Subjects: Reaching an inflection point, looking at the Brightside of life, puritanism rising, protecting culture in a growing business, evolution as a tool to not only survive but thrive, a case for employee-led benefits
Authors: Graeme Smith and Craig Rachel, Glynn Davis, Paul Chase, Naz Johnson, Julia Wilkinson, Lina Olea
Reaching an inflection point by Graeme Smith and Craig Rachel
While the men’s football World Cup and the festive season look like they are providing welcome boosts for the UK’s hospitality sector, the need to cut costs from across the profits and losses and to preserve cash (whether through rescheduling investment activities such as opening new sites or regularly assessing pricing levels to reflect inflation and customer demand) remains a constant.
That need is set to intensify as December gives way to the first quarter of 2023. It is a moment we believe could – with the continued macro-economic challenges in play – herald an inflection point for many businesses, and one that could kickstart mergers and acquisitions (M&A) activity as we move into the second half of the year.
At present, the most regular issue, aside from the impact of train strikes and the knock-on effect on Christmas bookings, expressed to us from operators is the challenge of the cost base coupled with the uncertainty of where costs will go – and when some of the massive inflation seen will eventually recede. Clearly, the latest near-10% rise in the national minimum wage in April 2023 increases the pressure and will force many operators to focus on what efficiencies might be available in staffing costs next year.
While operators themselves may be hedged on costs such as energy and debt interest, their suppliers may not be, meaning even with forward planning, it is hard to avoid the impact of inflation in the cost base. Added to that, the consumer response to falling disposable income is yet to be understood. Government intervention on energy provided some relief but it is yet to be seen how much consumers will cut-back now that the heating is on, or on the back of anxiety that their mortgage rates will rise in line with increases in interest rates. Thankfully, employment levels are still high, which provides some solace.
Many operators are evaluating the position at which they enter a new year. The prevailing macroeconomic conditions may again require businesses to address parts of their portfolio that have slid underwater. At the same time, some financing agreements that were amended and extended during the pandemic – buying vital time for operational recovery – are due to roll off in 2023. Facilities that mature in 2023 may trigger a need to refinance, and it could well be the case that debt capacity is lower when it comes to that refinancing point. Interest rates are higher, profit margins have probably been compressed, and there may not be as much appetite in the market for debt finance.
If that is the case, it could result in a funding gap that needs to be bridged either by equity, or possibly by other sources of finance. So, we think these maturing facilities could well drive transaction activity next year. This may mean refinancing, fundraising or even disposing of part or all of the business. Completing M&As or fundraisings against an uncertain economic backdrop will demand a very different skillset to realise value, generate appropriate levels of liquidity and satisfy shareholders with reasonable returns.
A key for sellers will be to initiate longer lead times to prepare businesses for the market. A clear plan on how the business will look and operate post a transaction is a must and could place some companies ahead of others when it comes to funding support – and crucially, the scale of that funding support. Talking to clients, it’s about being able to navigate through this acute short-term disruption, but to do so in a way that leaves the business as well positioned as possible to take advantage of growth when this disruption clears.
The areas that come up time and time again in discussion include a real laser focus on costs and energy-efficiency measures. There’s also the ability to raise prices to respond to inflation, but balancing that against the customer’s willingness and ability to pay. Staff will continue to be the linchpin asset for businesses, and as we go through disruptions – or the ‘perma-crisis’ as UKHospitality chief executive Kate Nicholls dubbed it this week – the need to invest and keep that team together grows ever important.
Operators also need to communicate with funders – whether it’s equity or debt – and if there is a need to refinance, then starting those discussions early is vital. Finance providers will need longer to get comfortable with financial forecasts and businesses may need to speak to a broader range of funding providers. For example, when it comes to debt, it is important to speak not only to banks, but also to specialist lending funds which may offer larger debt amounts with more flexibility, but typically at a higher cost.
