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Morning Briefing Strap Line
Fri 24th Jul 2015 - Friday Opinion
Subjects: Benchmarking the sector, the trends changing consumer behavior, over-egging the menu and political cross-dressing
Authors: Kate Nicholls, Claire Blampied, Glynn Davis and Paul Chase

Benchmarking the sector by Kate Nicholls

When we hold the annual seminar launching the latest round of the ALMR’s Benchmarking Report – the largest, most robust and most authoritative survey of its type in the sector – the first question I am always asked is, what has changed? And the answer this year is, surprisingly, an awful lot.

As the ALMR has grown and developed over the last nine years since we first started benchmarking KPIs in the sector, so the scale and range of businesses contributing their figures has also expanded – and this leads to some real cross-sector learnings. As our membership has changed, we’ve added in first nightclubs and now for the first time we have a separate set of analysis for casual dining operators.

I’m always fascinated to see the story emerging from the raw data provided to us by operators about the health of our industry and the way in which it is changing. With nine years worth of data to mine, there are really insightful trends to examine – turnover shifts and offer mix, plotting market trends and cost lines against the recession timeline and the erosion of differentials between market segments over time as costs and margins squeeze.

Trends which have not previously been obvious have suddenly crept up on us and emerged fully formed. Last year, this was clearly around the bottoming out of the wet-led decline and the fact that community locals were turning the corner. This year, it is all about food.

The emergence of food has been a truism for some time, but this year’s survey confirms its dominance. First, as the leading segment in the market – even looking just at pubs and excluding casual dining outlets it is well over a third of the market. Secondly, as the driver of turnover and trade across all market segments. This year’s survey showed a record proportion of turnover derived from food, at just under 30%, and, for wet-led, sales dropped dramatically to under two thirds of turnover (63%).

The other interesting theme to emerge from this survey relates to the high street. When we started the survey in 2007, the high street was synonymous with drinking – local authorities were still talking about high volume vertical drinking establishments, young people circuit bars. Their terminology and understanding has not changed, but out survey shows the outlets have – and dramatically.

In 2007, high street and town centre outlets had turnover mixes, cost levels and rents which mirrored community wet-led locals. This year’s survey shows that they have morphed over that period to look more like food-led pub restaurants. The only difference is that food led businesses have slightly higher payroll levels. What is really surprising is that it has also replaced the community local as the average pub in terms of our survey data – on costs, turnover mix and margins. It’s not just that the high street has become politically fashionable, it is the new normcore. And it is outperforming the market in almost every success metric – like-for-likes, investment, jobs and growth.

It has become a truism over our survey period that food-led businesses will outperform the market – and they are now joined by their high street counterparts, where informal and casual dining is as important as capturing the late-night market. These are genuinely hybrid outlets and they are playing a significant role in defining and evolving the UK’s eating and drinking-out market.

And when you analyse the separate information from casual dining restaurants, you can see that their KPIs are almost identical to that of pub food restaurants. The segments are far closer in financial terms than they might appear at first sight, but casual diners achieve far better margins. The two segments have much to learn from each other – and it is not just one way.

Like-for-like growth across the sector stood at 4.2% over the last year and while this is down slightly on the past two years, for the first time it was consistent across the sector – with only nightclubs and wine bars showing flat growth. Interestingly, coaching inns and food-led pubs achieved higher than average growth at 6% and 5.5% respectively. This was almost double the like-for-like growth achieved by casual dining operators at 3.2%

Over the past six years our survey has been recording detailed like-for-likes, food-led businesses have seen their turnover increase by 52%, high street businesses by 40% and community locals by just 29% – inflation ran at 18% over the same period. High street food-led pubs and casual dining are arguably the strongest aspect of a sector that has shown consolidation during tough economic times. The UK’s town centre and suburban retail and eating-out markets have undergone something of a renaissance over the past few years with casual dining brands at the heart of this growth. This year’s ALMR Benchmarking Report shows what a robust offer we have, and what an exciting time this is for eating-out.

There is also a note of caution in this year’s report. The cost of doing business has continued to rise as national and local authorities continue to burden retailers with prohibitive legislative costs. Operating costs associated with legislation now stand at a record high of 5.5% of turnover and premises costs, particularly driven by business rates, which jumped to 6.4% of turnover. Of course this seriously affects a business’s chances of succeeding and, in an increasingly competitive marketplace, the margin between success and failure for high street operators is thin.

