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Morning Briefing for pub, restaurant and food wervice operators

Fri 29th Nov 2013 - Friday Opinion
Subjects: Pub closures, London restaurant differentiation and the alcohol reality gap
Authors: Richard Negus, Andrew Buchanan and Paul Chase

Pub closures: Too many or too few? by Andrew Buchanan

The issue of pub closures is one that refuses to go away. After the publication of the latest, hard-hitting closure numbers from CGA, it remains a hot topic on the news agenda and a constant source of debate on social media channels, with the main thrust of the argument centred on the spin put on the statistics. Although there can be little dispute over the accuracy of the figures, there are, as always, two sides to the story. One side of the argument presents the free-of-tie and market rent solution as the magic pill, whereas the counter argument maintains that just as many free-of-tie pubs close as tied houses. The one certainty is that the reasons for pub closures vary enormously, and this needs to be looked at on a case-by-case basis. Closures are not all the fault of either inept operators or greedy landlords squeezing the profit like blood from a stone, but a whole range of contributory factors that can lead to the eventual demise of a pub.

When a pub is close to closure there are clearly instances where traditional tied models do not work, and thinking differently, such as working with micro-brewers on a semi-tied basis, continuing to drive down the cost of entry for genuinely talented operators and looking at different ways to cut the profit cake, can revitalise a pub. All can be done within a tied model if you try hard enough. Equally, not every pub closure should be seen as a death-nail. How many blue collar areas can genuinely support five or six pubs within a quarter mile radius since the demise of heavy industry, the birth of the 42-inch television and 30 years of zero price inflation in the off-trade? How many rural pubs are simply too small to get enough covers through the door or pints across the bar to drive enough revenue?

Pubs are cash-hungry beasts and can take a great deal of feeding, and sometimes the commercial reality is only too clear. Dare I even suggest that the option of a restrictive covenant in areas of extremely high density is not a step too far? Statutory bodies are not without blame. How many “marginal pubs” are there where the local authority takes more profit than the operator and landlord combined and seems very happy to see a pub close before any sign of rate relief. In many instances, closed pubs become another valued community asset. Look at closed pubs formerly in our own estate and you will now see a hardware store, a builder’s yard and an ice-cream parlour. Local areas change over time, so it should be no surprise to see the pub scene change too.

The past 30 years has seen as much change in the way we use pubs and socialise than at any time since the opening chapter of Pete Brown’s fantastic book Man walks into a Pub. The shift in drinking at home rather than out of home is all too well-documented. The dramatic rise in the casual dining sector is a further indication of the shift in the way our customers think of and use the hospitality sector. Some of these factors are unquestionably responsible for pub closures, but they also give opportunity. In our own backyard, Manchester has seen an explosion of fantastic new pub, bar and restaurant openings and we have begun to work with operators in different ways to accommodate their needs. The growth of the craft beer category is fuelling a lot of this enthusiasm and vitality and that will unquestionably make its way into suburban markets.

For me, the issue is not the scale of pub closures, but that every option is considered and some effort put into finding a solution before the doors are shut. Sometimes that take patience – we have opened three pubs this year that have each been closed for a year or more. More importantly, what happens with the ones that are left. To the good folks looking for a way to spend their hard-earned and ever decreasing disposable income, ours is a very simple business. Sometimes the basics are completely overlooked. Clean pubs where the beer is cold, the food is hot and the welcome is warm continue to thrive and very rarely close. Give people a reason to come and they will.
Andrew Buchanan is a director of pub operations at Thwaites

Differentiation in the London restaurant scene by Richard Negus

British 13: Rest of the World 42. Not the latest World Cup football result, but the variety of cuisines in some of London’s 55 new restaurants opened during the past three months. 

Peruvian dishes, German specialities, mozzarella, ramen, hotdogs and champagne, ceviche, steak, burgers, pizza, smokehouse, fish and chips, are just some of the menu centrepieces on which new restaurants have been founded in the capital.

So what is behind the gastronomic expansion and what, if any, new trends are emerging in the restaurant sector? As someone who specialises in buying and selling restaurants nationwide, here is my property perspective on the changing London restaurant market.

It should come as no surprise that we are dining out more. Londoners (according to Zagat) now eat out on average 3.7 times every week, which is an increase on the previous year and a statistic that has been rising year on year, despite recent economic woes. In addition, more tourists are coming to London: according to the 2013 International Passenger Survey, July experienced a 23% increase in tourism. Accordingly, restaurateurs have been prospering and expanding to capitalise on increasing consumer demand.

The success of London’s restaurant market has seen not only an expansion of established operators, but also an influx of foreign investment and restaurateurs, forcing rents and premium values to record levels, particularly as newcomers seek “trophy sites” to promote their intended brand expansion. 

However, the restaurant market is a fickle one and as customers have become more knowledgeable and discerning about food (as a result of foreign travel, a plethora of television cookery programmes and improved public awareness of food and health), so the public have become more adventurous and demanding of restaurants. As a result, restaurateurs have had to adapt and move with the market, improving their product and looking for “gaps” to provide alternative food offerings to mainstream restaurants. The outcome of the increased competition is that London is able to boast a wealth and variety of restaurants second to no other capital city in the world.

With competition so strong among operators, the restaurant recipe for success is differentiation: to be able to offer something truly exceptional by way of menu, ambience, service, quality, value, or a combination of some or all of these. 

As with all property, location is a critical factor for restaurateurs, and while the likes of Covent Garden, Soho and the West End remain traditional hot spots for operators, relatively new dining destinations have become established beyond “Zone 1”, as restaurateurs have opened in locations that were, for many years, no-go areas for non-residents, Shoreditch being a good example of this. 