Of course, once we navigate the short-term seismic challenges in early 2023, thoughts will inevitably turn back to that medium-term focus, and that’s all around the strategic plan to grow. As we come out of the (short-term) disruption, we get more visibility on what a ‘normalised’ cost base means, and more clarity on what this all means for reforecasts, numbers and key performance indicators. There will also be the need to refresh that channel strategy (dine-in, delivery or retail) or the digital strategy, whether it’s front of house or back of house. Tying those things together will still need continued investment, so there’s a way of both engaging with the customer but also driving efficiency in the operations.
We still see a number of groups with lots of white-space to expand into, looking at new sites and also talking to investors to push on with roll-out programmes, to take advantage of other groups stepping back from expansion. We also believe there will be a rise in structured deals, where perhaps there’s still that ambition to grow, but maybe the equity structure doesn’t quite stack up in order to facilitate or support expansion. This can mean raising preferred equity or mezzanine debt, where the funding can come in to grow but doesn’t dilute the equity position if the business plan is met.
Operational real estate, such as pubs and accommodation, will likely still remain popular, both in terms of backing new platforms and also investing in those platforms that exist. Of course, there is the current disruption in the market to navigate first, but perhaps once that happens, we will see a return to more fertile M&A conditions as we contemplate the second half of 2023.
Graeme Smith and Craig Rachel are managing director and director, respectively, in the corporate finance team at business advisory specialist AlixPartners
Looking at the Brightside of life by Glynn Davis
During my formative dining years, Little Chef undoubtedly played an outsized role as many family trips involved a bite to eat at one of its many outlets scattered across the UK. Journeys would potentially be diverted in order to take in a bacon sandwich in the morning, chips and an accompaniment of some description if it was lunchtime, or maybe a blueberry muffin and ice cream if it was a mid-afternoon stop-off.
It might not have been haute cuisine (Heston Blumenthal tried and failed to inject some high-end elements into the chain in 2009), but it was a very welcome presence in the 1970 and 1980s, when eating out was something of a novelty to most people and cars, along with roads, were less reliable and slower, thereby prompting more pit-stops. Alas, Little Chef died a death when its standards fell and its competitors rose.
It seems Alex Reilley, co-founder and chairman of Loungers, has equal affections for the chain from his childhood, and he intends do something about it. He has outlined exciting plans to bring about a reinvented roadside restaurant called Brightside, which would fill a gap that has not been filled since the distinctive red and white Little Chef signs were a familiar feature on our roadsides.
Maybe there is a reason why the gap remains? He is banking on the fact that people will be willing to break their journey for a sit down meal of 45 minutes or so. Driving this potential shift will be an offer that is sufficiently differentiated from the existing roadside scenario, which primarily consists of a plethora of drive-thru outlets and big name QSR brands. Reilley is instead planning freshly cooked classic comfort food-style dishes targeted at families, locals and domestic holidaymakers.
You would certainly not bet against him, based on his track record with the Loungers and Cosy Club brands, and the fact that he has long harbored a desire to add a third string to the company’s portfolio. He’s been waiting for the right idea to come along, and the team have alighted on Brightside. The only downside seems that it has a very similar sounding name to my dentist, Brightside Dental. I’m certainly hoping that’s where the similarities end.
While Reilley has been waiting for the right proposition, the electric car market has picked up pace considerably and is becoming a feature of the mainstream market. The need to charge vehicles will prompt a much greater consideration of when people stop on their journeys. The power of combining charging stations and restaurants and other amenities has not been lost on Elon Musk, who is on the cusp of making his first foray into the foodservice sector.
The omnipresent Musk has purchased the former Shakey’s pizza parlour in Hollywood for redevelopment into a new restaurant, numerous charging stations and a drive-in theatre that will add food and drink to Musk’s growing portfolio, of which Tesla, SpaceX and Twitter are just part.