This is where we come in. The ALMR’s Manifesto for jobs and growth in licensed hospitality sets out some of the principal ways in which national and local governments can encourage this diverse and lucrative part of our economy. We are lobbying the government to ensure a fair and flexible property market – tackling the competitive disadvantages in the business rates regime, commercial lease terms and rents which hold back high street investment. We want to reduce the unnecessary costs of doing business and encourage licensing officers and planners to have a positive regard to economic growth in their decisions. And finally, we want to see responsible operators who invest in their people and their property incentivised through tax credits.

The sector is well placed for further growth and our Benchmarking Survey shows that high street casual dining and food-led outlets are leading the way. If we can continue to impress upon government the need for flexibility and fairness, we look set to capitalise on this great work.
Kate Nicholls is chief executive of the Association of Licensed Multiple Retailers. The ALMR Benchmarking Report is produced in association with Christie + Co

The trends shaping consumer behaviour by Clare Blampied

The changing nature of work and the flexibility and freedom this brings is having an impact on daily routines, eating and spending habits. A total of £283bn is spent by consumers each year on food and drink, of which approximately a third goes to the out-of-home market. And that’s set to rise, as demand continues to grow and as operators recognise and respond to the key emerging trends. 

The research findings within our report Eating Out – Today and Tomorrow create some valuable signposts for the future of the market, identifying four key elements shaping consumer behaviour when eating out-of-home – time, place, individualism and mobile technologies. 

We all know that today’s consumers are increasingly demanding, expecting both food and service quality to be faultless and tailored to their own individual needs. The central changes to daily routines are illustrated by the changing nature of work; such that the traditional working day no longer dominates the frame as it once did – almost half of our 2,000 respondents reporting non-traditional working patterns. Today part-time work, full time shift patterns, flexible hours, contract work, on-demand work, self-employment and home working all serve to complicate the traditional picture of the working day.

The UK’s increasing passion towards food is driving consumers’ ever-higher expectations when it comes to eating out. In our research, 60% of consumers describe themselves as ‘passionate’ about food.

Our consumer choices play a key role in identity, particularly when it comes to food – it says something about who we are. As such we are significantly more demanding as consumers, increasingly expecting service delivered on our individual terms, making personalisation ever more important. It probably explains why we are far more comfortable in moving between segments than ever before. They may take one meal at a kiosk or street food stall, the next at a quick service restaurant, another at a casual dining outlet, while still others could be at a full service venue or at a fine dining destination. This mercurial behaviour is an essential component of today’s market, and it offers opportunities for those brands and outlets who can navigate this new ‘market map’ effectively, often by understanding and targeting the occasions or contexts driving the appeal of different offers.

Higher consumer expectations look set to continue. For example, tomorrow’s consumers are likely to demand both an optimum blend of authenticity, service and technology (technology would seem particularly important around the occasion logistics of identifying, booking, finding a place to eat, then, as has been well trailed in recent times, paying the bill).

While consumers favour technologies which make their dining experience quicker and easier, operators are still wrestling with the role of technology inside the venue. For example, there have been a number of high-profile restaurants from around the world introducing bans on mobile phone use, sometimes rewarding participants for their co-operation – demonstrating a clear preference for a mobile phone-free setting. This is clearly an extreme but it is clear that not everyone wishes to be glued to their handset whilst dining. At the other end of the spectrum is the growing interest in the possibilities of, for example, table-to-table communications.

And what makes it more difficult is that currently there are conflicting consumer opinions over a digital/mobile enabled environment (vs a tech-free eating space). Overall 37% of consumers would prefer a tech-free environment, three times as many as those who said they would prefer a tech-enabled one. Even among Generation Y (18-24s) there is similar ambivalence, with 32% saying yes to tech but also one in three against it.

