It’s been a tumultuous year for the casual dining sector. Restaurant chains including Jamie’s Italian, Prezzo, Strada, Carluccio’s and Byron Burger are all closing outlets as competition, over-expansion, increased rents and rates and higher wage costs all take their toll.
However, while some chains are struggling and have been forced to streamline their portfolios, others are still on the expansion trail. So what makes a successful restaurant chain in this difficult market? And which brands are still expanding?
The food and beverage (F&B) sector experienced a boom in the years after the financial crisis as the growing trend for eating out coincided with the failure of several retail chains, which enabled restaurateurs to take units as landlords sought to fill voids.
“There were big floods of investment in restaurants. Restaurateurs were signing up to big rents and big service charges,” says Camilla Topham, co-director of specialist retail and restaurant consultancy Distrkt, adding that they were “signing up to terms that were squeezing” their operating margins.
This period of “overbidding” and “committing to bigger rents” than had previously been the norm has now stopped but, as Mark Calder, director of central London restaurants and leisure at CBRE, points out, many chains are still operating from large, high-rent premises that are no longer sustainable in this market.
What’s most important are value, taste, quality, experience and authenticity
Camilla Topham, Distrkt
The current state of the sector has not come as a complete surprise. Calder says that “it has seen such growth in the last 20 years; we were due a drop”.
As Shelley Sandzer director Ted Schama puts it: “We had one good party, but no party lasts forever.”
The party might be over but not all restaurant chains are in retreat. Local Data Company (LDC) research shows that while 684 restaurants have closed since December 2017, 551 new restaurants have opened.
Clearly, there is still appetite for expansion but restaurant operators that are continuing to grow in this challenging market will be mindful of the pitfalls struggling chains have fallen into.
As well as market pressures, some put the closure of chain restaurants down to loss of authenticity through over-expansion. What many restaurant operators appear to have realised is that, in order to be successful, they need to retain their USP.
What is “most important,” according to Topham, are “value, taste, quality, experience and authenticity”, citing The Ivy as an example of a brand that upholds these characteristics. She says it is “expanding impressively” and that by ensuring each restaurant has an individual feel, “it does not feel like you are in a faceless chain”.
The Ivy is also in the premium dining category, which Kate Taylor, director of development and London estate at Davis Coffer Lyons, says is “growing at a tremendous rate”.
She argues that a successful restaurant or chain needs to occupy a niche and offer more than just good food in order to prevent consumers going elsewhere for a similar meal at a lower price point or ordering from food delivery companies such as Just Eat and Deliveroo to replicate the dining experience at home.
One example of a brand that she says has found its niche is Grind, an all-day restaurant concept that specialises in coffee-based cocktails. The company has recently opened in a unit formerly let to Jamie’s Italian in Greenwich. It also operates restaurants in Covent Garden, London Bridge and Clerkenwell in London as well as Exmouth in Devon and is looking for new sites.
Another example is Loungers, which owns the Lounges and Cosy Club chains of family-friendly all-day restaurants whose concepts are based on providing the comforts of home. The group is set to operate 140 sites by the end of this year and has identified the potential for up to 500 sites nationwide. According to Calder, it achieved sales growth of 6% in the 12 months to April 2018 “by having a sensible expansion plan and by taking the right sites at the right time”.
But it is not just premium, niche and experiential brands that are performing well. Although the casual dining chains have been the worst hit, some, such as Tortilla, are still going strong. Since launching in 2007, it has opened 36 branches in the UK, is due to open a restaurant in Cambridge next year and hopes to open at least six additional sites next year and more thereafter. Although Tortilla’s chief executive, Richard Morris, will not divulge the locations, he says there are a number of sites already in the pipeline. “CVAs are playing into our hands,” he says. “It means we have more choice of locations.”
Wagamama is another example of a casual dining chain that is performing well. It claimed in its financial results for the year to 29 April 2018 that it had traded consistently ahead of its competitors for more than four years.
In the 12 months to April – in which it opened seven new UK sites to reach a total of 143 restaurants – Wagamama’s UK like-for-like sales grew 7.4% and its turnover grew by 14.9% to £293.3m. Its strong performance has not gone unnoticed. Last month, the company’s shareholders approved a £550m takeover of the chain by Restaurant Group.