High-footfall and high-profile properties do not benefit all restaurant types, and a growing number of independent restaurateurs are seeking secondary locations, off the main roads, providing customers with a degree of mystery and a sense of exclusivity. 

In respect of accommodation, the UK restaurant market remains dominated by leasehold properties, and this is unlikely to change, as restaurateurs prefer to employ capital more effectively in restaurant development rather than property ownership. Restaurateurs tend to require much longer leases (20 to 25 years) than retailers, so that owners can depreciate their higher (comparative to retailers) fit-out costs over the length of the lease. Moreover, the long leases, increasing rents and proven restaurant tenants are attractive to landlords seeking tenant security and rental growth, hence landlords’ keenness to accommodate restaurateurs.

 In terms of restaurant space, the vast majority of multiple restaurateurs (such as Prezzo, PizzaExpress, Café Rouge, Nando’s, and so on) look to provide circa 100 customer seats (covers), which typically equates to a total area of around 3,500 sq ft (including back of house and ancillary areas). There are obvious exceptions to this, and some operators will seek accommodation with more than 200 covers, while generally the independent restaurateurs will work with much smaller space (much cheaper overheads and requiring less financial investment), that is, around 2,000 sq ft, which provides around 60 covers. Having said that, the spectrum of the 55 recent restaurant openings ran from a ten-cover establishment to one with 250 covers. 

Finding 3,500 sq ft in central London is no easy task and strong demand has forced operators to be flexible over basement and first floor trading. Demand for prime restaurant space has caused rents and premiums to increase to record levels. During the past 12 months, rents in prime locations have increased to what very roughly equates to circa £1,000 to £1,500 per cover and premiums as high as £10,000 to 15,000 per cover (for the benefit of the leasehold interest and trade contents). For many traditional restaurants, the increased competition has driven rents to unaffordable levels and forced owners to sell up and relocate. Accordingly, some of the UK’s historic national restaurant brands are being forced out of London.

Restaurant design and ambience has become ever more important, particularly with regard to differentiating the offer from the competition. The current trend with “fast casual” operators, while difficult to generalise, is for a “minimalist” or “urban” look and feel. The successful restaurateurs are letting the food and service do the talking, a feat which is much more difficult to achieve than overdeveloping a restaurant’s design.

In a sector where more than 50% of new restaurants fail, there seems to be no shortage of newcomers to the market, and where supply is limited by planning and licensing restrictions, there is likely to continue to be a shortage of supply in central London; all of which means that the strong competition will ensure that London’s restaurant market remains the best in the world. 
Richard Negus is a partner with agent AG&G

The gap between perception and reality by Paul Chase

I am reminded whenever I attend a conference that features a discussion about alcohol, public health or the licensing system, just what a gap there is between perception and reality. And at this time of year I find myself attending many such events. Having listened to a recent presentation from a Home Office official telling us how EMROs and the late night levy were necessary to "rebalance" the Licensing Act, and to some of the answers given by an ACPO representative in a Q&A session, this gap was really driven home to me. Both of these sessions took place at the Institute of Licensing National Training Event in Birmingham – a three-day session with excellent content and presentations.

I think it frustrates all of us that the licensed retail sector continues to be seen through the prism of the problems of the night-time economy, as if these problems were the be-all and end-all of the entire sector. For example, the aforementioned ACPO representative said that in his opinion, alcohol-related disorder and drunkenness in the night-time economy were getting worse, even though the Home Office official on the panel said they were getting better. And then we came on to a discussion about EMROs and the late night levy. The ACPO representative questioned whether these were workable in their present form. It turned out that what he meant was, "Can we get them in place given the extent of pushback from the trade?" He went so far as to say that the fact that the trade had a "fighting fund" to resist EMROs was immoral! Why? Because “Parliament has spoken.”

But did he listen to what Parliament said when it spoke, I asked? Because what it said was, there should be a consultation on the introduction of an EMRO at which all parties were able to present their views. All the trade is doing is putting aside money to ensure it is represented in the best possible way and that the process of consultation is properly conformed with. His response to that was that these matters should not be decided on the basis of who has the most money to spend on lawyers. An EMRO consultation is like a trial: a trial of the issues. Trials produce winners and losers. The winners are happy, the losers are unhappy. But if losers confuse the quality of the arguers with the quality of the argument, then there is a name for that: sour grapes.

And this leads me on to another gap: the one between those that see alcohol as a substance that causes all kinds of problems, and those that see alcohol as facilitating a hugely enjoyable social experience that enhances the quality of life and contributes to the economy. An EMRO consultation involves a clash between these two perceptions. On the one side are the police and the health lobby, who recite the problems; on the other side is the trade, who point out the economic benefits to the high street and the night-time economy in terms of job creation, vibrancy and gross value added. EMROs threaten that delicate balance of interwoven prosperity.

The really interesting thing about the EMRO battles is that when given the opportunity to weigh the balance between these two concerns, councillors, to their credit, see the maintenance of trade and jobs as outweighing the regulators’ concerns and deny the EMRO application. This is the real significance of comments about the immorality of the trade response. If only councillors were not exposed to both sides of the argument, the police could get their way. Oh, if only we lived in a police state, regulation would be so much easier – they would tell us what to do and we would have to do it!

All credit to the ALMR for creating the fighting fund and for ensuring that a proper, democratic debate takes place. After all, Parliament has spoken!
Paul Chase is a director of CPL Training and a leading commentator on on-trade alcohol policy

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