Why overeating has led to overheating in the food and beverage property market

This morning those amongst you who watch BBC Breakfast might have noticed some LDC stats on the rise of the number of food and beverage outlets which was tied to numbers from LDF who have reported a 39.6% increase in the turnover of the UK restaurant industry.

The numbers are significant with a rise from £15.5bn to £21.6bn. So what has driven this rise? We know that consumer spend has been tight, the UK population has not increased significantly and property costs have continued to rise (be it in terms of utility costs, rents, business rates and fit out costs).

So is this growth sustainable, sensible and something that ultimately could lead to oversupply, price cutting and therefore fierce competitive headwinds which all will not survive?

The current growth in my view is not sustainable and is starting to mirror the ‘slow car crash’ that we have seen in the supermarket space. Forewarned is forearmed as investors in La Tasca and Tragus who exited the market last year will testify.

There are a number of new operators along with established operators all on this growth path. Names include Franco Manca, Chilangos, Wahaca, Honest Burgers, smashburger, Ed’s Diner, Bill’s, Frankie & Benny’s, Byron, Pizza Express, Prezzo, Five Guys, Tortilla, Nando’s ……….

So why do I think we have reached a critical point with this market?

The main reason is that I am starting to see supply outstrip demand as well as see fierce competition for locations which ultimately leads to over renting (i.e. over paying on their rent in order to secure space over a competitor).

Many existing and new food operators are talking of significant growth which in part is being driven by a very hot investment market that is very much growth driven. A typical model is to acquire a growing and popular small chain and then expand from say 5 outlets to 50 – and then sell it on the basis of the growth potential. The next owner then looks to double this number and then sell on again based on a growth agenda. At some point the steam runs out and someone is left with too many outlets which are not delivering the sales and profitability that they had modelled. This is not new as the cyclical nature of economics has shown us.

So where is my evidence of this potential ‘car crash’? Analysis of the LDC data gives me the evidence base to my thoughts above. At the top line the net increase in restaurants (this excludes coffee shops, fast food takeaway, sandwich shops, fish & chip shops etc) in the last 5 years has been +20% which is a net increase of 14,000 new restaurants across Great Britain.

To put this in context – Birmingham city centre has 1,600 retail and leisure units (including food and beverage outlets). Therefore the net increase in new restaurants equates to nearly 9 (8.75 to be precise) new Birmingham’s…just full of restaurants!

Some of the top growth restaurant types are below;

  • Restaurant – American (Burgers) 69% growth (+265 restaurants)
  • Restaurant  – Brasserie (e.g Brasserie Blanc) 60% growth (+266 outlets)
  • Restaurant – British (e.g. Bill’s) +16% (+144 outlets)
  • Restaurant – Brazilian +123% (+32 outlets)
  • Restaurant – Japanese +40% (+180 outlets)
  • Restaurant – Tex/Mex +52% (+133 outlets)
  • Restaurant – Portuguese (e./g Nandos) +42% (+113 outlets)
  • Restaurant – Turkish +48% (+126 outlets)
  • Italian, Chinese and Indian restaurants have also grown.

Regionally the East Midlands has seen 57% growth of Burger restaurants in last 12 months with Grantham, Newark, Towcester and other smaller places seeing increases in their burger offer.

So burgers lead the way at present and hopefully some of you might now see the reasoning for my concerns as this growth is unabated and no doubt people better than I can look at the health impact of such growth on the population!

What are your thoughts? Is this growth sustainable? Can the prime centre rents continue to grow as they are? Most of these restaurants, unlike shops, sign 25 year leases and on average spend £500,000 to £1,000,000 on fitting out these restaurants as experience, quality and volume are key to success!

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