Reilley and Musk are clearly onto something, judging by the prediction from McKinsey & Co of a radical change ahead in the behaviours and demands of consumers when using their cars. It forecasts petrol sales will fall from $87bn in 2019 to $79bn by 2030, while non-fuel sales will rise by around a third to $30bn as a result of drivers spending on food and beverage when stopping to charge their vehicles. The electric charging will also bring in $20bn.
This is expected to spark a reinvention of roadside facilities, and evidence of these changes can already be seen. This includes the conversion of a Shell petrol forecourt in south west London into an all-electric equivalent with ten rapid chargers and a strong offering of drinks, snacks and groceries. To bulk up its food and beverage offering for this new world of motoring, Shell is actively signing deals with fast food brands and coffee chains in its various global markets, where it has 46,000 stations. Further activity in this area involves Asda, which has recently completed the purchase of 132 forecourts from Co-op as it seeks to transplant its new Express convenience store format into more roadside locations.
Neither of these sounds that exciting to me to be honest, and maybe therein lies the opportunity for Reilley and his Brightside concept. Although far from radical, it does at least look like it might well herald a more interesting future for road travellers than the incumbent players seem to be planning.
Glynn Davis is a leading commentator on retail trends
Puritanism rising by Paul Chase
Puritanism always seems to thrive when we have an economic downturn, or when, for other reasons, the prognostications for our future seem particularly bleak. It was no accident that puritanical opposition to alcohol thrived in Victorian Britain but died off when prosperity improved and became more widespread. Hard on the heels of the failed experiment with minimum unit pricing in Scotland, we now see a consultation that may lead to an almost complete ban on alcohol advertising and promotions (see my last Propel article). And to the point where any public display of alcohol brands will be seen as potentially corrupting for the young, so we must all be deprived of anything but the most basic of information about beverage alcohol products.
And now Edinburgh Council, among others, has voted to ban sexual entertainment venues – referred to by the old-fashioned term strip club – but known as lap dancing clubs to most of us. I have no brief to defend this form of entertainment – if you don’t like it, don’t go to one – but don’t legislate the morals of others by restricting the choices of those who do want to work in them or be customers of them. But, of course, writing moral prescriptions for others is what puritans do, and we shouldn’t forget that Scotland is really where the anti-alcohol temperance movement began, so old traditions die hard.
And now fresh ammunition for those who want to save us from ourselves by limiting our choices around alcohol is provided by the latest statistics around alcohol-specific deaths. Alcohol-specific deaths have risen sharply since the onset of the coronavirus pandemic, with alcoholic liver disease the leading cause of these deaths. This rise is likely to be the result of increased alcohol consumption during the pandemic. Research has suggested that people who were already drinking at higher levels before the pandemic were the most likely to have increased their alcohol consumption during this period.
Here are the main numbers: In 2021, there were 9,641 deaths from alcohol-specific causes registered in the UK, the highest number on record. The number recorded in 2021 was 7.4% higher than in 2020 (8,974 deaths) and 27.4% higher than in 2019 (7,565 deaths), the last pre-pandemic year. Between 2012 and 2019, rates of alcohol-specific deaths in the UK had remained stable, with no statistically significant changes in the age-standardised rate. Consistent with previous years, the rate of alcohol-specific deaths for males in 2021 remained around double the rate for females. Scotland and Northern Ireland had the highest rates of alcohol-specific deaths in 2021 (22.4 and 19.3 deaths per 100,000 people, respectively). Comparing with 2019, there have been statistically significant increases in the alcohol-specific death rate in England, Wales, and Scotland.
Predictably, Drinkaware, a drinks’ industry funded charity that seems to have been intellectually colonised by the neo-prohibitionists, had an opinion on this. “These statistics are absolutely devastating, each number masking an individual family tragedy,” said Karen Tyrell, from Drinkaware. “It is unacceptable that in one of the richest countries in the world, the rate of alcohol-related deaths was four times higher among men in the poorest areas compared to the most affluent.”