Taylor says Wagamama has become an established brand and has responded to consumer demands with “consistent, well-executed products”.
Its continuing success could also be down to type of cuisine. According to LDC data, 291 Asian-cuisine restaurants opened in the UK in the last 12 months – an 11.1% increase since December 2017 - making Asian food one of the fastest growing categories.
“A pad thai spring roll is something that is understood now – it does not bamboozle the customer as it might have done a decade ago,” says Shelley Sandzer’s Schama.
One of the Asian operators on the expansion trail is Japanese steakhouse Benihana, which is looking for sites of between 3,500 and 7,000 sq ft in regional cities including Edinburgh, Manchester and Oxford. Taiwanese dumpling concept Din Tai Fung has also broken into the market. It currently operates from a 9,000 sq ft unit in Covent Garden and has secured a second restaurant at Centre Point.
Another example is Bombay-style café Dishoom, which has five restaurants in London and has recently launched in Edinburgh and Manchester. “Asian cuisine has a lot of space to expand,” says Distrkt’s Topham. “The surface has only just been scratched.”
Burger outlets, on the other hand, may have reached saturation point. “The cake has been cut, perhaps too many times to be sustainable,” says Schama.
There are, however, winners and losers in every category and Five Guys appears to be one of the winners. It is among the top 10 fastest-growing restaurant chains, having grown its portfolio by 10.3% in the last year, according to the LDC. Schama notes that both Patty and Bun and Honest Burgers are also looking to expand – both have requirements for units of between 1,500 sq ft and 2,000 sq ft and are aiming to open a minimum of five restaurants a year over the next five years. They are primarily targeting central London but, says Schama, may also consider “cosmopolitan commuter towns and cities” such as Brighton.
As for pizza restaurants, they remain popular, but increasing competition is hurting some of the more established brands such as Pizza Express. CBRE’s Calder says: “Pizza used to be dominated by Pizza Express. Now, there are so many options to have great pizza at a more affordable price – it’s taken a hit because of that.”
The challenges affecting the food and beverage sector are many. As well as increased competition and rising costs, the prospect of Brexit is also having an impact – and not only because the sector relies heavily on a European workforce. The uncertainty surrounding the UK’s exit from the EU has hit restaurateurs’ confidence, according to Distrkt co-founder Michael Webb, who says that while operators are attempting to predict the aftermath of Brexit, “it’s crystal-ball stuff”.
As a result, he says, some operators are holding off until a decision is reached because they believe they will get better deals post Brexit.
‘Not too aggressive’
Tortilla’s Morris says he is“keen to open new sites” but will avoid taking risks. We’re “not being too aggressive because of the uncertainty of Brexit”, he says.
It does not appear to have had an impact on international restaurant groups entering the UK, however. “That has been at a similar level for the last five years, if not longer,” says Calder.
London, in particular, remains attractive. Topham says the capital “is a leading city, which is buoyant, a safe place and safeguarded with legislation” and thus represents “a good investment”. International occupiers are committed to finding space in London, primarily in hot spots such as Covent Garden, Soho and Shoreditch, she says, adding that “Asia sees London as cheap at the moment”.
Pizza used to be dominated by Pizza Express. Now, there are so many options – it’s taken a hit because of that
Mark Calder, CBRE
According to Taylor, while there is still demand, “requirements have scaled back a bit”. While occupiers were looking for an average of 2,500 sq ft to 3,000 sq ft a year ago, now they are looking for smaller units of 1,500 sq ft to 2,000 sq ft.
Schama says that the impact Brexit has had on the sector is not the same as that of a recession. “[Brexit] hasn’t made the average person nervous about how they spend their disposable income,” says Schama.
Although the climate is tough for restaurateurs and competition is strong, “when people start to make sacrifices, they might not move house, they might not buy a car, they might not take holidays, but they will still spend a few quid on a meal”.
It isn’t all doom and gloom for the sector then. In fact, by all accounts many restaurant chains appear to be in rude health. Yes, there are challenges, but the operators that respond to the market, expand sensibly and keep sight of their USP will be well placed to ride out the storm.