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Morning Briefing for pub, restaurant and food wervice operators

Fri 7th Oct 2022 - Friday Opinion
Subjects: There is still a way through, what next for UK plc, why 2023 might be the year of the franchise, building resilience to thrive through tough times
Authors: Charlie McVeigh, Paul Chase, Sarah Travell, Nick Liddle

There is still a way through by Charlie McVeigh

The lesson I take from the reaction to the “mini-Budget”, including from some sector leaders, is we are all socialists now. In the decades since Mrs Thatcher’s radical reforming government came to an end in the early 1990s, the economic belief-system of the nation has moved gradually but inexorably to the left. Where we once had a firm belief a balanced budget and free enterprise were the best route to deliver wealth and happiness to an aspirational nation, government and voter now look to solve any perceived unfairness with yet more rules and regulation funded by an ever-greater deficit. This has led to 51% of households being on some form of state support and the tax burden rising to levels not seen since the Second World War.

During lockdown, there was a calamitous acceleration in this trend and the nation moved from social democracy to full-on Soviet-style dictatorship with every aspect of life subject to control by Big Boris in an effort to suppress the virus. Even questioning this shift was deemed criminal.

At the same time, since 2009 the huge amount of free quantitative easing-cash swilling around the system has caused an asset pricing bubble on a scale not seen before in the UK. For our sector, this has led to huge increases in freehold and rent pricing. And for the same reason, many of our so-called zombie businesses with failed brands and business models have continued to find funding as they lurch from company voluntary arrangement to company voluntary arrangement. While this may have protected jobs and temporarily kicked the lender-can down the road, a high street full of struggling brands has clogged up the market and dampened the animal spirits we need to drive growth, innovation and sustainable employment. For every Loungers there may be as many as two or three such zombie businesses. And well-run businesses suffer at the hands of this government and financier-led life-support. What level would property costs be at without it, for example? (We might be about to find out).

On to the great moment of reckoning. A new Tory chancellor stands up and launches a radical new economic strategy, unfunded and untrailed in any manifesto that the wider country could vote on. Lower taxes, deregulation, freedom! The economic promise of Brexit – long delayed by covid and Boris – finally at hand. 

Yes, the presentation and detail was cack-handed and excessively ideological. Blimey, wasn’t Liz just awful that day? But as an entrepreneur I’ll take a free-market approach any day of the week against raiding companies’ profits and an expensive and unreliable green revolution teeing up the rebirth of nationalisation. I know of at least one hospitality leader who has been approached by Jacob Rees-Mogg asking for a list of unhelpful regulations that stifle business so he can slash them – let’s do this!

But the colossal misjudgement of Truss and company is to assume the population at large, or even businesses, would be interested in such a gift. After 30 years of demonising free enterprise, during covid the message final stuck. So much so, that even us private sector types are suffering from Stockholm Syndrome and think the answer to our future prosperity is not for government to get out of the way, but for yet more so-called “support” from our captors. 

Labour can’t believe its luck – Kwasi had hardly sat down before the tanks of the left were parking on the newly vacated centre ground. The 33% point lead in the polls slammed the point home. And the great risk is that free-market, business-friendly economics are now in danger of joining free speech and other once-hallowed cancelled concepts in the dustbin of history.

The chief flaw in that Truss argument is even a well presented, well thought through version of the mini-Budget would have resulted in increased uncertainty and instability given the 18-month window available to see results. Most businesses are dialling back growth plans as no one really knows the mid-term impact of all of this will be. So the cure looks worse than the disease right now. And though it pains me to say it, right now the socialists do look the more stable option.

But don’t get too relaxed. A Labour government would inevitably lead to higher taxes and greater regulation. We have become so used to the drip-drip of new rules in hospitality every year that we don’t believe that it can be any other way. The idea that workers and consumers could form their own opinion on a company’s ethics and behaviour – particularly given the transparency of the internet age – and vote with their feet (as in reality they already do) seems like a dangerous idea now. 

Look, I didn’t vote for Brexit, but it does present an opportunity – with the right government – to roll some of this stuff back – and in time also to reduce the tax burden. I hope the terrible prat-falls of the current Tory clown-car don’t deprive us of this opportunity for another generation. I still think there is a way through – it requires Ukraine to resolve and several other big bits of luck – but the security shutter on the emergency exit is rumbling shut.
Charlie McVeigh is the founder of Draft House and chairman of Butchies. This piece first appeared in Premium Opinion

What next for UK plc by Paul Chase

This week’s government U-turn on the 45p top rate of tax demonstrates not just that a week is a long time in politics, but that timing is everything. Attempts to make good, long-term economic decisions often fall foul of the need to survive politically in the short-term. As an industry, hospitality needs to grasp the consequences of the seismic ideological change, promised by Liz Truss’s administration, of a much needed small-state, low tax economic model for UK plc.

