords, particularly if they can demonstrate their proposition drives footfall to the particular location that can benefit others. There may be opportunities for hospitality and leisure operators to collaborate to provide a whole site or whole area solution for landlords. 

Finally, when it comes to refinancing, beware of the risks involved, especially as debt has become less predictable and more expensive. Any refinancing will require careful planning, and there should be a focus on having and exploring multiple options when it comes to this process. Don’t just assume that you will be able to get the same level of debt as the last time you refinanced and you should expect to have to explore broader sources of debt finance from banks to credit funds to make sure you can be successful.

Returning to football cliches, we anticipate another year of two halves, with the first half seeing an emergence from generationally high levels of inflation to more stable levels and the second likely to see transactions being completed in a more stable environment. 

We are already seeing processes starting to spool up to take advantage of increasing stability. As the market turns and the outlook brightens, fortune should favour the brave. In the end, investors committed to the sector will want to move fast and avoid missing out on the early recovery bounce. The question will be; are you in the right position to take advantage?

No beef, but…. 

It was one of those sudden spring days, the sun bursting out of a blue sky for a few hours before disappearing once more into the gloom. It would be a crime not to spend some time in its warmth, and it was Sunday, too. I thought I should take a wander across town, perhaps score a roast somewhere. I hadn’t done that in a while.

Sunshine slanted through the pub’s windows and conversations buzzed among the aromas of gravy and slightly scorched Yorkshires. They may not have a table. But in what was once called the public bar there were a few free, and only one topped by the tell-tale Toblerone “reserved” sign. Good.

While wating for the chap to pour my beer I was asked by two other staff whether I was being served. Impressive. 

“Will there be anything else?”

I asked for the roast beef, and he reached for one of those small pads and wrote down my order.

“Which table are you on?”

I pointed to the smallest, not wanting to take up unnecessary space.

“Have you booked?”

I hadn’t.

“I’m afraid we’re only doing bookings. Sorry about that,” he added as he scratched out my roast beef with a finality that felt like a punch to my rumbling solar plexus and pre-empted any protest.

I took my beer to the agonisingly free table and became immediately distracted by the particularly good-looking pint of Harvey’s Best topped with a deep head of crisp white foam. From here I could see the back of the pumps. No sparklers. Interesting.

I took a picture of my pint and started to compose a tweet. Perhaps I shouldn’t mention the sparkler thing. Too controversial. Instead, I expressed my annoyance at not being allowed to eat despite the empty tables. It had happened to me before and I understood why pubs do it, though they seem to do it more since the pandemic.

It does feel odd to be denied food when there’s a table in front of you, but, really, I had no beef, in either sense, so I didn’t include the name of the pub. That turned out to be the right decision. 

It began with a few “likes”, straws in the wind ahead of the coming Twitter storm. Within ten minutes I was being tweeted at from all directions, mostly by people I didn’t known with strong opinions. It went on into the night and into the next day. It became my most “successful” tweet. Clearly many were more bothered about my predicament than I was myself.

At one extreme I was urged never to set foot in such a rotten pub ever again. And in any case the business was doomed if it continued with such horrendous practices. At the other extreme I didn’t know what I was talking about. I should’ve booked like everyone else, no matter that I didn’t know I was going to end up at that pub.

And to be fair there were many useful contributions in-between, and as I replied to what I had to reply to, trying to dampen down the row, certain thoughts congealed.

Personally, having been in many pub kitchens and wondered how they could bring together all the elements of a Sunday roast in such cramped conditions, I could see the limit on lunches served may be determined not by how many tables you’ve got but by how much equipment and how many staff you can squeeze in back-of-house.

In a blinding revelation I realised these people eating sadistically in front of me had not, in reality, booked a table – they had booked a plate of food. This is the way to see it.

A growing awareness of food wastage could be another factor, and that’s a positive thing, though it also reflects increasing cost pressures. The pub in question, too, might have been caught out by the fine weather that attracted customers into the garden unexpectedly increasing the potential covers.

