Horizons – US restaurants poised to pass Mexican segment as biggest UK growth area: American-themed barbecue pits, smokehouses, burger bars, and diners could be about to replace Mexican outlets as the biggest growth area on the UK’s eating out scene over the next few years, according to Horizons’ latest Ones To Watch research. The biannual Ones To Watch report, which tracks the growth of new and emerging brands with between five and 25 outlets and which have shown over 20% growth over the past three years, lists a number of US-themed outlets in its list of the top ten fastest growing brands, either by number of new outlets or percentage growth, and an even larger number of US-themed fledgling “Bubbling Under” brands. While Dunkin’ Donuts tops the latest chart of the fastest growing brands by percentage growth rate (2013-2016), US-themed Red’s True Barbecue comes in jointly at number six alongside Grillstock Smokehouse while Coast To Coast, the Restaurant Group-owned American-themed outlet, now has 21 sites with another four planned to open this year. “We have seen a significant rise in the numbers of Ones To Watch and ‘Bubbling Under’ brands (those that have yet to reach five outlets) offering US-style dining including barbecue pits, smokehouses, burgers bars and classic American diners,” said Horizons’ analyst Nicola Knight. “They are opening across the UK on high streets in affluent market towns and secondary cities, many in converted pub premises, which offer the size, location and parking facilities that suit these all-day diners.” American casual dining outlets, whether home-spun or US-based, have also been attracting the attention of investors as well as larger operators, largely because of their roll-out potential and scaleability. Red’s True Barbecue, at number six in the Ones To Watch rankings, has recently secured £9m-worth of investment, while Fulham Shore, owner of the Real Greek and Franco Manca chains, has agreed a franchise agreement with charcoal grill specialist Bukowski Grill. Roll-out Restaurants is planning to grow its Dirty Burger concept, while pub operator Young’s is about to open its first standalone Burger Shack & Bar, with plans for at least 20 by 2018. US-owned Smashburger is due to open its first UK outlet, while Fatburger and Shake Shack have both announced their intention to seek UK expansion. “American casual dining certainly isn’t new to the UK but we are seeing a steady resurgence in its popularity as operators have modernised and upgraded the concept,” said Knight. “They appeal to a broad range of consumers, whether dining as a couple, a family or a group of friends. Not only that but they are good value, often offer a broad range of dishes of various cuisines, with friendly service and sophisticated marketing.” While Mexican burrito bars and restaurants were the growth story of the past few years the market now seems to have reached a point of consolidation whereby the main players continue to expand but fewer new operators are emerging. Horizons’ latest list of “Bubbling Under” brands, those currently with less than five outlets but with plans to expand, shows nearly 70 concepts offering an American-style dining or burger experience. “This means there will be a lot of competition amongst these players, particularly when it comes to sites,” added Knight. “Typically only three or four will emerge as true high street brands with the staying power to survive and there’s likely to be mergers, and even closures, while others fail to expand as intended.” A straw poll of 35 Ones to Watch entrepreneurs recorded a more upbeat mood than in previous straw polls with all respondents planning for growth, the majority of whom were planning over five new outlets. Major cities, excluding London, as well as shopping centres continue to be the most targeted locations for expansion over the next 12 months, with some mentioning event space, residential areas, tourist locations and international locations. Property availability remains the biggest challenge to fledgling operators, although less of a challenge than in previous straw polls (October 2015). Staffing was mentioned by 29% as a challenge (up from 12% previously), and property costs were mentioned by 23%, up from16%. Fastest growing Ones to Watch brands by new site openings: 1 Red Kiosk Company zero to 20 outlets*); 2 Dunkin’ Donuts (one to 20); 3= Kaspa’s (two to 18) 3= Franco Manca (six to 20); 5= Cau (three to 17) 5= Coffeelink (zero to 14); 7= Chatime (zero to 13) 7= Steakhouse Bar & Grill (zero to 13); 9= Coast To Coast (nine to 21) 9= Joe and the Juice (five to 17); 9= Chozen Noodle (four to 16). *Number of outlets in 2013 compared with 2016.

Restaurant Group chairman elect – Danny Breithaupt has our full support: Restaurant Group chairman elect Debbie Hewitt has insisted that chief executive Danny Breithaupt has the board’s full support despite this morning’s reported further drop in trading. Hewitt did, however, admit that there had been a need to refresh the board – chief finance officer Stephen Critoph has left the board with immediate effect. Cenkos Securities leisure analyst Simon French said: “The group is guiding towards a full year like-for-like sales decline range of 2.5%-5.0% which would equate to profit before tax of £74-£80m (28.7p-31.0p earnings per share we estimate). The departure of the chief financial officer – to refresh the board – seems harsh when these are operational issues but suggests the Board is not afraid to take action and it will also launch a review of operations. New openings guidance has been cut from circa 45 to more than 30. The operational problem is undeniably Frankie & Benny’s (pubs and concessions are in like-for-like growth) and in particular the 38% sites that are on pure retail schemes where footfall and like-for-likes are significantly down. However as we have said for some time we think the problems are far more reaching around product quality, price and hence value proposition to customers, who now have more choice and are more adventurous in their dining habits. We assume like-for-likes decline 4.0% for the FY which equates to £76.4m profit before tax (29.6p earnings per share) – a 13% downgrade. At the opening price of 335p, this equates to a 2016E price-earnings ratio of 11.2x, adj EV/Ebitdar 6.7x (EV/Ebitda 5.8x) and a 4.6% yield on a divi cut 12% (although the Q&A on the conference call still left it unclear whether the group would be prepared to allow cover to fall below 2x). We think it is now inevitable that private equity (e.g. TPG, Bridgepoint, BC Partners) will seek to consolidate existing operations to deliver synergies from the group’s c£40m central cost base and exploit the under leveraged balance sheet, ‘Buy’.”