Ideological debate seems the only form of debate Truss feels confident about, but her government’s first foray into supply side economics has been a hesitant, mixed-up affair. The prospect of tax cuts might get the Tory faithful cheering, but the news they would be funded by more borrowing medium term, in the hope that unspecified supply side measures would spur economic growth and fund them long term, certainly didn’t impress the markets.

As Charlie McVeigh observed in Monday’s Propel, vast amounts of quantitative easing cash swilling around the economy have created asset bubbles which, for our sector, has led to huge increases in freehold and rent pricing. This in turn has been supported by brands with failing business models finding government funding and lurching from one company voluntary arrangement to another. This has, as McVeigh observes, kicked the lending can down the road. But the tendency to do that more broadly has characterised the post-World War II approach as successive governments have used deficit-funded welfare to buy off opposition to private property. Welfarism has grown like topsy, and any attempt to arrest that growth now encounters fierce resistance from vested interests.

Prudent individuals run their personal finances by doing three things: growing their income, controlling their spending and using the difference between the two to increase their assets. I just want to see a government that will run the nation’s economy by applying the same principles. Well, we’re still a long way from that. 

The banking liquidity crisis of 2007-08 casts a long shadow. The zero-interest rate policy of the UK and other governments, plus quantitative easing, have created asset price inflation and now retail price inflation. The government’s covid lockdown policies – criticised by opposition parties only insofar as they didn’t go far enough – have been a complete disaster, and not just for our sector. For the best part of two years, we’ve had swathes of the economy shut down or trading severely restricted, and the intersection of the banking and covid crises has left government in the position where all its options are sub-optimal. Telling the public that there are no good, pain-free options, and that we can only choose the lesser of several, painful ones, is a difficult political sell, but it is the inconvenient truth.

Raising bank base rate to between 4% and 5% – which was the norm historically – will now happen quite quickly. This is a necessary but painful adjustment that should lead to more rational asset pricing. The real threat to the UK’s financial stability posed by the mini budget was not the abolition of the 45p top tax rate, but the deficit funding of middle-class welfare with a two-year, across-the-board energy price cap. This should have been a six-month price cap targeted at the bottom quintile of the population, which would have enabled more support for the energy bills of businesses, also in a targeted way. This would not look like the government was signing a blank cheque.

I’m generally not in favour of government raiding corporate profits, but I do think a windfall tax on energy companies should now be looked at. Less money would then need to be borrowed to fund support to those most in need of it. Long term, I hope the government will sweep away the supply side restrictions that stymie economic growth, and their prime target should be reform of the tax and planning systems. I recently watched an interview with Richard Walker, managing director of Iceland Stores, in which he stated he wanted to open 30 new stores, but all these openings were being delayed by a planning system that is complex and ponderous and which panders to Nimbyism. 

There are two main schools of economic thought: those economists who want more government intervention in the economy and those who want less. I subscribe to the less interventionist school. Moving away from the false, Keynesian approach that government must manage demand to close imaginary output gaps is what has got us in to the mess we’re in. Government should concentrate on supply side reform and let markets and market pricing do their job. If government concentrates most on tax and planning reform, it could do our economy a huge service.

So, here’s my wish list for UK plc: A simplified, single band of personal taxation and the replacement of Universal Credit with a negative income tax; low corporation tax to attract inward investment; a reformed NHS funded by a mixture of taxation and compulsory health insurance for those in work; a faster, simpler planning system that enables economic development; a Bank of England that controls the quantity of money rather than the price of it; a government that commits to balancing the budget over the trade cycle – borrowing only for capital expenditure, not day-to-day spending – and with current account borrowing limited to 3% of GDP; and the national debt reduced to 40% of GDP over the long term.

