The view so far - leisure and hospitality sector 2017

The market is essentially flat in terms of sales growth but with inflation continuing to rise and wage growth stagnating, worries over spending levels are increasing. In addition to weak sales, operators across the country are feeling the impact of rising wages, business rates and food costs.

At the beginning of the year we made some predictions about the leisure and hospitality landscape in 2017. 

A renaissance of ‘Best of British’ and seasonal menus

With cost increases due to foreign exchange fluctuations and the continuing consumer trend for British produce we predicted a surge in British ingredients and drinks hitting menus and on-trade. 

We’ve seen a massive increase in demand for artisan-produced goods. The UK’s 'gin boom' has led to increases in the number of distilleries, with sales hitting the £1bn mark in 2017. Strong demand for craft beers continues to fuel growth in the number of breweries and micro-breweries. Millennials are increasingly demanding a wider range of home-produced beers and spirits.  This love of all things British has not though extended to the humble avocado with sales up 184 per cent over the past five years. Operators need to leverage this trend to benefit from lower input costs and millennial ‘Craft’ focused wallets.

Homogenisation of prime rental areas

We foresaw that increased property costs would push small, independent operators to off pitch sites.

Competition for space in main city centre areas has seen rent and premiums rise to unprecedented levels, forcing smaller, independent brands further out of town. We’ve yet to see any significant reductions in premiums for prime sites, despite some larger operators initiating selective site disposal programmes and others scaling back their roll-out plans.

As trading conditions get tougher landlords will have to reduce their expectations. Operators and landlords must be innovative in how they work together to create spaces that provide great customer experiences and encourage footfall. 

The return of vouchers (but not as we know them)

Consumers are spoilt for choice and operators need to drive loyalty. We predicted that this trend would lead to the widespread return of discounting.

The level of discounting is increasing and third-party discount apps are becoming more popular. Currently O2 priority moments offers deals with well-known casual dining operators and start-up Meal Pal provides quick pick up lunches for less than £5. Many operators have invested in loyalty clubs including cards and apps that provide rewards, VIP offers and prizes. Operators need to continually evolve with technology to truly understand their customers and what motivates them to keep coming back. 

Operators fight back against delivery

At the beginning of 2017 we saw early signs that some of the larger operators would seek to regain control from the delivery giants to protect their brand and build stronger relationships with their customers. Whilst some have tried, the likes of Deliveroo, Just Eat and Uber Eats continue to dominate. In recognition of consumer complaints that quality is not always maintained, new entrants such as Supper in London have arrived, looking to take a slice of the delivery pie.

More failures and restructurings

Banks have generally been supportive thus far although the rebasing of previously agreed covenants, albeit after more intense negotiations, is becoming all too common. With cost pressures continuing to rise and competition intensifying, we expect banks to begin to put further pressure on operators to cut back expansion plans or divest a greater number of under-performing sites.

A cut in VAT

We continue to speculate whether the government could be forced to undertake some form of fiscal stimulus to generate short term demand – a cut in VAT worked post-Lehman.

Such a move would be welcomed by many as consumer confidence begins to fall against the backdrop of increasing political and economic uncertainty. The British Hospitality Association continues to push for a reduction in the UK rate of tourism VAT to 5 per cent although we don’t expect to see any changes during the Brexit negotiation period.

Less PE investment, more consolidation

We predicted increased private equity (PE) scepticism of underlying UK market growth and that overseas’ PE or firms would seize the opportunity of a weakened pound to increase investment into the UK food and drink sector.

So far this year we’ve seen limited sector consolidation and only four PE deals completed compared to 17 throughout 2016, pointing to a real softening of M&A appetite in the UK food and drink sector. 

There have been some high profile investments from overseas PE, such as Switzerland-based Spice’s investment in Leon and US-based TSG’s investment in BrewDog but not the volume we were expecting. Whilst we expect to see some notable deals in the second half of the year, deal volumes are likely to remain depressed as investors take account of fading consumer confidence and ever growing margin pressures.

For more information please contact Paul Newman, or your usual RSM contact.