As we settle into 2024, we are certainly seeing a divergent restaurant sector with three directions of travel. There are those businesses that, despite everything, have continued to meet budget, grow like-for-like covers (the real mark of success – not like-for-like sales), retained and incentivised great staff, controlled margin and are delivering 20%-plus Ebitda conversion. I am ignoring competitive socialising businesses – they are on a different planet.

 

These businesses are the best of breed, top of the class and generally have a strong culture, great founders and are not yet too big (ie: less than 30 sites). If we are going to see private equity deals in 2024, it will be these businesses that will transact, as interest rates tail off, allowing banks back into the sector. I am seeing evidence already that the sector focused investors are moving. I am also seeing non-private equity investors and a new class of purchasers emerging, including trade buyers, platforms, family offices and interest from the Middle East, so I predict we will see some new names emerge in 2024.

 

We are also seeing concepts that have become too big, are suffering under the burden of debt from the Coronavirus Business Interruption Loan Scheme (CBILS) with its punishing interest rates, and trying to manage exposure to unprofitable sites. Closing non-performing sites will be critical to these businesses, as will be a desperately needed interest rate cut and some business rates relief. With low single digit Ebitda conversion and pressure on margin, without positive actions and decisive leadership, these businesses are at risk of not being able to arrest their decline as putting prices up is no longer realistic as the cost-of-living crisis recedes. These businesses will need to raise capital and right-size to turn things around.

 

The super challenged area of the market contains the small independents and those that have become too big to succeed. We are starting to see heartfelt closure announcements by founders and owners who can do no more and who are forced to give up the good fight or incur the possibility of personal liability for wrongful trading. To have navigated the market since 2020 to fail now must be heart-breaking. There are distressed investors waiting in the wings to pick up good businesses that simply got into trouble, but a pre-pack administration sale is value destructive for founders and their investors, so it’s never a great outcome for the stakeholders.

Some of these businesses have been propped up by furlough, CBILS and Future Fund loans, but they are on a terminal direction of travel, and I predict that while the banks will nudge some to close/sell up, it will be HM Revenue & Customs (HMRC) that will lower the sword of Damocles on these businesses as it is no longer prepared (if it ever was) to allow VAT monies to fund working capital. The slightly positive thing is that, as always, wonderful new concepts will emerge from the ashes and jobs are aplenty, so if we can get the strikes under control, there may be some great news stories in 2024, alongside some sad ones.

 

After the “service charge” scandals of a few years ago, where it appeared some restaurant groups were propping up their Ebitda figures with large proportions of the service charge pot collected at point of sale, none of which was going to the staff, it became clear there was a large disconnect between what the public thought was happening (ie: the service charge added to the bill was a tip that should go 100% to the staff – US style); what the industry thought (ie: the service charge allows us to keep menu prices lower and in return we ask for a contribution at the meal’s end); and what HMRC thought (ie: these funds need to be taxed in some way, shape or form, and if it goes directly to the staff via an independent strong system, the company gets an employers National Insurance contributions saving).

 

Whether rightly or wrongly, the government took the side of the public – possibly without fully understanding the complexities of the issue. This is complex, and having dealt with literally hundreds of restaurant groups in my career, not one of them has the same approach to tipping and service charge. Some retain all the service charge for the house but pay their staff generously. Others allow almost 100% to be run through the tronc system to effectively “top up” the staff pay. Others take anywhere between 2% to 20% to administer the tronc system while others say that the service charge generates so much cash that if they passed it all on to the staff, they would be paid well more than junior doctors.

 

Some of the conversions I am having at the moment range between “we’ve been doing this for years, what is the fuss” to “we might have to reduce the service charge to ensure our staff are not overpaid”! I urge all of you in the sector who operate a tronc system to read the draft code and pass on your comments.

One comment I would make is that if you are running any business, particularly one based around hospitality being delivered to the public – where your staff are at the coal face, touching tables, making people happy, being ambassadors for your business and embodying your culture – then ensuring they are well paid and better paid might affect your financial performance in the short term but should build a better long term business, allowing higher retention rates, leading to promotions from within and greater cohesion to your operation. However, if your business relies on the service charge to make a profit, then losing this could be critical to ongoing survival or drastically affect the value of your business.

January, the month of maximum alt-alc action. What am I going on about now? I’m getting fed up by the variety of terms used to denote no and low-alcohol drinks, so I’ve invented my own. It’s based on the Portman Group’s use of “alcohol alternatives”, which seems to me to convey more accurately what’s going on here.

We’re not talking about soft drinks. These are products that have been deliberately created to mimic full strength alcohol, and to deliver some of the experience of drinking without the risk of getting drunk. This raises interesting anthropological questions about why this is necessary, and why drinking cola or orange juice on a night out isn’t the same. It throws up questions, too, for public health. Can alt-alcs make a significant contribution to reducing alcohol harm? Is that really what they’re there for?

Some, as I’ve mentioned in a previous column, believe alt-alc is merely a ruse on the part of the industry to get us to drink more alcohol, and to make sure that doesn’t happen, the Portman Group has intervened this week with some new “alcohol alternatives” guidance for producers and marketers. Sensibly, it defines alcohol alternatives as drinks with an ABV of 0.5% and below. The UK government still hasn’t sorted out the official definitions, and until it does, it’s right that everyone else gets on with this one.

