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Morning Briefing for pub, restaurant and food wervice operators

Fri 4th Aug 2023 - Update: Papa John’s acquires more UK sites, Subway sale process, XP Factory, services, food inflation
Papa John’s adds a further 27 sites to new UK company-owned business: Papa John’s has added a further 27 sites to its recently launched company-owned estate in the UK, bringing its total ownership to 118 restaurants, as it looks to improve the performance of its business here. Talking to analysts after its Q2 update, the company said its international business comps were down 1% from last year, which primarily reflects declines in the UK, its largest international market. Rob Lynch, president and chief executive of Papa John’s, said: “However, we are pleased with the improved relative performance in the second quarter in the UK as we implement best practices developed within our domestic market, including marketing investments, specifically in the aggregator channels, menu innovation, and operational improvements.” Earlier this summer, the business, which operates more than 500 sites here, announced a shift in its UK strategy with the acquisition of 91 sites previously operated by the M25 division of Drake Food Service International to form a portfolio of company-owned restaurants. Lynch said: “In June, we established a company-owned restaurant portfolio in the UK with the acquisition of 91 restaurants. We also recently acquired 27 additional locations in July, bringing our total ownership in the UK to 118 restaurants. I recently visited these locations and after meeting with our leadership team and those in the field, I’m excited about the long-term growth potential of these restaurants and the holistic UK market. For the full year, we anticipate international comps will remain under pressure as challenges within the UK continue to persist but will improve each quarter as our new UK restaurants are integrated into our corporate organisational structure and other international markets continue to perform and grow. I want to emphasise that we expect longer term margin benefit from our recently acquired UK restaurants once they’re fully integrated into our corporate structure, but there will be some near-term pressure as we integrate these stores.” Lynch said the brand now owns almost a quarter of the UK market and is “leveraging that asset base to make sure that we fully understand how to optimise that model similar to what we’re doing in the US and then scale those optimisations and those improvements across the franchisee base”. He said: “And the franchisees that are going to win are the ones that are going to adopt those principles. We’re already partnering with multiple franchisees in that market to do some consolidation. Not on our part, but helping them to consolidate some restaurants with franchisees that we believe will be the best operators moving forward. So yes, there may be some changes that happen over there. But I think that the model that we’re building is going to scale pretty rapidly and our intention is for those restaurants to become more profitable. And we may choose to operate those for the long-term, we may find franchisee partners who can come in and grow with us and we franchisee some of those assets. We have a lot of optionality over there dependent upon what the right situation is to make sure we we’re setting that system up for long-term success.”

Next edition of The New Openings Database to be sent to Premium subscribers today, to show details of 108 new sites, 6,000-word report included: The next edition of The New Openings Database will show the details of 108 newly announced site openings and upcoming launches for Premium subscribers when it is published today (Friday, 4 August), at midday, including which company has opened a site or its plans to open one in the future. It will have details on what type of site it is and its location, and there will also be a website link to the businesses. The database is published on a monthly basis, and the next edition features growing restaurant and café brands, niche cuisine, and expanding experiential concepts. Premium subscribers will also receive a 6,000-word report on the new additions to the database. Premium subscribers also receive access to four other databases: the Propel Multi-Site Database, produced in association with Virgate; the Propel Turnover & Profits Blue Book; the UK Food and Beverage Franchisor Database; and the Who’s Who of UK Food and Beverage. This month, Propel will launch the UK Food and Beverage Franchisee Database – the first time that profiles of 100 of the top food and beverage franchisees have been available in one place in the UK. The go-to database, which features many of the big franchise operators running Costa Coffee, McDonald’s and Domino’s sites, brings together a wealth of information on an increasingly important part of the market, and the first edition will feature more than 32,000 words of content. The sixth major database exclusive to Premium subscribers, it will be sent out bi-monthly, including new entries and updates to existing entries. The companies, listed in alphabetical order, will have their most recent results reported as well as broader information around the company’s background, site numbers and board make-up. Companies can now have an unlimited number of people receive access to Propel Premium for a year for £995 plus VAT – whether they are an operator or a supplier. The single subscription rate is £495 plus VAT for operators and £595 plus VAT for suppliers. Email to upgrade your subscription. Premium subscribers are also being given exclusive access to the recording and slides to Propel Multi-Club Conferences. They also receive their morning newsletter 11 hours early, at 7pm the evening before; regular video content and regular exclusive columns from Propel group editor Mark Wingett. 

