That sinking feeling: Have we reached Peak Restaurant?

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Drinks: Drinks
Location: England
Other: Venues

With rising costs, economic uncertainty and more eateries competing for less consumer spend, 2017 is looking like the end of the glory years. Have we finally passed Peak Restaurant, asks Chris Losh?


Ever had a feeling that perhaps you missed the peak time to sell something? That by holding out for a better offer or chancing your arm a bit you ended up costing yourself money? Well if so, you can only imagine how the team at Ed’s Easy Diner feel.

In 2015 the business was on the market for £90m. Just over a year later, in October 2016, after a spell in administration it was offloaded to Giraffe for just shy of £9m.

The story of Ed’s is one of over-expansion, over-confidence and over-reaching; of breakneck boom followed by cataclysmic bust. The sheer speed at which it happened might be extraordinary, but in its sorry morality tale, many are seeing this as the shape of the UK dining-out scene for the next couple of years.

Simon Chaplin, head of restaurants for commercial property agent, Christie + Co believes that the market is cooling off. ‘Ed’s Easy Diner is the first sign of a crack in casual dining growth,’ he told Imbibe. ‘There may be one or two groups [in 2017]who crumble.’

So let’s ask the question. Have we, after half a dozen years of solid – and occasionally frenetic – growth, reached Peak Restaurant?

‘I think so,’ says Charlie Young of the Vinoteca group of wine bars. ‘It’s not that it’s going to break – it’s actually breaking. We’re starting to see casualties.’

One high-profile example is no other than Jamie Oliver, who announced the closure of six of his 42 Jamie’s Italian eateries in the UK in January, citing tough trading conditions and ‘post Brexit uncertainty’. He almost certainly won’t be the last.

Closure catalysts
So what’s causing the problems? There are several major factors outside the control of the hospitality industry – rent and rate rises and, yes, Brexit – for instance. We’ll come to those in more detail later. But one of the most obvious issues has been the sheer number of openings.

From Scotland to the West Country, everyone I contacted for this article agreed that there were probably more restaurants in their city now than the population could reasonably support.

‘Places are starting to close,’ said Bristol restaurateur, Kate Hawkings. ‘It’s not that fewer people are going out, it’s that more places are opening at an unbelievable speed. There are so many now that you rarely eat at the same one twice.’

Some of this boom has been driven by a combination of historically low interest rates, and subdued rents. After the last financial meltdown in 2008, many businesses were struggling and, to protect their income, most landlords dropped their rent to safeguard what they had. A reduced income is, after all, better than an empty building.

These rents stayed low for several years. And indeed, for businesses that had the chutzpah to start out then, it was a great time. ‘We were picking up property for nothing,’ says Will Beckett of Hawksmoor. ‘No-one wanted it. That seems like a completely different age.’

Indeed it does. Rent rises have been significant pretty much across the country, but particularly in the hot-spots of the South-East. When I spoke to the director of one small group he told me that the rent on their Soho site is rising this year from £120K to £200K. You need to sell an awful lot of wine to make up for that.

Some of these swingeing increases are a simple, if drastic, recorrection to several years of not moving much, but there are other factors at play, too. Equity groups are a growing influence in the restaurant world, pumping money into nascent groups that they like the look of and helping them to expand at breakneck speed.

Since these groups are a better risk financially, it means that landlords are more confident about pushing the rent up for them, which then inflates the costs for everybody else. You may think your landlord’s proposed rent increase is unfair, but if a tribunal can find a similar venue with an equivalent rent, you have little chance of a ruling in your favour.

One seasoned restaurateur told me that, historically, rent would typically be around 10% of a restaurant’s turnover – about the same as expected profit.

But in London, at least, rents for some establishments are now approaching 20% of turnover, more often than not swallowing up significant chunks of profit margin in the process.

We are, it seems, in the early stages of this new reality, where businesses are starting to lose money – sometimes big money. But it doesn’t necessarily mean that we will see an epidemic of closures. At least, not yet.

‘There are a lot of businesses that sort of stagger on,’ says Beckett. ‘The question is, how long is the period going to last where businesses are on the edge or landlords hang onto the big [negative]numbers? My guess is a little while longer.’

Rising rates

Depressingly, the increase in rents over the last few years has had a further negative impact: on business rates. The latter are set on a combination of rents and business for the previous period, and they tend to work some years behind the trend.

So the previous levels were set on the back of low rents and subdued business following the banking crisis of 2008. But the new levels coming in in April will be based on a more positive trading environment and also on higher rents. One restaurateur has described the increase as ‘eye-watering’.

‘If it was just rent increases, that would be manageable,’ says Young, ‘but you’ve got a perfect storm. The living wage has pushed prices up, business rates are going up 20%, the crash of the pound is pushing costs up, and all of it leads to an increase in prices for the customer. Everything is going to cost more.’

The rent and rates increases are more of a factor in London – and, to a lesser extent, the South-East – than elsewhere in the country. Indeed, in Manchester, rent is barely an issue at all, once you move outside the A-list locations.

‘At the top end, the premiums flying around for space are ridiculous,’ says Simon Binns, What’s On editor for the Manchester Evening News. ’But the independent sector that operates just below that and is prepared to take a gamble on a more fringe location are the ones who are often doing the more interesting things.’

Manchester has seen a lot of redevelopment of once moribund areas, and developers have typically been happy to offer peppercorn rents to restaurants, since they attract customers to the area. But as redevelopment reaches saturation point, such sweetheart deals have become less common.

