Consumer

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

Restaurant operators have been gorging themselves on the British appetite for dining and drinking. Get ready for the diet.

Since the U.K. emerged from recession, much of the extra income in consumer pockets has gone on eating out, rather than on buying stuff. With inflation outstripping wage growth, that spending on so-called "experiences" might be reined in too. Not a happy prospect for restaurant chains in the crowded "casual-dining" market, nor the private equity groups that back many of them.

Eats Everything
Independent operators opened almost twice as many outlets as restaurant chains in 2016-17
Source: Local Data Company

Even before any real downturn in demand, life's become more challenging for restaurateurs. Costs have risen because of Britain's minimum wage policy and higher business rates. Thanks to the slumping pound, restaurants must pay more for food and drink too. The plentiful supply of cheap migrant workers might be cut off after Britain leaves the EU.

This all takes place against a backdrop of rising rents, as operators scrap for the best sites, and not just in London. Prime pitches in thriving regional developments such as Liverpool One and Birmingham's Bullring command rents of more than 55 pounds per square ft. That beats affluent London suburbs such as Islington and Clapham, according to property consultants Colliers International.

The casual dining chains need like-for-like sales growth of at least 5 percent to cope with these extra costs, says Paul Newman of professional services group RSM. 

Flatlining
Underlying pub and restaurant sales have been broadly flat for the past three months while costs are rising
Coffer Peach Business Tracker

But while Brits haven't stopped heading out to eat yet, the industry's problem is that there are too many destinations to choose from. Just as informal meals out have mushroomed, so have the chains, meaning custom is spread too thin.

Still Hungry
Even after five years of expansion, food and beverage is one of the fastest growing categories
Source: Local Data Company

The strain is showing. Frankie & Benny's owner Restaurant Group Plc has had a tough year, though recent trading is more encouraging. Comptoir Group Plc, Wildwood pizza and grill owner Tasty Plc and patisserie chain operator Richoux Group Plc, are all struggling. Handmade Burger Co entered administration last month.

The response has been to cut back on expansion. Whereas casual dining chains were often looking to open about 30 sites a year, property consultant CBRE says that has halved. Others are going further. Restaurant Group has closed 41 locations, about 10 percent of its estate. Jamie's Italian, Byron Burger and Strada are trimming too. TPG-owned Prezzo has put 26 sites on the market, although it is adding space elsewhere.

Churning Up
As conditions become tougher, a fifth of British food and beverage outlets have undergone change
Source: Local Data Company

Consolidation looks inevitable given all the oversupply. Last year, restaurant and bar operator Drake & Morgan bought Corney & Barrow wine bars. That should be a taste of things to come.

There's an obvious impact on the commercial property market. Companies still want sites in the best locations, but demand is cooling elsewhere. Landlords are having to tempt tenants with more incentives, such as rent-free periods.

As a slowing economy starts to bite, companies will need to work harder to keep their customers by reflecting evolving tastes such as the trend for vegetarian and healthy dining. They'll also find themselves competing more with cut-price operators such as JD Wetherspoon Plc. This is an industry with a lot on its plate.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andrea Felsted in London at afelsted@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net