The longer we put off the introduction of fiscal and monetary prudence, the more painful the adjustment will be, but we cannot continue with financial smoke and mirrors. Will any government do these things? Well, a real conservative government would.
Paul Chase is director of Chase Consultancy and a leading industry commentator on alcohol and health

Why 2023 might be the year of the franchise by Sarah Travell

There are many different statistics that point to why franchises are such a popular option in the UK for aspiring entrepreneurs and have higher success rates than running an independent business. In fact, according to a recent survey, 80% of new franchise businesses are still running after their first five years. 

Franchising has always played a key growth role in the UK’s hospitality sector, but now there are many different brands looking to build a national and, in some cases, international presence through this route. While burgers, pizza and coffee still dominate the sector, dessert, bubble tea, craft beer, noodles and Indian street food are among those up-and-coming categories looking to gain market share.

The Propel Premium database of multi-site companies, which Virgate sponsors, has now grown to include 2,676 companies, operating 67,226 sites. An additional 60 companies, which operate 520 sites between them, were added last month, and some highlight the growing influence of franchising across the sector.

For some, it provides a chance to move from employee to entrepreneur, including McDonald’s franchisee Dean Chapman, who operates four McDonald’s restaurants under franchise within his HFLC Restaurants business. In 2010, he was appointed head of McDonald’s Franchising UK, helping franchise owners run and manage their restaurant more effectively. In 2015, he resigned as a McDonald’s employee to buy his own restaurants as a franchisee. Likewise, Papa John’s delivery driver turned multi-unit franchisee, Jay Singh, recently opened his fifth site. The new store has opened in Alton, Hampshire, adding to outlets in Farnham, Basingstoke, Andover and Farnborough.

For others, it’s about fast growth. FiLLi is the fastest growing chai and Indian street food business in the United Arab Emirates, which was founded by Rafih Filli. Taking its network to more than 40 fast casual stores across eight countries, FiLLi this summer opened its debut UK store – a 2,000 square foot site in Harewood Avenue, Marylebone. FiLLi was founded in 2004, and the new London store will cater for eat-in, grab and go, delivery and collection. The business is already in negotiation on stores in Luton, Leicester and Manchester, and the plan is to open up to ten new UK stores over the next two years, with select franchise opportunities available.

Likewise, Stuffed, the London stuffed gelato doughnut concept founded during lockdown by Ikram Hussain, is set to expand through franchising. It already has ten franchise sites lined up, including its debut regional site, while a second company-owned site is in the pipeline too. The first Stuffed opened in Shoreditch last summer, since when it has been exploring expansion through franchising. Two franchisees have now signed up to open five stores each, with the first of them set to open in High Wycombe before the end of the year.

The sector also continues to attract investment. Earlier this month, Soul Foods Group, a multinational quick-service restaurant franchisee with almost 400 sites across the UK and Canada, received a “significant” minority investment that will be used to double its portfolio in the next five years. A consortium of leading institutional investors, formed of Centerbridge Partners, Metric Capital Partners, and OpCapita, made the investment. The founding Janmohamed family, led by Aly Janmohamed, will continue to be the majority owner of Soul Foods Group. The capital will be invested in new site development, renovating existing site infrastructure and acquisitions. Since being founded as a family-run, single-store operator in the UK in 1985, Soul Foods Group has grown rapidly. It is among the top three largest franchisees of KFC and Starbucks in its chosen markets and manages restaurants for Burger King and Taco Bell.

And then there are those looking to repeat their initial success in the UK, overseas. Artisan dessert restaurant Heavenly Desserts is set to make its international debut in the coming weeks. The company, which opened its first store in 2008 and now has circa 45 UK sites, already has master franchise agreements in place for countries including the US, Pakistan and Denmark. But its first international opening, in the district of Mississauga, near Toronto in Canada, will launch next month. For Scottish brewer and retailer BrewDog, its franchise journey in the US, will start by leaning on the expertise of a former McDonald’s franchisee. The James Watt-led company recently secured its first franchise location in the US, which is due to open in mid-2023. The pub, situated in the RiNo neighbourhood of Denver, Colorado, comes via a partnership between BrewDog USA and HopDragon Holdings. Founder of HopDragon Holdings, Juan Carlos Mondragón, said he was drawn to BrewDog as the next expansion of his hospitality portfolio following family trips to the brand’s flagship brewery in Scotland. Mondragón, who has also previously been a McDonald’s franchisee in Mexico, added the new pub will be the first of three Denver locations to open over the next four years.