Well, I think these increased mortality figures are a consequence of covid lockdowns and the closure of pubs. People who already had a drink problem were sat at home all day with nothing to do and were deprived of the controlled drinking environment of the pub. It is surely no surprise that they drank more. But Drinkaware highlights that it is unacceptable that excessive drinking affects men who are poor more than those who are affluent. But what policy change do they think should come out of this? Abolish poverty? End the class system? Easier said than done, but that doesn’t matter to those that prefer pious statements to practical policies.
Drinkaware is now calling for a new co-ordinated UK-wide alcohol strategy to reduce the damage from alcohol to society and public services. And what might such a strategy look like? An increase in alcohol duty on the price paid for alcohol? Minimum unit pricing? Restrictions on advertising? Dr Katherine Severi, chief executive of the Institute of Alcohol Studies (IAS), the leading anti-alcohol temperance group, said: “Despite opposition from commercial interests, we can’t afford to delay or dilute policies that help save lives.”
So, there you have it: there is now very little difference between Drinkaware and the IAS. Maybe it is time the drinks industry stopped funding an organisation that seems bent on crafting its destruction. Happy Christmas!
Paul Chase is director of Chase Consultancy and a leading industry commentator on alcohol and health
Protecting culture in a growing business by Naz Johnson
2023 is going to be very exciting for Arc Inspirations as we look to build on a record year and open five new sites. Over the last 20 years, we’ve built a successful and award-winning business across the north of England. However, we’ve now started expanding beyond our heartland. We’ve worked hard to create an incredible company culture, and as we grow, I’m determined to protect it and make sure we remain a fun and rewarding place to work.
Our culture shines through at our established sites, where our team members are often our best recruiters. They love coming to work in Banyan, Box or Manahatta, so they recommend it to their friends. We love it when this happens, but it’s not an approach we can rely on when entering a new city, so it’s vital we demonstrate our culture to prospective team members in other ways.
Opening the Glassdoor
The job website Glassdoor is a common starting point when researching a potential employer. When I started in the business last year, our Glassdoor rating was 3.27 out of 5. Not bad, but not great, and definitely not reflective of how we see ourselves as an employer.
We now encourage our teams – and even people leaving our business – to leave a review on the website. Not only has this improved our score to 4.7 out of 5, but it also means that anybody visiting our page can see what it’s really like to work for us. Instead of corporate blurb on a job advert, they can take a team member’s word for it.
We also make sure we respond to every review. Three out of four Glassdoor users are more likely to apply for a job if the employer is active on Glassdoor, so every time somebody leaves a review, we respond and invite them to email us to discuss issues in more detail. We’re not too proud to take criticism, and inviting and engaging with feedback shows that we respect and listen to our people.
Develop your future leaders
In interviews, we always talk about the career progression opportunities at Arc, and how we believe in promoting from within. 89% of our general managers worked their way up through our business, some starting as barbacks and floortenders. We have a strong pipeline of junior managers progressing to more senior positions, and more than 50% of our senior leadership team have progressed and grown within the business, so we’re not short of examples to provide.
We invest heavily in development to set our rising stars up for success and equip them with the skills and the confidence to lead. A great bartender has a much better chance of becoming a great bar manager if you train them properly and spend time and effort with them to give them the tools and the know-how to succeed in a bigger role. Campaigns like Hospitality Rising are helping to champion the sector as a legitimate career, so it’s great to be able to point to these development opportunities and distance ourselves from dated part-time/stop-gap misconceptions.
Recognise and incentivise the worker – but never forget about the human
We spend a lot of time looking at the things that make a difference for our people. Incentives and pieces of recognition are crucial, and we offer employee of the month, employee of the quarter and an annual awards event, as well as taking our top performers away on ski trips to Meribel and study tours to New York. We also make sure that we feed our teams a good meal on shift and give them access to great benefits like gym memberships and discount platforms for supermarkets and cinemas.
