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Wed 8th Mar 2017 - Restaurant Group unveils strategy review, more focus on pubs and concessions
Restaurant Group unveils strategy review results as like-for-like decline 3.9%: The Restaurant Group is to grow its pubs and concession business whilst re-engineering its other key brands to make them more competitive. Its roll-out of leisure sites has been slowed down and £10m of cost savings have been identified for delivery in 2019. Total revenue was up 3.7% to £710.7m in the 53 weeks to 1 January 2017 whilst like-for-like sales down 3.9%. Adjusted profit before tax was down 11.2% to £77.1m. But there was an exceptional charge of £116.7m (H1 2016: £59.1m, H2 2016: £57.6m) primarily reflecting site closures, asset value impairments and provision for onerous leases. Statutory loss before tax was £39.5m (2015: statutory profit before tax £86.8m). Chief executive Andy McCue, said: “Having completed the strategic reviews of our brands, we are now pursuing a new and focused plan to turnaround and grow the business. TRG has significant scale advantages, a diverse portfolio of brands with strong brand awareness and is highly cash generative. However, there is much to change in our Leisure businesses to provide customers with better value and an improved experience while, at the same time, ensuring we continue to grow our Pubs and Concessions businesses. It will take time to effect the scale of change required and for customers to respond but I’m proud of how our colleagues are rising to the challenge.” The company added: “We expect 2017 to be a transitional year. We plan to address the competitiveness of our leisure businesses head-on, requiring investment in both price and proposition, as well as increased marketing spend to re-engage lapsed customers and attract new ones. We are focused on a volume-led turnaround which will take time as customers respond to the improvements we are making. Where initiatives prove successful, we will invest behind them in order to accelerate our progress.” Of its key brands and plans, it stated:

Frankie & Benny’s: The company stated: “We identified last year the key root causes of our decline: loss of value credentials, poor menu changes and lack of operational discipline which impacted the consistency of our offering. Initial trials of alternative value options indicate that, while a step in the right direction, simply correcting for past mistakes will be insufficient to recover our market share losses endured since 2013. Since then we have traded price over volume while competitors have improved their offer and consequently, we have lost customers who now need to be persuaded to revisit us and regain trust in an improved proposition. Our initial responses include: re-focusing our efforts on the core customer base of ‘families’ and those ‘out and about’; developing an improved customer proposition, more closely aligned to the requirements and preferences of these groups; launching a new weekday value menu at £9.95, the lowest price for five years, to be competitive during non-peak times, whilst improving the choice and quality of offering; reinstating some previously popular dishes; re-engineering and testing a new core menu in readiness for launch this month, which will offer our customers substantially better value. This menu is also easier for the guest to navigate and less complex in its delivery, enabling us to improve our consistency; and embarking on targeted promotional campaigns, over specific periods, to ensure we are competitive and delivering a compelling offer to the most value-conscious customer segments. Our improvement focus will be on restoring our value credentials, deepening the distinctiveness of our offer and investing in marketing to attract back lapsed customers.”

Chiquito’s: The company stated: “Chiquito’s brand positioning in the market is relatively weak. Compared to competitors, a narrow reach of potential customers are attracted to the brand. Customer research indicates Mexican cuisine and particularly its association with spice, can alienate some potential customers. For the customers that do visit us, their frequency of visit is the lowest of our competitor set, due in part to our value positioning as well as a relatively high proportion of visits being oriented around infrequent, special occasions such as celebrations. Separately Chiquito has, more recently, substantially underperformed the market. This decline has been driven by poor menu changes, a lack of value competitiveness, speed of service issues, as well as a softer market due to weaker cinema attendances. Taking learnings from recent menu trials, we have made improvements to the offer, having introduced a weekday value menu offering two courses for £10.95 and three courses for £14.95, with encouraging early participation rates. We have also tested a variety of promotional mechanics as we build an understanding of the response rates by campaign type, customer segment and versus competitor activity. We intend to broaden the appeal of the brand, making it accessible to a wider customer base. This will involve: a widened cuisine extending to, for example, Texan and Californian influences; providing customers with the option for greater customisation, including of fillings and spice levels; better value, delivered via an improved price architecture; a menu that is easier to understand and navigate; and reducing unnecessary complexity of dishes, facilitating quicker service and improved consistency. We will roll out the changes in a sample of restaurants to learn and optimise before implementing more widely. Later in the year, once the changes are widespread, we will invest in marketing behind the rejuvenated proposition”. 