As in so many aspects of the market, it is important for operators to really understand their customer base before pushing ahead with initiatives –  they have to navigate an increasingly complex picture. 
Clare Blampied is the Managing Director of Sacla’ UK. The Sacla’ insight and future trends report, called Eating Out – Today and Tomorrow, explores the key emerging trends and habits shaping eating out in the UK, and ever-evolving modern attitudes towards dining out. To obtain a free copy please email lauren@fsc.uk.com

What happens when menus over-egg it by Glynn Davis

When I was growing up in Yorkshire a breakfast out would sometimes involve a visit to the Golden Egg. This was one of the earliest brands from the restaurant chain gang, the Kaye family –  the clan who have set up numerous successful eating establishments.

What it did not just sell was golden eggs. But nowadays a restaurant opening with such a name is often perceived as a specialist in that particular food stuff. Taking such a focused route when I was young would have been unthinkable. It would have been suicide for the restaurateur.

The done thing was to provide an all-encompassing menu that catered for all tastes, whereby your target market was pretty much everybody –  from babes in arms to old folks in wheel chairs. No risk was taken in missing an opportunity to sell a meal.

Today things are radically different –  with disposable income on eating out a quantum leap above what it was 30 years ago and the frequency of eating out for the average person today would have only been matched by the most affluent during my youth.

This increased eating out as invariably led to the creation of ultra specialists. This has gone so far that when the Bad Egg Bar + Diner recently opened the expectation of its customers was that it simply sold egg-based dishes. This quickly led its chef/owner Neil Rankin to expand beyond offering only a normal level of eggs on his menu to there now being a dedicated section of the menu given over to the ingredient.

He had admitted to finding it rather irksome that the name he gave the restaurant has been dictating what he puts on the menu. But he is sufficiently financially savvy to recognise that it makes sense to provide what the majority of his customers seem to expect when they visit the restaurant.

This trend for ultra specialism has led to there being a growing number egg-focused eateries opening up in quick succession including Egg Break, Good Egg and (wait for it) the Poached Egg Bar. (Oh yes, we have even got down to having a restaurant that concentrates on only one way of cooking its eggs –  at 63 degrees for an hour if you are sufficiently interested).

Needless to say, much of this egg action centres on trendy parts of London. As has been the case with some of the other examples of the specialist trend. The Cereal Killer Cafe serves only –  you guessed it –  in myriad varieties. Not that much value-add there you might think but it seems to have survived the initial accusations that it was charging way too much for a bowl of puffed wheat and milk and is expanding to a second outlet.

We’ve also had the pop-up tinned fish restaurant, Tincan, where you got exactly what it said on the tin. Nobody was pulling your leg there, they were simply pulling the ring on the tin. There is also a place called Meatball.

But it is hard to see what mileage many of these places would have beyond the capital. Maybe the denizens of Manchester, Edinburgh, Leeds or Birmingham could accept some of this ultra specialism but to only limited extents surely. Some of the earlier examples have certainly found it tough expanding. Just Falafel was forced to close its UK outlets and I seem to recall a specialist rice restaurant –  alas no more.

There is also a renaissance taking place with fish & chips as a number of new stylish-looking players emerge offering only limited options beyond the core fish and chips and typical side dishes. Hummus Bros is continuing to grow and there are also a batch of limited-menu hot dog restaurants that are on the march such as Herman ze German and Top Dog. 

Which brings us to the big cousin of the hot dog –  burgers. The fast food industry has been built on the success of meat patties. The likes of McDonald’s was created upon its limited menu that helped with the simplicity of the operational processes involved. This then enabled ‘fast’ to be stuck in front of the word ‘food’ and it was able to deliver a whole industry and a new way of life for the world.

But hold on a minute, what exactly happened to these burger chains? Well, as they sought world domination they gradually expanded their menus to embrace chicken, ribs, and ice creams etcetera. Its salad days were arguably over when it added green leaves.

This has taken them very much away their original (very successful) remits. The desire to be all things to all people removed their USP with the result that they today battle with menu sprawl. The current management of McDonald’s is fighting hard to reduce the size of its ridiculously expansive menu and return the company to something a little closer to its original concise core menu.