Our people are skilled, passionate and committed, but the work can be hard. They give a lot of themselves to us, so it’s important that we give a lot back and focus on their physical and mental wellbeing. Not every benefit has to be financial. It’s just as important to remember that these people have a home life, families and hobbies. We always try to factor that in when we build rotas and give people as much notice as we can so they can live their own lives as well.
Ultimately, it comes down to treating people like adults. We’ve built a business based on mutual respect and having fun, and we’re confident we’re on the right track to protect our culture as we grow through 2023 and beyond.
Naz Johnson is people and culture director at Arc Inspirations
Evolution as a tool to not only survive but thrive by Julia Wilkinson
2022 signifies three challenging yet ultimately triumphant years of Seven Dials Market, which sits at the heart of our West End village, Seven Dials. But what does this anniversary celebration consist of? Central to it, is the market’s dynamic evolution over a succession of unparalleled, testing times for the hospitality industry. Whether it be the pandemic, hospitality staffing crisis, the economic challenges or the seismic shifts in consumer dining habits over this period, KERB’s Seven Dials Market has not only weathered the storms but has come out fighting, delivering something truly successful year after year. Looking back now, it’s sometimes hard to believe that Seven Dials is still KERB’s first and only bricks and mortar location so far.
Unpacking some of this success, a few key themes emerge, namely: incubation, community and partnership. Since its launch in September 2019, Seven Dials Market has fast become a hub for 45 independent, pioneering traders, many of whom have gone on to further expansion through their nurturing relationships with Shaftesbury as a landlord and KERB as operators. KERB founder Petra Barran and chief executive Simon Mitchell share parallel values with Shaftesbury; we both want to find and incubate emerging food and beverage (F&B) concepts and give them the support they need to flourish.
The likes of Club Mexicana, the vegan Mexican street food trader, for instance, has gone on to take a stand-alone bricks and mortar restaurant in Carnaby’s sought after Kingly Court following their success at Seven Dials Market, highlighting the brand’s success across, and investment in, Shaftesbury’s portfolio. Similarly, original Seven Dials Market trader Truffle Burger has gone from strength to strength, now operating five venues across London and selling more than 323,986 dishes (162,089 sides and 161,897 mains) from Seven Dials Market since its launch in September 2019. There have also been over 4.4 million visitors to the market over the past three years, and upwards of 2.36 million this year alone, a huge testament to Seven Dials Market’s status as an international F&B destination that maintains a local, welcoming feel, positioned at the heart of our carefully nurtured community.
April 2022 saw the launch of Cucumber Alley, formerly a retail space, delivering a new dessert hub for London’s best and brightest food traders. This launch heralded in new era for Seven Dials Market, where the focus shifted from survival (during the pandemic) to thriving (post-pandemic). Despite this shift, a focus on community has remained constant. Throughout its operation, Seven Dials Market has provided a community venue where friends and colleagues can connect, as well as re-connect post pandemic. This is testament to the market’s offering, its ability to adapt and its resilience.
Not all central London food halls have successfully relaunched following the height of covid-19, whereas Seven Dials Market has been able to curate its offering in line with the symbiosis of selected pioneering operators, while also diversifying its customer base. With Seven Dials Market, KERB has set a precedent to inspire and push F&B boundaries while complementing the surrounding Seven Dials dining offer, which is a culmination of a conscious community that puts creativity, innovation and authenticity at the forefront.
Core to Seven Dials Market’s success is also the notion of partnership, on a number of levels. There is the obvious relationship between KERB and Shaftesbury, but also the inter-trader partnerships and synergy between other Seven Dials tenants. For instance, Donmar Warehouse, who also occupy part of the historic former Thomas Neal’s Warehouse, is able to benefit from Seven Dials Market’s extensive F&B offering, proving the complementary nature of occupiers across Seven Dials. It is also highly appropriate that through the successful and respectful re-purposing of a historic listed building, food use has returned to the former fruit and vegetable warehouse at Seven Dials Market.