There was a time when pubs could serve Sunday’s leftovers the next day, as cold roast beef sandwiches and bubble-and-squeak. Delicious. But few pubs open on a Monday now.

These operational quirks, the stricter controls, seem to have become more embedded since the pandemic. In a way it reflects a growing professionalism, but I worry we’re losing something.

Pubs epitomise casual dining. It’s a different experience if you have to book. I want to be able to drop into a pub on a whim and have something to eat. That’s harder to do now on a Sunday, when demand often exceeds supply, and life feels a little poorer for it.

In case you care, by the time I got to the next pub it had run out of food, and the pub after that was closed, awaiting demolition. Never mind, though, there was a lasagne in the fridge.

In the world of restaurants, the United States have long ruled at internationalisation. Many wrongly think McDonald’s was the first international franchising player in the world of restaurants, but from my (limited) research, I discovered “Wimpy Bar” was probably the first to make its way across the Atlantic in 1954, with the first site in Coventry Street, London. KFC was before McDonald’s too, launching in Preston in 1965. In fact, McDonald’s first international store wasn’t until more than 20 years later in 1967 when it opened in Canada and it wasn’t until 1974 that it would first be welcomed to our shores with a location in Woolwich, south east London – where a Big Mac sold for 45p.

Since then, we’ve seen many big brand exports from the USA dominate the global market, mostly in the quick service restaurant space, and with a few casual dining players. UK operators venturing overseas has been much later and slower in comparison, but we are starting to see a growing footprint with some star players and emerging heroes.

One of the key challenges to UK brands going international has been the predominant focus on managed operations among UK players, which is very different from the US, where franchise is often the preferred method of growth, even from a small managed footprint. There are several factors behind this difference of strategies, foremost that the large distances and sheer scale of opportunity in the USA make it difficult to maximise a brand’s potential through an owned-and-operated model. There’s also a mature, decades old franchise infrastructure, network and experience that means there are hundreds, if not thousands, of experienced multi-site franchise operators ready and looking for new brands and opportunities. For anyone that knows the market well or has seen the movie The Founder, you’ll know there’s also a significant real estate play around franchising in the United States, where commercial real estate is often cheaper and opportunities for drive-thru and out-of-town locations easier to come by.

Back here in the UK and, more broadly, Europe, there has been a reluctance among private equity backers of the big brands to consider franchising, partially through the concern of losing control of brand standards, but also quite simply because their business model is earning a return on the deployment of large amounts of cash, which is what’s required to build a managed group. Chairing panels at the Global Restaurant Investment Forum, we heard this message time and time again. Coming out of the pandemic, we’ve noticed a “pivot” among some of these investors: seeing that borrowing is expensive, willingness to invest in the sector less appealing and with a tougher home market, they realise that franchising, and especially international franchising, could be the way to go. We’ve had many briefs over the past two years at THINK Hospitality, where people who admit themselves never to have considered the international opportunity are now proactively analysing the potential and even getting going with building out this side of their business.

If considering this channel, it’s worth noting that it’s not necessarily the easy golden goose that a casual analysis might suggest. Like any growth strategy it has its pros and cons. In the long term it can be a highly effective, investment-light approach to growing a brand with highly profitable cash rewards. However, for the successful franchisor there is a considerable upfront investment in legals, brokerage, building relationships, creating documentation and building a support team. For most brands this means you need to get to a significant scale of franchised stores before it becomes profitable. There is also the risk of the brand not delivering to your standards, franchisees not fulfilling their development agreement to build stores and reputational damage if things go wrong. Even some of the most successful franchisor brands we’ve worked with struggle with having got into bed with the wrong franchise partners, no matter how much due diligence they have done, with significant amounts of time, money and management resources subsequently being spent on damage control, corrective action and chasing royalty payments. 