Coast to Coast: The company stated: “Launched in 2011, Coast to Coast sites showed promising early trading, leading to an acceleration in the opening programme, peaking at 23 restaurants. However, since 2014 the business has suffered extreme declines in like-for-like sales. The brand positioning has become progressively more premium, which has been at odds with the typical customer missions when visiting out-of-town locations. As with our other Leisure brands, poor price and menu decisions have been made, although the extent of the changes within Coast to Coast have been more pronounced, with a corresponding impact on performance. We do, however, see an opportunity to re-position the brand towards a focus on steaks and burgers, both of which are growing market segments and yet remain relatively unpenetrated in our current locations. Our offer will be substantially more affordable, with a compelling range and quality ingredients. Inevitably this will result in lower gross margins, which we believe will be offset by increased volume of covers. The more focused offering will also facilitate a stronger brand identity and to maximise its potential, we expect to invest in marketing alongside some capital expenditure to make clear the proposition has changed. We are developing a plan for how this new proposition will be delivered. In the meantime roll out of further Coast to Coast sites is suspended until we have clear evidence this new proposition is working.”

Serve our customers more efficiently: The company stated: “The business lacks rigorous, streamlined processes and systems that would enable us to deliver the right service standards, with the optimal level of resources, on a consistent basis. We see opportunities to improve our sales forecasting accuracy, to optimise our labour modelling and to deploy resources more accurately which, in turn, will increase our sales by ensuring the right service level is available at the right times, while removing costs from those parts of the day where we operate sub-optimally. We have plans to reduce non-value adding or customer facing activities throughout the business, some of which are dependent on process, systems and supplier changes. We are also focused on equipping our servers with the training and tools, tailored to each brand, to showcase our proposition fully, generating higher sales through cross-sell and up-sell.” 

Grow the pubs and concessions business: The company stated: “Our Pubs business is well positioned with a distinctive offering and defensible locations. Strong operational execution, along with locally sourced produce, has attracted a loyal and increasing customer base who rate the offering highly, relative to competitors. We see opportunities to further increase sales in existing sites by optimising our menus and pricing and investing in marketing. The pubs deliver consistently good and growing returns, with a relatively modest refurbishment capital requirement compared to our other brands. Our pubs are concentrated in the North West, North Wales and the Home Counties, presenting opportunities to organically extend our footprint. Over the medium-term we expect to increase the rate of openings as we build and convert a bigger pipeline of prospective sites. Our concessions business operates five different food and beverage formats, across 37 brands, within 12 UK airports. The business has grown sales and profits consistently driven by new space from contract wins, strong growth in passengers and continued improvement in sales per head and conversion of passengers. With our unique capabilities enabling us to consistently deliver high operational standards at high volume and peak-load intensity, along with our format development and partnering skills, we are positioned well for further contract wins in the future.” 

Build a leaner business: The company stated: “The business has excess cost driven by complexity and inefficiency. We have undergone a detailed review of the cost base and have identified opportunities to reduce costs by approximately £10m on an annual run-rate basis, delivered in 2019. Implementation has begun and the savings we capture in 2017 and 2018 will be re-invested in price, product and marketing to grow the business. The one-off cost to achieve these efficiencies is expected to be c. £6m. These efficiencies will include streamlining our processes, reducing overheads, extracting further purchasing benefits from our scale and reducing the number of people we employ. This will involve some difficult decisions but we are confident our colleagues will embrace being part of a more efficient organisation. We are effecting a culture change towards a more customer focused, insight-led organisation which can operate at pace. To that end, we are pleased to have made some important changes to the leadership team: Murray McGowan has been appointed Managing Director, Leisure and will join us on 5th June 2017. Since 2015, Murray has been the Managing Director for Costa Express and prior to that, worked for Yum! Brands, Cadbury and McKinsey. Lucinda Woods has joined us as Director of Strategy and Business Development and brings analytical and strategic skills from her experience at Paddy Power Betfair, Investec and KPMG. Debbie Moore has joined us as Group HR Director and brings extensive multi-site and large employee company experience from Spirit Pub Company, Royal Mail and Dixons. Keith Janes has been promoted to Property Director, having been at TRG for two years and previously rolled out formats for Costa and Nokia. We are taking a more disciplined approach to capital investment. We have undertaken a comprehensive review of our property pipeline on a site-by-site basis and have refined our selection criteria, resulting in a reduction in the number of viable prospects.” 