Partnership with KERB has ensured key features such as the original mosaic tiling throughout Cucumber Alley remaining a constant, providing a nostalgic link to the past while driving Seven Dials Market into the future. Seven Dials Market’s three-year anniversary also happens to coincide with KERB’s wider ten-year anniversary and Shaftesbury’s 36th year. The success of the market through evolution, therefore, proves the value in collaborative experience, insight and perspective, and the ability, when the right mix is struck, for such pioneering initiatives to not only survive challenges, but thrive for years to come.
Julia Wilkinson is restaurant director at West End landlord Shaftesbury
A case for employee-led benefits by Lina Olea
All hospitality leaders can agree on the multiple challenges covid-19 has brought, from a seemingly never-ending recruitment crisis to the need to deeply re-evaluate their internal policies to keep staff engaged and happy. With many news outlets reporting that the power is now in the hands of the employees, it seems obvious that working on creating a healthier work environment is the only way to keep a hospitality business afloat and thriving – in spite of all circumstances. In an industry notorious for its low retention rates and work-life balance challenges, change isn’t around the corner, it has to be sought.
To counter these effects and boost employee loyalty, East Coast Concepts (ECC) have doubled down on employee wellbeing. Today, 49% of their staff reporting feeling happy with their work-life balance. Communication, it turns out, seems to be a part of the greater employee happiness equation. Here’s the deal: communication isn’t simply about you and your business. It’s also about your teams, how they interact with each other and how you reward their work and dedication.
By rewiring your internal communication strategy, you can attain great results, both for your teams and for your customers. It all starts with one thing: the desire to make your company a better place. A study conducted by the American Psychological Association revealed that 93% of employees who felt valued by their company reported being motivated to do their best at work, while 88% declared feeling engaged. Words, it turns out, matter a lot more than we think. Vocalising your appreciation for your employees is crucial to their success and happiness.
Although I am convinced that the right communications tool is key to improving processes and job satisfaction, it isn’t enough to counter the dreaded effects of the current economic climate. ECC’s success in that matter seems to be a testament to the effectiveness of care within the work place. After discussing all things wellbeing with ECC frontline teammates, I was able to see the effects of these new policies for myself: from mental health programmes to extended paternity and maternity leave, ECC employees truly feel cared for. ECC employees also have access to an extra day of holiday on their birthday, five extra days of holiday after three years of service, and a service providing mental health first-aid training – amongst multiple other benefits.
Through a 60-hour weekly cap – with the option to choose to do more – and a limit on standby shifts, ECC employees are offered the ability to enjoy their time off without fearing being called into work because a colleague has fallen ill. They’re also able to truly log off on their time off by disabling their Yapster notifications, so they can come back to work truly recharged. Work-life balance is a major point of contention within the hospitality industry, with many workers reporting feeling overworked or disconnected from their office working peers and family members. Working on a better separation between life and work is a great way to create a healthier environment for your teams.
Rather than simply seeking to provide employees with a handful of perks that they may or may not use, good leaders – those whose policies emulate societal changes – choose to cater to their workers’ needs by investing in services that truly serve them. The need for employers to listen to their employees through surveys isn’t stressed enough, but it is one of the most effective ways of ensuring that the benefits you offer won’t sit there waiting to be used.
Let’s redefine the meaning of employee benefits: they aren’t meant to be shiny words strategically advertised to attract more workers – although they sure help. Their deeper purpose is to make employees feel like they are a core part of your organisation, and that their wellbeing and happiness within your structure matter to you. Through regular surveys, great leaders ensure that they never miss out on their employees’ pain points and regularly update their policies to keep their talent hooked.
The results? A well-crafted team of frontline workers who aspire to reach higher positions within the business and who hold themselves accountable for the success of the company. Looking forward, I would love to see how other innovative rewards and benefits are implemented within the hospitality sector.
Lina Olea is marketing director at hospitality mobile communications platform Yapster