Crucially, it states that alt-alcs that share branding with an alcoholic drink should not be considered cross-promotional, on condition it’s made clear that it’s 0.5% or below. This rejects any notion that alt-alcs are only there to help sell full-strength brands. The Portman Group is more concerned that these products, like regular alcohol, are not marketed at under-18s, which again seems sensible and, perhaps more controversially, recommends that no suggestion is made that alt-alcs may be consumed during pregnancy.

It also says these drinks “should not insinuate that sobriety or choosing not to drink in a situation is dull or questionable”. In other words, not imply there’s an association between alcohol and social or sexual success. We’ll have to see how this works out in practice, but the guidance seems to me to comprise a useful clarification for producers.

Also this week, the Sheffield Addictions Research Group (SARG) published a monitoring report on the no and low-alcohol sector in the UK, intended to be the first in an annual series. Its overview of the market shows 10% of adults drink alt-alcs at least weekly, which amounts to a significant proportion of pub and bar customers who will order them regularly.

And, importantly, it’s heavier drinkers who are more likely to consume them. This counters a suspicion that the market is mostly among light and non-drinkers, which wouldn’t make much of an impact on health and confirms industry observations that people are mixing alt-alcs with full strength drinks during the course of a session, or week, actively managing their alcohol consumption.

Still, SARG is concerned that alt-alcs are too expensive, often costing more than alcoholic equivalents and deterring “deprived households” that might benefit from a switch. At the same time though, it notes that the average price of “no/low drinks” is decreasing in real terms. This would make sense. There’s a lot of upfront costs for producers in building alt-alc facilities and finding out what works in the market. As time goes on, those costs should reduce.

Competition is growing too. As SARG says, big producers dominate the shelves and taps, but already this year, dedicated low alcohol brewer Drop Bear has opened its new brewery in Swansea, and Mash Gang, which brews craft alt-alc at multiple locations, has secured investment for expansion. Both bring a sexy edge to a market that’s suffered in the past from being no more than a default, distress purchase for many. 

Staying on the beer, which accounts for 80% of alt-alc sales in the on-trade, Big Drop is another brand that continues to innovate and grow, while family brewer Adnams is quietly establishing its 0.5% Ghost Ship ale as an alternative that’s highly regarded among those who know their beer. It’s flying in its own estate and beyond, driven by its availability on draught.

Quality is, of course, key. And while there are too many duds out there, alt-alc beers, at any rate, are improving all the time. That means more choice, more styles and more flavours. Pub and bar operators are generally playing a cautious game, understandably given the limits on taps and shelf space. But it could be that this year is the time to take a gamble. These are early days for alt-alc. It’s still only January.

Seated at the expansive bar counter of the new Irish Exit bar in Moynihan Train Hall in mid-town Manhattan in New York City, early evening was a joyous experience in what is undoubtedly one of the best station bars or pubs I’ve encountered during my travels.

 

With around 250 covers, it is a pretty extensive space, but the sight lines are broken up to give a more intimate feeling to the venue that sits on the concourse of the station, surrounded by an array of food vendors. Anyone interested in train travel will recall those old school wall-mounted train timetables that continuously flick over when the train times need refreshing.

Irish Exit has a couple of those placed above the central bar area that flick up little known facts about Ireland, along with the updated train times. There is something very comforting to this flickering sound, and among other things, I learnt that three million pints of Guinness are brewed in Dublin every day.

 

There are also some innovative aspects such as QR codes on the tables that suggest you have “one for the road – the train can wait”, while other signage recommends you take away a “pint of plain for the train”. There was also a sign that summed up the bar – “drink like the Irish – exit with a smile”.

 

Amid all its professionalism and clever little touches, Irish Exit is, at heart, an Irish bar, and there is something unique about that proposition that is not quite replicated by other bars and drinking cultures. New York is undoubtedly the home of the Irish bar outside of Ireland, and the guys running Irish Exit have some great form because they previously created The Dead Rabbit pub in Lower Manhattan in 2013, and by only 2016 it was awarded with the acclaimed title of “Best Bar in the World”.

The place is very slick and a world away from the Irish pub that I visited in north London just before my New York trip. PJ O’Connor’s sits near Wood Green underground station and looks very much like the bulk of the New York Irish bars that you find scattered across the city, and in every other city in the world, in reality

Its frosted glass gives no indication of what to expect, which can be quite intimidating, as my wife informed me. But on entering the compact venue, there was a warmth in the welcome as it revealed itself to have that quintessential character of an Irish bar. It’s never just about the Guinness, or the horse racing on the TVs, or the cheese and onion Tayto’s crisps. It’s something else.  

 

On my visit to The Devonshire in Soho recently – which has rapidly established a reputation as one of London’s best Irish bars – the much-lauded landlord Oisin Rogers informed me that it’s all about the craic. I first came across this when travelling to Ireland for the horse racing many years ago, and I found upon investigation that it is “a term for news, gossip, fun, entertainment and enjoyable conversation, particularly prominent in Ireland”. It could undoubtedly encompass other factors, but I reckon we all know it when we see it or feel it. 

 

It is very much synonymous with the pub. When recent newspaper reports highlighted a man in Ireland who had drank 81 pints across the three days of new year, he suggested he’d embarked on this odd activity simply for the craic. It’s a slightly nebulous definition – similar to terroir, I’d suggest – meaning we can all very much take from it what we like.

For me, it is not about downing 81 pints. It is instead about my understanding that the Irish bar, wherever it might be – whether it’s Wood Green High Street or in mid-town Manhattan – will be a place that delivers something unique and welcoming. It sounds simple, but is clearly not that easy, because every hospitality business would do exactly that it if could.