Our learnings in this space is that it really is about doing your homework upfront, analysing the markets that best suit your brand with a professionalised base of franchisees that could take your brand and handle it well. Then really ensuring you build a strong relationship, realising that it takes more than contracts and manuals to build a fantastic franchise relationship. It takes a willingness to negotiate and listen, understanding where your brand can flex and where it cannot. It is also a numbers game in more than one way, as you need scale to generate a decent return, but also to ensure that you have enough high performing sites and great franchise relationships to outweigh the poor performers, non-payers, and bad relationships you will inevitably encounter.

Let’s look at some of the success stories of UK brands going international. The first that comes to mind is Wagamama, the lovechild of the UK casual dining industry for many years, whose crown may seemingly be slipping, but is still performing and growing internationally. Ask anyone who was involved in the very early days, and they’ll tell you it was probably too quick to franchise internationally and was very opportunistic to take up offers that came in from around the world, with sites as far afield as New Zealand (where I first experienced the brand in 2009), which is a long trip to audit a few sites. It subsequently brought in an international director who looked to take a more structured approach to international growth and to clean up the existing relationships.

The two big names in British coffee, Costa and Caffe Nero, have both done well overseas, through both franchising and joint ventures. Costa Coffee is now the second-largest coffeehouse chain in the world, with well over 1,000 units overseas, including nearly 500 in China. Since being acquired by Coca-Cola in 2019, it has continued its international expansion across Europe, Asia-Pacific, the Middle East and Africa; and in summer last year launched its first bricks and mortar store in the US, in Atlanta, Georgia, with a second location launching shortly after at a university in the city. Caffe Nero has grown internationally to Ireland, Sweden, Poland, Cyprus, Croatia, Turkey, the UAE, Oman and a larger footprint than Costa in the USA, with 36 stores, mostly centred around Boston. Meanwhile quick-growing challenger brand, Black Sheep Coffee, has US ambitions with one store already open in Dallas.

Jamie Oliver Restaurants is an interesting case, as to many in the UK, it no longer exists due to the closure of the UK operating business, but this celebrity chef-led brand has continued to grow at pace internationally with a multi-brand portfolio of concepts, beyond the Jamie’s Italian brand, including Jamie Oliver Kitchen, Jamie Oliver’s Pizzeria, Jamie Oliver’s Diner, Jamie’s Deli and The Jamie Oliver Cookery School. The brand will boast more than 90 sites across 24 countries by the end of this year, with recent announcement of a new franchise partnership in Germany and its Indian master franchisee, Dolomite Restaurants, announcing its intention to triple the estate and expand the footprint across the country.

A rather different UK-headquartered business is SSP Group, the FTSE 250 listed travel food caterer and concessions operator. The business operates in 35 countries all over the world, with Asia-Pacific being among its quickest growing markets. The business is focused on travel hubs, principally in airports and railway stations, with several owned brands as well as hundreds of franchised, both global and local heroes. To add local flavour to international line-ups, it has become champions at giving smaller, more independent brands an opportunity into airports – sometimes offering these local start-ups their first franchise opportunity.

At the premium-end of the market, there are many British celebrity and Michelin-starred chefs doing things on the international stage through franchise and license agreements, including Simon Rimmer, Jason Atherton and Tom Aitkens. In recent months, we’ve seen the launch of Atlantis The Royal Dubai, a huge statement hotel opening in a city that is already world leading for dining. Central to the restaurant line-up, two powerhouse names from the UK; Gordon Ramsay and Heston Blumenthal, who both have overseas presence. Ramsay also has a considerable footprint in the USA, with sites in Las Vegas doing numbers that would make any British operators eyes water.

One area that our American counterparts seem not to have been ahead of the game on was experiential leisure, with several British brands taking the lead in the market, including Swingers, which launched into New York City last year; Red Engine concept Flight Club launching in Perth, Australia; and State of Play Hospitality operating the Ace Bounce and Flight Club brands in the North American market.