‘The sheer volume of openings in Manchester means that competition is harder than it ever was,’ says Binns.

Burger & Lobster’s failure has been the most obvious example, but some observers think that Ibérica’s numbers are down as well in a city not exactly short of Spanish restaurants.

‘When people are struggling it’s not rate rises that get cited, it’s lack of customers,’ says Binns. ‘There’s been a huge explosion in the number of bars and restaurants opening in Manchester, but there hasn’t been that much growth in how many people live here.’

A similar basic supply and demand issue is likely to play itself out in Edinburgh. The redevelopment of St Andrews Square, a stone’s throw from Princes Street, has generated something of a feeding frenzy, with 10 new restaurants opening including the likes of Drake & Morgan, Wahaca and Dishoom.

‘When it’s festival time, or Christmas party season, it’s fine, but in the quieter months I think it could be quite tough for some operators,’ says David Hall, MD for Innis & Gunn Retail. ‘A lot of places are going to struggle. You really have to fight hard for every customer now, because there’s so much choice.’

Rents are reckoned to have gone up 25% in the city over the last couple of years, and this, combined with increased competition and finite demand is likely to cause problems. Rather like in London, Hall believes that restaurants will be hurting throughout 2017, but we may not see the actual effects until next year.

‘Into 2018 we will see pain for some operators,’ says Hall. ‘Even now you can see some who have paid a lot of money, and have a big rent but who don’t have a good customer base at all.’

Problems ahead
If rent and rates, and supply and demand vary from region to region and city to city, there are two other factors that are going to have a significant impact on restaurateurs across the country: Brexit and the National Living Wage.

The latter is due to rise by £0.30 an hour, to £7.50 for any staff over the age of 25. It looks insignificant, but is, in fact, a 12% pay rise. It would be a hard-hearted employer who begrudged that to some of the lowest-paid workers in the country. But it will add yet more pain to businesses who must be looking at the ‘debit’ column of their accounts with growing alarm.

As for Brexit… it remains rather like Churchill’s description of Russia: ‘a riddle wrapped in a mystery inside an enigma.’ Nobody, including the people tasked with negotiating our withdrawal, seems to have any idea where we might be in two years’ time.

What is true, however, is that the weakening of the pound compared to the euro and the dollar has instantly made an awful lot of raw goods 10-20% more expensive. Many merchants refrained from passing on price rises to their customers in the autumn, choosing instead to tough it out through Christmas. But the coming spring wine lists are unlikely to make pretty reading for restaurants looking for a bargain – particularly at the lower end.

That £5 wine that you managed to get on the list at £18, for instance, is suddenly going to be £6 – and on sale, probably, at well over £20. Those responsible for putting together wine lists will need the touch of a jeweller to balance the demands of accountants and consumers.

Perhaps more worryingly is the impact that any economic slowdown might have on the overall economy – and, by association, the health of the on-trade. Economists have been consistent in saying that the impact of Brexit will not be felt until this year. And once cost of living rises start to filter through to consumers, eating out is typically one of the first expenditures to be cut.

In 2017, it seems, restaurants are being assailed on all sides. They are facing rising rent, rates and wages, increased competition, higher prices and continuing economic uncertainty.

Have we passed Peak Restaurant? The information suggests that we have. The question is how far and how fast we will tumble down the other side, and what lies at the bottom.


Going down?
Restaurateurs give their opinion on what we can expect from the next few years

‘We’ve been through a boom phase when lots of people did well, and everybody could survive as a restaurant. Now we’re getting to a stage where it’s a bit more winners-and-losers.’ Will Beckett, Hawksmoor

‘There are no signs that the number of openings in Manchester is going to slow down, but we will see an increase in closures, because the market will balance itself out. Good restaurants don’t close – only bad ones.’ Simon Binns, What’s On editor, Manchester Evening News

‘Pressure is coming from all sides. It’s going to make it tough. If you’re not hitting good food sales,
some businesses are really going to struggle.’ David Hall, Innis & Gunn Retail

‘All our wine prices are going up, but you can’t pass that on, so margins are being squeezed.’
Kate Hawkings, Bells Diner

‘Business rates bring you nothing. They’re simply a tax on what you do.’ Martin Lam, consultant

 

‘The National Living Wage had to go up, and I’m a supporter of it, but the Government is going to have to give businesses some sort of break. They cannot simply continually expect small- and medium-sized enterprises to act as scapegoats.’ Stuart McCluskey, The Bon Vivant

About Author

Chris Losh

After five years working on My Weekly magazine (during which time he learned how to write horoscopes and make things out of mince) in 1995 Chris Losh entered the world of drinks writing and, despite all advice from his doctor – and the wishes of most South African winemakers – has stayed there ever since. He began on Wine and Spirit International, editing it for several years before moving on to edit Wine Magazine. Both publications have since gone the way of the Dodo, but he claims to have nothing to do with their demise, and his alibi appears solid, since he was freelance writing for anyone who would pay him at the time. In 2007, he helped to set up both Imbibe magazine and the Sommelier Wine Awards, and has spent much of the last three years eating, drinking, and listening to French sommeliers talk about minerality. In 2009 he was shortlisted for the Louis Roederer Feature Writer of the Year, but didn’t win. Perhaps he should have stuck to horoscopes. And mince.

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