Is the Restaurant Sector Struggling with Hunger Pains?

The dine-at-home market is growing rapidly as demand for ready-to-eat delivered food is increasing ten times faster than dine-out, according to NPD Group.1 Due to this, the UK restaurant sector is facing major disruption.

Read Upside - Autumn 2018

Technology has offered growth that didn’t exist several years ago through online and app-driven channels. However, this growth has caused disruption in the restaurant sector, presenting challenges and often requiring capital investment when businesses face many other cash flow pressures.

Inflation in the UK continues to run at around 3%, levels not seen since 2012, driving food and beverage prices up at a time when consumer confidence levels are still showing a downward trend. Real wages have contracted for ten years now, the longest period of contraction since the 1860’s,2 and whilst customers put choice and convenience high on the menu, value will always be a key decision-making factor.

Labor costs continue to rise as national minimum wage increases are implemented; for example, as of April 2018, 21-year-olds receive £7.38 p/h, up from £6.50 just three years ago, an increase of 14%.3

The hospitality sector maintains a large proportion of staff on zero-hour contracts, which, given the recent spotlight, makes them vulnerable as at least one major political party has pledged to ban the contracts outright.

Outrage over business rates has been grabbing headlines for years, underscored by the recent slew of businesses with a high street presence being restructured, whether via Administration or Company Voluntary Arrangement, or even being wound down. Although this year’s Consumer Price Index is going to set business rates, pegging against the Retail Price Index, property costs are increasing significantly just at the time when customers demand more value for their money. The trifold squeeze on margin is coming from revenue, costs and overheads.

In the new economy, commissions payable to online food ordering platforms are typically in the range of 20% to 25% of the order value.4 Taken with the loss of wet sales associated with delivered food, these commissions fundamentally alter the business model and owners must adapt to this.

Traditionally, the capacity of a kitchen only needed to account for the number of in-house covers. Now, with online orders coming in at the same time, a kitchen must cater for in-house covers and delivery orders, creating capacity and staffing challenges.

As a result, the property market is changing. We see landlords and restaurateurs with access to delivery agents moving away from dine-in customers, as they look to maximize kitchen space and reduce underutilized dining space in their properties. Properties with a larger kitchen capacity or one which can be extended to meet the demand for take-away are now attracting a premium.

The online home delivery market will continue to evolve, and we already see certain aggregators operating ‘dark kitchens,’ servicing only online delivery orders to try to keep up with demand. This follows the ‘dark store’ model operated by some supermarkets as they first transitioned into online grocery sales. At the moment, smaller operators do not have the scale or capital to do this themselves, much as independent grocers couldn’t compete with larger supermarkets; however, the difference is that aggregators are presently applying this model in conjunction with existing branded restaurant chains.

It is only a matter of time before the aggregators look to take additional margin by creating quality, white-label offerings to match branded restaurant food. Making their own products is risky, but it also presents opportunities for the aggregators to exercise more control over output and reputation. Supermarkets are a prime example of how quickly the private label has caught up with name brands over recent years.

The food delivery market is expected to grow by 17% in value over the next two years, meaning it could be worth close to £5bn by 2020,5 according to market analyst NPD. While disposable incomes may be flat, people are increasingly looking to spend their cash on experiences, including dining at a restaurant or at home via delivery.

The restaurant sector is going through a period of sustained change. Operators will need to balance the day-to-day cash flows in a challenging market against securing the vital capital investment required to shape the business for the future. Our UK Restructuring Advisory team is uniquely positioned to advise the industry and stakeholders, whether this involves securing the right investment for the business, managing creditors through a transitional period or providing restructuring/solvency advice.

Sources:
1 https://www.theguardian.com/lifeandstyle/2017/mar/03/restaurant-takeaway-delivery-boom-uk-deliveroo-ubereats-food
2 https://www.thetimes.co.uk/article/wages-rise-faster-than-inflation-to-end-squeeze-on-incomes-k92t9qq28
3 https://www.gov.uk/national-minimum-wage-rates
4 https://www.quora.com/What-is-the-business-model-of-online-food-ordering-websites
5 https://www.npdgroup.co.uk/wps/portal/npd/uk/news/press-releases/the-unstoppable-rise-of-the-takeaway-delivery-phenomenon-means-the-market-is-now-worth-4-2-billion-up-73-in-a-decade/

 

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