Industry Activity

Will Baxter
09/05/2017 - 07:30
The hospitality sector recorded a healthy level of M&A activity in 2016, consistent with the previous year. Whilst the sector is highly susceptible to economic uncertainty and shifts in consumer confidence, interest from both trade and private equity investors continues to a range of transactions. Will Baxter, head of hospitality, Grant Thornton UK LLP, explains.

The biggest deal of 2016 was Heineken’s takeover approach to leased pub operator Punch Taverns. If approved, the deal will see the 3,350 Punch estate split with Patron Capital, a real estate investment fund, with Heineken taking the lion’s share of 1,900 pubs.

A growing trend in the pub sector is for food-led pubs to add boutique-style accommodation to their offering, giving operators the opportunity to take advantage of the 'staycation' and weekend breaks market.  The growth in popularity of this area was evidenced through two deals in 2016, with Penta Capital providing backing to Seafood Pub Company's growth plans, and The Coaching Inn Group securing a further £10 million investment from the Business Growth Fund.

A record 200 new restaurants opened in London last year, beating the previous high of 179 in 2015. However, there were also 76 closures, which is a significant increase on the previous year and could indicate that a peak has been reached in the restaurant market in the capital. There is no doubt that it is an increasingly competitive market, with more 'traditional' foodservice operators under fire from emerging innovative offerings.

One trend gaining traction is that of 'eatertainment'. Consumers, in particular millennials, are beginning to seek ‘more than a meal’ when they eat out. Operators are therefore looking to provide unique experiences that cannot be recreated at home, alongside a food and drink offering. 2016 saw a rise in these types of venues incorporating entertainment, such as crazy golf, as well as alternative formats such as street food markets.

In London, Jonathan Downey, has been a key figure in the street food market boom, establishing Street Feast in 2012 - which converts vacant sites into bustling street food markets with multiple street food and bar concepts. More recently, he teamed up with Leon’s Henry Dimbleby to create London Union, raising £2.5 million through crowd-funding to roll out the concept. Other similar successful formats include Boxpark, which opened its second site in Croydon in 2016, and street food concept Trinity Kitchen in Leeds.

Whilst there is a definite trend and growing interest in healthy eating and nutrition, the British love affair with curry stands firm. Indian restaurants have always been popular with British consumers, however the cuisine has been undergoing a renaissance in recent years with new entrants offering twists on more traditional offerings, and many players establishing fast-growing chains.

Dishoom, a Bombay-style café, opened its first site in Covent Garden in 2010, and now has four restaurants across London as well as a recently opened site in Edinburgh. Other new operators in London include Kricket, Gunpowder and the Naanery at Baluchi. The trend for new Indian formats is in no way confined to London, with successful Indian restaurant operators outside of the capital including MyLahore and Mowgli.

The strong competition for restaurant sites during 2016 meant that property prices rose by over 14%, according to property agency Christie + Co. With the business rates revaluation coming into effect on 1 April 2017, property costs continue to put operators under pressure – especially in London. However, there is a widely felt sentiment that rents could be reaching a level that cannot be sustained going forward. Whilst rates won’t be going down, the effect of the rates review should halt or slow price increases, as a rise in the number of vacant properties will reduce competition for sites.

There is no doubt that 2017 is going to be another challenging year for the sector, against a backdrop of ongoing uncertainty surrounding Brexit and wavering consumer confidence.  Wider sector issues including increased staffing costs and business rates, and rising input prices due to the depreciation of sterling will create further pressures.

However, as 2016 demonstrated, these factors are unlikely to have a major impact on a sector where the need for convenience continues to drive the consumption of food and drink out of home. Both trade and private equity acquirers will continue to pursue attractive assets in this growing market.

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