The credit crunch will be tough on restaurants but it won’t lead to meltdown, was the positive message that Jeffrey Young, managing director of Allegra Strategies, told a room full of some of the UK’s top restaurant executives last month.
“The restaurant industry is facing a challenging trading environment,” he said. “There is definitely low consumer confidence, which is a big concern, but it is not doomsday out there. It is slow growth not shutdown mode.”
Young was speaking at Restaurant’s latest R100 meeting of the UK’s largest restaurant chains, held last month at Earls Court, where Allegra presented its UK Restaurant Leader Report. The report, which canvassed the views of more than 300 senior restaurant and food executives and 1,200 consumers, paints a clear picture of what restaurant owners will face over the coming years.
The findings reveal that while rising food and raw material costs, coupled with dwindling consumer spending, will undoubtedly hit the industry hard over the next few years there is an opportunity for companies able to respond to the changing climate to thrive. Chains that concentrated on service, value for money, better consistency and staff training, as well as food, could weather the credit crunch successfully, Young told delegates.
Current climate
With the financial markets in turmoil Allegra’s report indicates that restaurant owners are bracing themselves for the worst. Its findings show that more than 85 per cent of senior restaurant executives believe the trading environment to be more challenging than a year ago and, unsurprisingly maybe, that 97 per cent of respondents are concerned with the economic climate.
Rising food costs in particular are identified in the report as the biggest challenge facing the industry, just ahead of the credit crunch. “Inflated cost of raw ingredients and petrol are seriously affecting margins. These increases cannot be passed on as customers are not willing to accept price rises in such hard times,” according to the group executive chef at a fine dining restaurant group. “Disposable income is scarce at the moment and with the onset of further economic pressures, eating out will inevitably take a back seat with some consumers,” added the head of food development at a leading pub operator.
Rising costs are being managed primarily by negotiating fixed term contracts with suppliers, with 27 per cent of companies saying they have spoken to their suppliers about their contracts.
In addition, pub operators have been developing dishes using ingredients that haven’t risen so steeply in price while fine dining restaurants are sourcing alternative cuts of meat and fish, the report identifies.
Another major challenge restaurateurs face is a lack of funding, according to Allegra. Lack of access to capital was identified by 53 per cent of executives as the major limiting factor for growth over the next 18 months, followed by a rise in rent. “Most operations are finding it difficult to find the right site at the right price,” said Young.
Opportunities
Despite these challenges, there are plenty of opportunities for restaurants to turn the credit crunch to their advantage, the report shows. The most obvious strategy will be placing greater emphasis on service and value for money as well as the quality of food.
Offering a personal and engaging service is named as the most important aspect for restaurateurs in the research, followed by an innovative and exciting menu and value for money. “I am not surprised because as a frequent visitor to chains personal service is really the factor that makes the good ones stand out,” said Young.
Consistency and quality rather than quantity is also key; delivering a broad and varied food offer was named by only 6 per cent of owners as being critical to success. “More knowledgeable customers is by far the biggest change the industry has seen over the last five years and operators are honing in on service and re-engineering their menus,” said Young. “Consistency is very important. A restaurant won’t have to produce the most surprising dishes but consistency is vital.”
Staff retention
Those restaurants that will successfully survive the credit crunch will also have to tackle the issue of staff retention, which is highlighted in the report as being a particular concern for businesses.
Nearly 40 per cent of executives cite shortages of suitable staff as a major challenge facing the industry, with 16 per cent describing high staff turnover as a major issue. Most believe training to be the best way of retaining staff (66 per cent), followed by increasing wages (28 per cent) and providing incentives (22 per cent).
Those that can effectively train and retain their staff will not only be able to offer the heightened level of service the customer now requires but will be able to slash their expensive hiring and training budgets, said Young. “Training is the number one factor that the industry believes it needs to address. It will never solve the problem of turnover in restaurants, because that’s the nature of the beast, but it is something that the industry needs to tackle. People are looking for opportunities to develop their career and if you can help them to do so you will keep them longer.”
