The last year has been a difficult one for the restaurant industry. While the pandemic was tough for a lot of businesses, many managed to hold on to dear life only to go out of business in the years after.
This has meant that the market for buying restaurants and restaurant space has suffered. Not only this but the pandemic changed the way people eat out which according to Simon Chaplin, senior director of Pubs, Restaurants and Franchising at Christie and Co, has caused a realignment in which business models are viable and which businesses are looking to expand.
The usual story of rising interest rates and inflated product costs meant more companies were trading at a loss making it much harder for many businesses to be acquired by pirate equity funds who would leverage the company’s profits to acquire debt used to buy the company.
What transactions did take place in 2023, what types of companies were able to participate in this and how will the market look in 2024?
The rise of the franchise
The main players in the restaurant transaction market last year were franchises. Christie helped brands such as Sushi Shop and Chozen Noodles as well as international brands like Carl’ s Jr, Paulaner and Bonchon to enter the UK market. According to Chaplin this is again a result of the pandemic as it changed our dining habits and made delivery food a bigger option for many people.
As well as the pandemic the cost of living crisis is also a factor in the increase of franchises. The fact people have less disposable income when either going out to eat or ordering in means that they are doing it much less frequently. As a result people are tending to go with tried and tested brands meaning franchises are seeing the benefit. This is then causing franchises to expand. Franchises are also less of a risk for investors.
“2023 was a year when everyone was meant to be struggling. The one sector that grew was QSR and most of the QSR operators are franchised. I think franchises give lenders certainty money is tight at the minute and they don’t want to lend value to restaurants or hospitality, but they will lend money to franchise brands because they know that there’s safety in numbers. There is a bit more certainty and you don’t find many of them fail,” Chaplin says.
The increase of franchises in the market has also increased the number of foreign franchises in the UK such as the aforementioned Carl’s Jr but also other American fast food brands like Popeyes and Wendy’s. Chaplin believes that this can only be a good thing as these American brands bring a strong product and brand identity which has been proven to work bringing more competition to the market which can only benefit the consumer.
“We think it’s a good thing. It’s more competition, more people interested in taking on those franchises. Carl’s Jr. is one we’re bringing over from the States. They’re big in Europe, they’ve got 102 sites in Europe, but trying to get them into the UK into a pretty competitive burger market [is difficult] but they have a distinctive brand which stands out. So I think homegrown brands are fine but consumers are looking for something a little bit different and the novelty of a worldwide brand can be quite important,” explains Chaplin.
Which markets will suffer?
With an increase in franchising it is inevitable that other areas of the restaurant industry will suffer as there is only a finite amount of customers and money to go around. The first instinct would be to say that independent restaurants will struggle as people increasingly go for tried and tested brands.
However, Chaplin does not expect this to be the case as there will always be room for the independents in the shape of local cafes and family run businesses as well as in the high end market, although many renowned chefs are being forced to shut some venues to focus their energy on just one.
What Chaplin predicts is that the mid-market will struggle in the coming year. He believes the decline of footfall in shopping centres and the cost of living crisis will mean that brands such as Pizza Express or Prezzo will be forced to downsize.
“Shopping centres have seen footfall drop, so have parades and high streets in mid market towns where you’d have five or six branded operators but they opened in towns which they shouldn’t have done. They grew for numbers and if those towns aren’t busy with shoppers, then it’s difficult. The big shopping centres are still struggling for footfall.
“The big stores have gone, House of Fraser whatever it might be but all those restaurants congregated around those stores and there’s just not the people going there. So online shopping for retail, food or clothes means that the restaurants are not getting that business. So I think that mid market, family dining experience is suffering. The pubs have also stepped into that quite nicely and provided an as good if not better product,” states Chaplin.
The year ahead
Despite what has previously been said Chaplin still believes that 2024 can be a better year for the industry. As produce costs come down with inflation he believes that there will be more profit on the table for many operators. As these profits roll in he believes that operators will have to spend money on improving existing sites, whether that be training staff or refurbishing completely, which will only improve the customer experience. Then as interest rates fall and borrowing becomes easier many companies may look at expanding again.