After a difficult start to 2018, this week brought more bad news for the UK restaurant sector. Casual Dining Group, owners of high-street chains Café Rouge and Bella Italia, announced losses of over £60 million, despite a small rise in sales.
A string of other well-known chains has experienced closures, losses or difficulties in the last 12 months. Earlier this year, pizza chain Prezzo closed 94 stores, Jamie’s Italian announced it was in debts of over £70 million, and Carluccio’s employed KPMG in a bid to cut costs. Since the beginning of 2015, shares in the Restaurant Group, which owns Frankie & Benny’s and Garfunkel’s, have lost two-thirds of their value.
Higher business rates, higher labour costs and food prices are squeezing already tight profit margins. The introduction of the National Living Wage in 2016 and subsequent rises have increased costs significantly, along with charges such as the Apprenticeship Levy and increased Employer’s Pension Contributions. EU workforce shortages, which we highlighted in a recent report, have also contributed to margin decreases, as employers choose local workers, who as a whole demand more money.
Food prices have also risen significantly above inflation since the Brexit vote, further increasing costs. These are compounded by the falling value of the pound.
Stagnating wages and falling real wages create another challenge. In 2017, real incomes fell for the 9th year running, affecting consumer confidence and spending on eating out.
Research this month by RSM found that in the context of falling wages and rising debt, consumers are still willing to spend on ‘experiences’ – which compete with the restaurant industry for consumers’ limited disposable income.
But while they have limited income, consumers are far from limited in choice when it comes to restaurants. The number of UK restaurants and food outlets has been steadily rising, from 64,000 outlets in 2012 to over 83,000 in 2016. Roger Tejwani, of stockbrokers Finncap, argues there is simply “too much capacity in the market”, making it harder for chains to retain customers.
In this climate, it’s perhaps unsurprising that some Private Equity firms have given the sector a wide berth, with transaction volumes considerably down in 2017.
In an environment in which it’s harder than ever to make a profit, restaurant chains must find ways to better understand changing consumer habits and stay ahead of their (many) competitors. To do this, technology is key.
The Deliveroo app has already boosted the UK casual dining sector through helping outlets access customers from their homes. A report by Capital Economics estimated that Deliveroo added £460m of revenue to the UK restaurant sector in 2017. An increase of Deliveroo takeaway orders helped boost Azzurri group’s sales by 12.5% last year. Deliveroo has also opened ‘pop up kitchens’ in areas of high demand for certain restaurants, widening access without setting up expensive high-street branches.
As well as enhancing deliveries, technology can be used to improve dining experience, brand awareness and drive reservations. Restaurants must take into account the rise of technology to ensure returns. Indeed, many already are.
For example, major chains such as McDonald’s have already introduced fully automated self-service kiosks, reducing errors and waiting times. Residents of Reykjavik, Iceland, have been able to get their takeaway delivered by drones since August last year. The digitisation of the dining experience shows no slowing down, and Deloitte predicts that “the restaurant of the future” will integrate technology into all stages of the customer experience.
Effective use of technology is also crucial in attracting the “customer of the future.” Young people aged 16-24 spend more money eating out than any other age group and will, therefore, shape future consumer trends. Deloitte’s casual dining report argues this demographic are likely to use online technology for writing and reading reviews, pre-ordering and examining digital menus.
With vast quantities of consumer data online, technology is also crucial in understanding changing dining habits and future customers.
In a crowded market with ever-tightening profit margins, restaurants that efficiently use technology to improve their offer above their competitors are most likely to see returns.