It's not all plain sailing of course and there have been a fair number of failures on the international front, including many big brands you would assume would have the firepower to ensure success. You can point to Carluccio’s, which launched two restaurants in the US before closing them in 2017. Having been successful in launching into New York City, Pret struggled to get a foothold in other US cities, permanently closing 17 locations in Boston and Chicago pre-pandemic, although it is back on the international expansion trail in a big way now, with a newfound strategy of franchising.

While I’ve focused on licensing, franchising and joint ventures here, there is always the route of building directly managed operations overseas, which we’ve seen many restaurant groups succeed at too. In September 2021, Hawksmoor audaciously finally opened its doors in New York City to great acclaim, having had to push back opening several times during the pandemic. It’s recently announced its impending launch in Chicago, the home of the steakhouse, which I’m sure it will succeed equally well in. Pre Tao-Group acquisition, Hakassan was another fantastic example of a British brand making it big around the world, with nightclub and restaurant concepts.

In the coming months we’ll see The Alchemist open its first international location, in Berlin, with Kerb’s food hall following next year, and we’ve had announcements that celebrity cakemaker Peggy Porschen and affordable fine dining concept Six by Nico will soon enter the Middle East. In the press around the recent acquisition of Fulham Shore, internationalisation was also called out as a growth opportunity with a recent announcement of an upcoming Spanish site. It’s clear to see this is a growth strategy that is gaining in appeal. We are excited to see the continuation of British brands making it abroad and continue to help many of them in understanding the opportunity and making the move.

I recently saw an ad for the Google phone, driven by the idea of streamlining everyday activities onto one device: “You use Gmail, Google Maps and Google Chrome, why wouldn’t you do it all on a Google phone?”

The question seems a genuinely good one. When an easier option is on the table, why wouldn’t you choose change?

But instead of bringing about a break-up with my iPhone (sorry, Google), the ad made me think about change in the hospitality industry. In what is a really tough time for our sector, we need to make a conscious decision to take risks and do things differently. 

Take the labour shortage. Vacancies in the industry are 56% higher than pre-pandemic and businesses are being pushed to breaking point. This problem is intensified by the fact that productivity growth within the hospitality industry is fairly stagnant, with operators losing hours every day on manual tasks that could be automated. 

Making menu updates across multiple channels, for example, has become a huge time sink. 

It pains me when I hear operators explain the hours wasted hopping between accounts, tablets and platforms to make the same change multiple times. Operations are often forced to dedicate at least one full-time member of staff to oversee this – with some working through the night to keep up.

The problem grows exponentially with the size of the operation. With 15 locations, and your menu existing on your POS, online order channels and three separate delivery platforms, that’s 75 places to manually update one dish. 

It’s an unfathomable use of time when we simply don’t have any to spare.

These inefficient processes have been driven by necessity. The pandemic forced the industry to accelerate digital adoption and solve problems as soon as possible, causing us to over-rely on point solutions. These offer efficiency when taken as an isolated channel, but create fatally flawed workflows as a whole. 

There are solutions to this. But only if we choose to do things differently. We need to reflect on the way we do things to look for more efficient, scalable processes that will set us up for the future. 

We’re at a turning point where greater efficiency can be achieved if we can catch up with the strides we’ve made with digital innovation. For menu management, for instance, it’s now possible to move away from fragmented channel management. We can make updates once and simply push them out to all channels. By streamlining processes in this way, it’s possible to maximise productivity without growing the size of your teams.

I’m a strong believer that adopting a new way of thinking will solve the productivity crisis in hospitality. 

This is already happening in certain parts of the industry. Kiosk adoption, for example, has exploded in the last 12 months as operators have sought new ways to tackle the labour shortage. Just last month we saw record numbers of kiosk sales across our clients – with orders processed through kiosks up 68% on March 2022. One of our clients also saw three record weeks of sales after reimagining the ordering and food preparation process to increase productivity and throughput. 

This is the sort of thinking we need as an industry to be more resilient, profitable, and productive. After all, there’s literally no time to lose.