Restaurant growth is up, but turbulent times lie ahead

A challenging period of market correction looms, however, until demand better aligns with supply, MCA analysis reveals.

MCA’s UK Market Restaurant report finds independent restaurants, typically neighbourhood restaurants serving ethnic cuisine, make up 68% of restaurant sales and 84% of outlets, accounting for £13.5bn in sales, yet remain in decline as brands expand, and cost pressures come to bear

Branded restaurants, despite significant presence and awareness, are actually a relatively small part of the market, accounting for £5.7bn of sales, which is 28% of market sales, and 15% of outlets. These brands have been growing in outlet numbers and turnover, but at a more subdued rate than previously.

Despite the headline figures, MCA warned the restaurant market faces turbulent times as consumer, competitive and economic headwinds intensify.

Simon Stenning, executive director of MCA, said: “Significant headwinds are building up in the Restaurant market from declining consumer visit frequencies, rising cost pressures and concerns from over-expansion.

“These are combining to depress profit margins and usher in a challenging period of market correction or rebalance until demand better aligns with supply.

“Operators are going to be severely tested as growth will increasingly depend on brand management, menu development and driving existing store performance.

“As new space sales contributions diminish, the test of a true operator will be how they optimise the levers of sales growth.

“These levers include targeted pricing, encouraging trading up, effective use of promotions & upselling, and developing delivery.

“Successful operators are able to push through customer spend increases above inflationary rates, without compromising recognition of value for money, undermining food quality, taste or their advocacy ratings.

“Those operators proving most adept at skilfully optimising the key levers of sales growth will emerge fitter and stronger, with profitability and reputations enhanced.”

The warning comes as it was revealed seven of the ten leading brands saw operating margins by reported turnover drop in 2016.

MCA expects profit margins to continue to decrease in 2017-18, as cost pressures intensify and demand remains subdued.

Branded restaurants are expected to see continued subdued growth over the next few years, with turnover growth predicted for 2017-2020F at c4.3% per year, down from c5.6% between 2014-2017E.

This growth will be driven more by same-store sales and less by physical expansion, as outlet growth is forecast to drop to 1.2% per year from 3.0%.

MCA expects restaurant operators will need to achieve like-for-like growth of 2.5-3% over the next few years to retain profit levels.

Stenning added: “This will be tough for many, given recent comparatives of 1%, and operators with undifferentiated offers, dated menus and lower calibre management will be most at risk in increasingly turbulent times.”