Companies are already reacting, with 66 per cent saying they train staff in an attempt to reduce turnover. Offering competitive wages and more incentives are also named as effective ways to reduce high turnover. “Increase wages, provide more training and opportunities for future development and more performance related bonuses,” was the tactic one group chief executive said he used to retain his staff.
Consumer habits
Changing consumer habits also identified in the report will give restaurateurs food for thought when developing future menus. Its findings show a resurgence of ‘Britishness’ in food tastes and a shift towards healthier eating, which Young said was likely to have a growing impact on out-of-home consumption. Its research shows an attempt by the public to consume more fruit and vegetables and reduce fat consumption and that restaurants are responding, with 82 per cent acknowledging the growing influence of healthy eating in their lives.
Thirty three per cent of operators see menus featuring more fresh and healthy foods in the next five years and 24 per cent believe there will also be a greater shift towards provenance and authenticity in restaurants, even in family-run establishments that up until now haven’t made much of a play towards provenance.
“I expect to see more fresh and healthy items on menus,” said one restaurant group. Another also predicted that menus in the future would carry “simpler dishes and healthier choices”.
The move towards helping customers lead healthier lifestyles is already under way. In March this year YO! Sushi become the first restaurant to adopt the Food Standard Agency’s traffic light nutrition labelling. The chain has produced a customer booklet that provides nutritional information for all of its dishes so that its customers can make informed decisions about what to order.
As such, healthy eating and organic concepts are predicted by the industry to grow the fastest in the next five years, followed by British food and seafood.
Fast food and Italian concepts are predicted to record the slowest growth. “We are going to see a lot more simple produce on the plate,” said Young.
Brands
Companies best placed to excel during the credit crunch are likely to be the mid-market branded chains that offer consistency and healthier options, the research indicates. And executives remain optimistic about the future.
More than half of the respondents believe that eating out of the home will increase over the next five years and many will continue to expand on the back of such optimism.
Young’s claim that the restaurant industry will continue to grow, albeit at a slower rate than previous years, is borne out by Allegra’s findings that 75 per cent of chain operators intend to open at least three sites in the next year, with 22 per cent of those planning to open more than 10 outlets. Of the respondents, 9 per cent will open more than 20 new sites next year.
Tragus, for example, has announced plans to open around 20 new sites in the next financial year and The Clapham House Group will open four more Gourmet Burger Kitchens and two The Real Greeks by the end of 2008. Savills, meanwhile, which owns brands such as Frankie & Benny’s and Chiquito, is reported to be opening around 30 sites next year and Pizza Express and ASK owner The Gondola Group is expected to open a total of 50 sites in 2009.
Fast casual concepts, in particular, will record the strongest growth, Young predicted. While Gordon Ramsay Holdings is named by executives as the most admired UK restaurant ‘brand’, the majority of companies in the top 10 are mid-market chains, including Wagamama at number two, Pizza Express at four, ASK at Seven and Nando’s at eight, demonstrating their powerful influence on the market.
Those tipped for future greatness in the report include Giraffe, Leon, Las Iguanas, The Real Greek, Ping Pong, The Bombay Bicycle Club and Byron.
Restaurants and gastropubs will grow to a lesser extent, however, with fine dining and fast food predicted to grow at a slower pace. Hotel dining is set to grow the slowest.
Ultimately, it won’t be as clean cut as that. Whether a fine dining establishment or a fast food chain, success or failure will depend not on the market in which a restaurant operates but on how it responds to changing consumer needs in a tougher trading climate. As Young said, “Innovation and creativity will be the most important competency over the next five years.”
Allegra Strategies UK Restaurant Leader Report & Consumer Research is based on in-depth interviews with 95 senior restaurant executives, 108 independent restaurant managers, 187 food and beverage executives and 1,200 consumers. allegra.co.uk.