The top five issues facing the restaurant industry in 2017:
With some 200 restaurants opening in London in 2016 alone the restaurant sector appears to have gone from strength to strength. However now that we are a little over 7 weeks in, what does 2017 hold for the industry? Here is our take on the top five issues facing the industry between now and December.
Decreasing margins:
The market turmoil and subsequent fall in sterling caused by last year’s EU referendum has led the value of the £ against the € has decreased some 16.7% between January 2016 and January 2017. Coupled with the uncertainty surrounding the type of deal the UK government will be able to negotiate, be it “hard, soft or red white and blue” (personally I would like my Brexit like my eggs - over easy), has resulted in a marked increase in the cost of importing ingredients.
With branded operators, such as Ed’s Easy Diner, already falling victim to current market conditions this increase in base cost will either need to be passed on to the consumer via an increase in prices or lead to a reduction of what may already be a rather fine margin. Operators will also need to ensure they differentiate themselves from competition to maintain footfall and market share.
Staffing:
The EU referendum has also cast doubt on the future of EU workers employed in the UK hospitality industry with latest figures suggesting that 25% of staff come from outside of the UK. Notwithstanding Amber Rudd’s recent assurances regarding the fate of EU nationals in a letter to MP’s restaurateurs will eagerly await the result of negotiations following the triggering of article 50 to understand what the result means for existing staff and new starters.
Business Rates:
2017 also sees the implementation of the much discussed, yet possibly little understood, business rates review due in April. The Government have welcomed the review with the headline grabbing statement that “6,000 small businesses in the UK will pay no rates at all”.
However, behind the headlines the exercise will be “cash neutral” meaning a reduction in rates for one area will see a rise in another. London is set to be the worst hit with premises seeing an average 14% increase – with some extreme examples, such as Verde and Co in Spitalfields citing a 53% rise.
Added to increasing rents, service charge and import costs the effect of the rise may have to be passed on to the consumer in one way or another. Yet with increased choice in the market whether customers will tolerate price increases remains to be seen.
Premises:
Over the past 12 months increased competition for restaurant premises and a distinct lack of supply has led to a marked rise in the cost of securing the right location. One well-known South West London commercial agent commented “competition for restaurants in the best position is definitely fiercer than 12 months ago with around 25 concepts after at the same site. Even shell and core premises in those in secondary locations tend to be oversubscribed with offers. If it’s not a premium then the rent on a new lease tends to be very high”.
The increase in demand can to some extent be attributed to:
- established multi-nationals looking at more cost-effective sites in secondary locations;
- foreign restaurants with private equity backing coming to the market and paying top rents to secure the right location; and
- fledgling concepts expanding quickly.
Once rent deposits, fees and fit out costs are considered the capital expenditure can be eye-watering.
Increased competition:
Finally, 2016 was the year street food went mainstream with concepts such as Som Saa going from residencies to permanent locations and temporary markets such as Nightales or Box Park becoming commonplace. The trend has also affected traditional markets, such as that in Leather Lane EC1, which have seen an increase in the number of street food vendors seeking to take advantage of lower entry costs and regulation.
With many of these markets being near to more traditional bricks-and-mortar premises and lower entry costs potentially allowing the vendors to benefit from greater margins, there is a fine balance to be sought between increasing competition and choice for the consumer and preventing market stalls from obscuring the frontage of, and taking much needed custom from, permanent premises.
Indeed, some restaurateurs are taking market pitches in front of their permanent premises to maintain visibility and capitalise on the passing market trade.
Conclusion:
2017 is shaping up to be a challenging year for an industry which has enjoyed exceptional growth over the past decade. As the erosion of profit margins and increased competition are likely to be barriers to entry for new concepts; the sector may find that these entrants are pushed to the fringes while Landlord’s opt to let their premises to established operators leading to a homogenisation of our high streets.
However, with prior planning and proactive advice operators can ensure they have options needed to set themselves up for success. If you are looking at looking to launch a new restaurant or coffee shop in 2017 or expand your existing offering and would like to discuss how you can ensure your business has plans in place to help it grow, then please call Alex Hutchings on 0207 436 5151 or email ah@cbglaw.co.uk.