Morgan Stanley predicts circa 5% annual growth in demand for delivery: Morgan Stanley has predicted a circa 5% growth in demand for foodservice delivery. Research analyst Jamie Rollo stated: “Technology and the on-demand economy are driving an increase in food delivery demand. We conducted AlphaWise surveys and web research to gain an insight into the likely scale of future demand and which operating models will win out. Our survey shows that 29% of consumers have increased their delivery orders in the last 12 months vs. 16% who have ordered less, suggesting ~5% sales growth for delivery. The UK already has a rich tradition of delivery, with circa 35k takeaway restaurants delivering food, and logistic services pioneered by Deliveroo are allowing the remaining 85k UK restaurants to join the trend, increasing consumer choice. We surveyed 116 businesses, 76% of which outsourced their delivery services, and most see delivery as positive for business, with delivery sales growing at 3x eat-in sales. Wallet share seems to be coming from supermarkets, traditional takeaway, and restaurant eat-in. 60% of the customers surveyed said they were substituting a meal cooked at home versus 28% substituting eating out at restaurants. In the last year, we’ve also seen the number of consumers using Just Eat relative to Deliveroo shrink from 7.6x to 4.7x, in line with the ratio of restaurant count. Since most restaurants on Deliveroo didn’t previously deliver, they are likely taking share from the traditional takeaway restaurants that did. Pubs have generally been slow to join the delivery trend, and have the advantages of being close to communities and offering more traditional food to suit a range of tastes. However, many are not set up for large volumes, and a broad menu might be a disadvantage. Our analysis and conversations with companies on their trials suggest an initial 1% boost to annual like-for-like sales. However, we think most will be net losers as adoption increases, adding another threat alongside high physical supply growth and cost pressures. Mitchells & Butlers (Equal-weight) could benefit more than most due to its high- quality, largely branded, food-led pub estate. Just Eat has already seen UK order growth decelerate. Unless it decisively moves into delivery, it risks losing share to vertically integrated platforms servicing high-street restaurants. This would likely require investment and dilute margins. We raise our PT from 480p to 500p after yesterday’s better than expected results but remain Underweight. We forecast ~5% annual growth for delivery, with most of the growth driven by an increase in supply from new restaurants that haven’t previously delivered. Our AlphaWise survey shows that 29% of consumers have increased their delivery orders in the last 12 months versus. only 16% who have ordered less. But where will this growth come from? With the exception of Domino’s, the c.35k restaurants offering food delivery hasn’t changed much in the last decade in an industry dominated by Indian, Chinese and pizza takeaway. Just Eat has brought these restaurants online and now one in every three households has ordered through the app in the last year; but the restaurant offer hasn’t changed. The emergence of on-demand delivery services like Deliveroo and other outsourcers is allowing a portion of the circa 85,000 other restaurants to move online. Our survey shows 64% of those that have started doing delivery in recent years through outsourced services believe it is good for their business, so we would expect the restaurant offer for delivery to continue to increase. More restaurant choice could accelerate demand for food delivery from consumers. We forecast delivery to grow by ~5%, with restaurants that haven’t historically delivered driving most of the growth.”

Ugly Dumplings secures first site: Agent Shelley Sandzer has secured a debut restaurant for Ugly Dumplings at 1 Newburgh Street, London. Covering 700 square foot, the new concept dining offer will be split over two levels, taking the former site of Pitt Cue. Contemporary dumpling specialists, The Ugly Dumplings, regularly trade at markets across London including Spitalfields Market and Startisans in Covent Garden. A new collaboration with investment partner Philipp Chaykin will evolve the brand from street food operator to a new concept restaurant offering a new menu, featuring a brunch offer and a global twist on dumpling recipes. This will be the brand’s first site and is set to open in the Summer. With Chinese Malaysian heritage, founder of The Ugly Dumplings, Ping Wong, combines traditional Asian home-recipes with western ingredients. The fusion of these flavours creates a combination of artisan dumplings that have proven to be popular across the capital. Prior to starting The Ugly Dumplings in December 2015, Ping gained work experience at Michelin star restaurant, Le Manoir aux Quat Saisons, in Oxfordshire, as well as working at street food markets in Camden Lock and Dinerama in Shoreditch. Amy Counsell, leasing agent at Shelley Sandzer, said: “We are thrilled to secure the first site for Ugly Dumplings in the UK, and assist in the next stage of their growth. Breaking the mould in the London dumpling market, the team have taken an innovative approach to their new restaurant and we are certain they will continue their success in Carnaby.”

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