TDR and Sycamore in talks for joint Subway bid: Private equity firms TDR Capital and Sycamore Partners are in talks to team up in their pursuit to acquire sandwich restaurant chain Subway, people familiar with the matter have told Reuters. Subway expects to fetch well over $9bn in a deal, and it remains uncertain whether TDR and Sycamore can meet its price expectations, the sources said. Another group led by Roark Capital remains in the running, the sources added. The bidders are continuing to carry out due diligence, and Subway may wrap up the sale process by the end of the month, one of the sources said. Private equity firm Advent International, which had teamed up with Goldman Sachs Asset Management on a bid for Subway, has dropped out of the process, the sources said. Goldman Sachs may decide to team up with one of the other bidders. A consideration for Roark in seeking to acquire Subway has been its ownership of Jimmy John’s, another sandwich chain, according to the sources. The two sandwich franchises compete for a similar base of customers and franchisees, though Roark is betting that the strategies of the two brands will not conflict with each other. Illinois-based Jimmy John’s has more than 2,600 restaurants in 43 states. Milford, Connecticut-based Subway has more than 37,000 restaurants in over 100 countries. Subway, Roark and TDR did not immediately respond to requests for comment. Advent, Goldman Sachs and Sycamore declined to comment.

XP Factory reports H1 double-digit sales growth: XP Factory, owner of the Escape Hunt and Boom Battle Bar brands, has reported double digit like-for-like sales growth across both its concepts in the first half of the year. Group turnover climbed 131% to £18.8m (H1 2022: £8.1m) in the period. Boom Battle Bar saw like-for-like sales increase 19% in the 26 weeks to 2 July 2023, while Escape Hunt saw a 20% increase. The company reported owner operated site level Ebitda of circa £3.8m up 245% (H1 2022: £1.1m), with franchise Ebitda of circa £1.5m up circa 30% (H1 2022: £1.1m). Boom franchise sites in Chelmsford and Ealing were acquired in June 2023. The company said: “The board was delighted with the trading performance in the first four months of 2023, delivering numbers ahead of internal expectations. Normal seasonality patterns for the industry see May and June typically a little softer, but as with its peers, this was exacerbated somewhat this year, due to the uncharacteristically hot weather and the adverse impact of rail strikes in London. Nonetheless, the group closed H1 in line with its plan. Notwithstanding the ongoing rhetoric of the cost of living crisis and rising interest rates, trading in July was significantly ahead of May and June and early indications are positive for August. Looking further out, the company is experiencing record levels of corporate and group bookings for H2 2023, which together with July’s performance helps underpin the board’s confidence in a full year performance in line with market expectations.” Richard Harpham, chief executive of XP Factory, said “We are delighted to have delivered such transformational growth compared to the same period in 2022. The performance in Escape Hunt has been outstanding and we are delighted to see the young Boom business continue to mature with ongoing improvements to its operating metrics. We are mindful of the pressures on consumers and on our cost base which bring an element of short-term caution but we remain optimistic for the future of both our businesses and for the 2023 outturn.”

Britain’s era of cheap food is over, say economists: Britain’s era of cheap food has come to an end, economists have said, as the Bank of England warned grocery price inflation will remain in double digits until the end of the year. The Telegraph reports that bank officials said that while there was “wide agreement” among retailers and suppliers that food inflation “had now peaked”, prices were likely to keep rising for the foreseeable future, with own brands seeing the fastest increases. Food price inflation peaked at 19.2% in March, a 45-year high, according to the Office for National Statistics. It has eased sharply in recent months, but remained stubbornly high at 17.3% in June. Retailers told the Bank that food prices were still expected to rise at an annual pace of “around 10% or slightly lower” by the end of 2023. Barret Kupelian, a senior economist at PwC, said: “The bad news is that even though food inflation is expected to moderate, food prices will remain high and not decrease. This means that the era of cheap food has probably come to an end in the UK.” He urged politicians to do more to bolster the domestic food industry to temper future price rises.

Slowdown in services sector raises recession fears: There was a “loss of momentum” within the biggest sector of the UK economy last month, renewing fears that a recession is lurking around the corner. The Times reports activity levels and new work among companies in the services sector expanded at much slower rates in July than in the previous month, according to the closely-watched purchasing managers’ index from S&P Global and Chartered Institute of Procurement & Supply, which surveyed 650 businesses. The headline business activity reading fell to 51.5 in July, in line with what economists had expected but down from 53.7 in June. Anything above 50 indicates growth rather than contraction. July marked the sixth straight month that the reading has been in positive territory, although it was the service sector’s weakest performance over that period having fallen in each of the past three months. “The loss of momentum signalled by service providers in July suggests that the UK economy is set to flatline at best in the coming months as higher borrowing costs take a bigger toll on consumer spending and business confidence,” said Tim Moore, economics director at S&P Global Market Intelligence, which compiles the survey. Rising interest rates and elevated inflation crimping budgets were said to be the main reasons behind “fragile customer demand”, with a number of respondents claiming that they were finding it more difficult to convert sales opportunities amid “subdued” confidence among businesses and households. The more optimistic companies tended to be in the travel and leisure industries, where household spending is still proving resilient. Concerns remain in the sector about the impact of squeezed disposable income among households, although 48% of those polled still expect their output to be higher in 12 months’ time than it is currently. Only 12% predict a decline. That said, the optimism reading slipped to its lowest since January. “The wind was knocked out of the sails of the service sector in July,” said John Glen, chief economist at the CIPS. “In response to interest rate hikes through the summer, businesses were re-thinking their investment plans and focussing on paying higher wage bills and keeping up with their brutal business costs instead of expanding their portfolio of products.”

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