Like everyone in the sector (indeed the country), our clients at Virgate are preparing for a period of uncertainty. During such times, a franchise model can offer a low-risk route to expansion and ownership, offering the backing of an experienced network and brand and a proven business model. It is not surprising then that many operators and businesses have already started down this path, and several more are set to follow, giving themselves the chance to expand into more white space and weather the expected downturn to come.
Sarah Travell is the founder and chief executive of Virgate, sponsor of the Propel Multi-Site Database, which now features 2,676 companies. Premium subscribers also receive access to the New Openings Database, the Propel Turnover & Profits Blue Book and the UK Food and Beverage Franchisor Database. Companies can now have an unlimited number of people receive access to Propel Premium for a year for £895 plus VAT – whether they are an operator or a supplier. The single subscription rate is £445 plus VAT for operators and £545 plus VAT for suppliers. Email to upgrade your subscription.

Building resilience to thrive through tough times by Nick Liddle

It’s a tough time to be a restaurant operator. The industry is stuck between a rock and a hard place. The rock: a crippling labour shortage, rising inflation, skyrocketing energy bills and unpredictable supply chain costs. The hard place? Reduced customer footfall and decreased spend when the orders do come in.

All this, and a recession looming on the close horizon – in fact, the Bank of England warns the UK may already be in one. It’s an admittedly gloomy state of affairs, and it’s causing sleepless nights for plenty of us. 

The recession might be inevitable, the industry’s reaction isn’t
You don’t need me to tell you how a recession will affect your hospitality business, but what I’m repeating in conversations with restaurant operators is that right now, on the brink of crisis, is the time to make changes to protect your restaurant. 

Accepting that a recession is coming is one thing. Believing that there’s nothing you can do about it is another. The economy is out of your hands, but you’re in control of how your business prepares, adapts and grows through economic hardship. The Harvard Business Review naturally puts it better than I can: “Crises can also be the best pretext for accelerating long-term transformational change”. 

It’s actually possible to grow during a recession
McKinsey & Company analysed the behaviour of 1,000 companies during the economic downturn between 2007 and 2011, and the effect this downturn had on their growth. McKinsey found that 10% of those companies fared materially better than the others, and they call these companies ‘resilients’. It wasn’t thanks to luck that these companies grew, but because of specific behaviours and actions they took to help them navigate economic headwinds. 

What are the characteristics of these so-called resilients? They always focus on growth, even if it means making investments that feel uncertain or painful in the short-term. Their default position is forward-thinking and a willingness to change. Finally, almost all the companies in McKinsey’s report had fully embraced digital as a way of growing, despite tough trading conditions.

The time is now to make change that matters
The hospitality industry is in a particularly difficult position heading into the recession, making it all the more important to act quickly and take action. McKinsey found that “resilients” take pains to focus on growth, even at the expense of cost. So don’t double down on ordering channels that aren’t contributing to growth, and instead identify revenue channels that can unlock increased value in every order. 

These might be channels you aren’t using yet, like self-ordering kiosks or mobile apps, all of which can increase average transaction value and contribute to growth in the short and long term. McDonald’s is an example of a quick service restaurant that has rapidly grown its digital capability and reaped the rewards: they delivered global comparable sales growth of nearly 10% in the second quarter of 2022 thanks to kiosks, mobile order and pay and McDelivery from UberEats.

Think long term. Don’t focus solely on panic-fuelled moves designed to get your business through the next month and mitigate short-term risk, but on the change that can benefit your operation now and into the future. The labour shortage isn’t going anywhere, so instead of focusing all your energy on increasing your headcount, think about steps you can take to make your operations more efficient. Use digital to automate manual tasks that take your team away from the jobs that matter, and drive retention by making life easier. These changes create a much more resilient, less labour dependent operation that will thrive into the future.

It might seem counterintuitive to spend at a time like this, but investing in digital now helps companies place themselves in a better position to actually experience growth during recession. Getting ahead by digitising critical processes will build significantly more long-term resilience than waiting to invest when the economic storm has passed, at which point catching up will be a much more difficult mission.

Most importantly, don’t fall into the trap of a wait-and-see mentality. Holding off on changes like digitalisation can severely impact a business’ resilience through a recession at a time when it’s more important than ever to stay abreast of fast-moving competition. I know from experience that committing to change during rough and unpredictable times is a difficult pill to swallow, but I’ve also learned that change during hardship is often the change that matters. So, now is the time to ask ourselves, are we dreading the recession or are we ready for it? 
Nick Liddle is the commercial director of sector tech company Vita Mojo

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