The reality is that this is all undoubtedly part of the cyclical nature of the restaurant industry and who knows somewhere further down the line, just maybe, we will be discussing how the downfall of Bad Egg began when it added cereals to its menu and that Cereal Killer Cafe’s halcyon days ended when it began offering egg dishes.
Glynn Davies is leading commentor of retail trends

Political cross-dressing by Paul Chase

There’s no limit to the opportunism of politicians, and the extent to which George Osborne stole Labour’s clothes with the announcement of a new National Living Wage (NLW) is a case in point. To understand what is going on here we need to separate the economic arguments for government wage-fixing and tax credits for those in work, from the social justice arguments. In a free market economy the interplay between demand and supply should determine the price of all ‘factors of production’, including wages for labour. Government should only intervene to correct a ‘market failure’. The two most obvious forms of market failure arise from monopoly and monopsony power.

A ‘monopsony’ arises when employers dominate the labour market, sort of an employer equivalent of a monopoly. The economic argument is that a ‘monopsonist’ is able to hold wages below the market equilibrium, just like a monopolist would force prices above the market equilibrium. Thus labour is being exploited by the market power of an employer, or small group of employers. This ‘market failure’ justifies government intervention that puts a floor under wages.

But the idea that the UK’s national minimum wage (NMW) was introduced to combat employer buying power that was artificially holding down the level of wages for unskilled labour is ridiculous. The NMW was introduced in April 1999 and it raised the wages of workers who were largely unskilled or semi-skilled across a whole range of occupations, but it covered only 3% of the workforce. The justification for it was never an economic one, but a moral, social justice one. Put simply, the Labour government believed it was just wrong for people to be paid below a given, hourly rate. So the NMW was introduced in the name of social justice, not to correct a market failure of the type defined above.

So, when in addition to the NMW Gordon Brown introduced Working Tax Credits in April 2003, he didn’t do so to subsidise ‘low-pay employers’ who otherwise would suffer a labour shortage, but to subsidise low-pay employees in order to correct a failure of government policy, namely, the way in which the benefits system was distorting the labour market and creating a ‘why work’ culture. If the gap between receiving benefits for doing nothing, and what a worker on minimum wage would receive net of tax was too small, then workers in this position realised they were really working for the difference and it wasn’t worth it to them. Working tax credits were introduced to widen that gap – solve a government policy failure, not a market failure.

So, now the newly elected Tory Chancellor comes along and says that he too wants to make work pay, and that a new, compulsory national living wage is the way forward. Again, there is no economic justification for this; it is a social policy/social justice objective. That’s fine, but it isn’t immediately apparent to me why the burden for realising that social policy objective should fall disproportionately on employers –  who aren’t paying below the market equilibrium for labour and don’t operate as a monopsony.

And it’s not just where these policies start that’s important, but where they end up. I support the general thrust of policy towards reducing dependence on benefits, reducing the cost of them and thereby enabling tax cuts that benefit workers on low pay, but when the NLW is fully implemented in 2020 at approximately £9.35 an hour, then 20% of all employees in the UK will have their wages determined by a government quango, the Low Pay Commission. So, a social policy that aimed to protect a small group of low paid workers, just 3% of the workforce will, just over two decades later, have morphed into a policy that fixes the wages of 20% of the workforce. This same mission creep can be seen in the rising cost of working tax allowances: a cost of £1.1 billion in 2003; rising to £30 billion by 2014 precisely because working tax credits were linked to the minimum wage, which, over its lifetime, has exceeded both price and wage inflation. The consequence has been to create a ratchet-effect that has seen the cost of tax credits sky-rocket.

Currently the hospitality sector accounts for 26% of all minimum wage jobs, so the effect of creating a much higher rate of pay for those over 25 who will be subject to the new, compulsory living wage, is going to have a big impact on the sector, particularly on rented pubs where the net margins are small.

Personally, I would have preferred deeper spending cuts to fund bigger reductions in taxes. And a more radical reform of the tax system to harmonise income tax and national insurance. Also, raising the level at which employees start to pay NI towards the level of the income tax personal allowance would do more to help those on low pay than a compulsory NLW that will throw between 60,000 and 120,000 people out of work. We should bear in mind that an increase from £6.50 per hour to £9.35 per hour is a 43.8% rise over four years at a time when retail price inflation is virtually non-existent. This is preposterous. Budgets are high political drama, but they also have a habit of unravelling. If this particular measure doesn’t unravel then our sector will pay a very high price for the Chancellor’s political cross-dressing moment
Paul Chase is a director of CPL Training and a leading commentator on on-trade health and alcohol policy

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