Duff & Phelps

2019 set to bring further pain to struggling UK restaurant sector

The pressures of Brexit, economic uncertainty and declining consumer confidence pile up challenges for restaurant chains.
[one-third-first]After a turbulent year in the UK restaurant sector, 2019 seems unlikely to bring much hope for a turnaround in the industry’s fortunes, with multiple economic factors and an over-saturated market continuing to put pressure on revenues and consumer spending. However, Jimmy Saunders, Director at Duff & Phelps, suggests that restaurant businesses that maintain their focus on quality, expand through demand-driven and organic growth, and invest in their infrastructure to meet the growing popularity of online orders, will likely stand a much better chance of having a successful 2019.[/one-third-first]

[one-third]Saunders commented: “We are seeing a number of fundamental issues disrupting the restaurant sector, but Brexit is the largest issue looming on the horizon. While the vote to leave the EU may have been cited by some business owners as a primary cause of failure, it is unlikely that it has led directly to the collapse of many restaurant businesses. Rather more likely is that economic concerns and general uncertainty, among both business owners and consumers, is leading to declining consumer spending – a trend that is almost certain to sharpen in the lead up to Britain’s departure from the EU.
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[one-third]“The more tangible impact of Brexit on the restaurant trade is the availability of staff. EU citizens make up a significant proportion of restaurant staff, and trade body UK Hospitality has already expressed concerns that a significant reduction in EU migrant workers will severely impact staffing levels in the sector. Again, this is only likely to worsen in the run-up to, and after, Brexit. Add in rising wage costs due to the uplift in the national minimum wage and it is clear that staffing will be one of the biggest headaches of 2019 for restaurant operators.”[/one-third]

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While Brexit presents an immediate challenge to the restaurant sector, 2019 may see a re-balancing in the rapid expansion of mid-market chains. In recent years, private equity firms have been investing in smaller chains, significantly building up their footprint while cutting costs to exit within 3 – 5 years at a profit. This practice has seen many chains over-expanding, opening restaurants in areas that do not have the footfall to support a number of chain restaurants, while cost-cutting drives have reduced the quality of ingredients and overall experience for customers.

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A number of popular chains that expanded rapidly in recent years have already begun reducing their footprint, many through CVAs, and this may prove to be a common feature of the UK restaurant market in 2019.

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Saunders continued: “One of the key developments in 2019 is likely to be the increasing impact online delivery services will have on the restaurant market. While these platforms are expanding restaurants’ potential customer base, restaurants must adjust their business models to absorb the 20-25% commission that these online services charge, as well as the loss in alcohol sales. In 2019, we may see more and more ‘dark kitchens’ where restaurant owners operate facilities that are just kitchens, with no space for diners, as a means to meet the demand from online delivery services.

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[one-third-first]“It’s not just online delivery services that are changing the restaurant game. The growth of social media platforms like Instagram have encouraged many restaurants to spend significant sums on their interiors, branding and other elements to provide that ‘Insta-friendly’ look. However, these high costs can place additional strain on the debt servicing costs of a new restaurant. In addition to rising wage and food costs, a restaurant that targets the young, social media-savvy market may find it has to refresh its look regularly to keep pace with rapidly changing trends, further increasing costs.”
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[one-third]“Adjusting business models and investing in new premises to meet the demand of online orders can help operators to access new revenue streams. The key is market analysis; operators need to understand the local market and recognise that rolling out mediocre offerings is not going to drive footfall. With declining discretionary spending, consumers are more likely to spend money on a special experience and make it count. A restaurant business that sees organic growth, driven by demand, without losing its focus on quality, should have a real chance of succeeding through 2019 and the broader economic challenges that the UK faces,” Saunders concluded.
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