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Restaurant crisis: Are owners playing the blame game?

Restaurant crisis: Are owners playing the blame game?

The first quarter of 2018 saw a host of chain brands publicly admit to struggles. The Italian restaurants seemed hardest hit with Jamie's Italian, Carluccio’s Prezzo and Strada all announcing diminishing profits and venue closures.

Restaurant crisis: Are owners playing the blame game?

Outside of the Italian segment, Byron Burger and Chimichanga (owned by the same company as Prezzo) threw up their hands in distress; in fact, every one of Chimichanga’s locations shut up shop. Then in July Gaucho ran into trouble, closing all of it’s CAU sites. So is this the end of the crisis? If not, which brand will be next to announce closures? If the reports are anything to go by, it could be The Restaurant Group, which owns Frankie & Benny’s, Garfunkels and Chiquito.

With each announcement in the media, the story behind the closures seemed to evolve. From Brexit to property prices and then customer confidence, the different reasons given by the brands led people to question the truth behind the headlines and carefully prepared company statements. Who was telling the truth and who was playing the blame game?

It was to get to the bottom of this that Preoday carried out research questioning both the professionals of the food industry, and the consumers visiting restaurants around the UK. We all knew what was being said publicly, but could industry insiders shed a brighter light on the difficulties?

Tough competition

The results of the survey were intriguing. What did the professionals see as the number one reason for the general struggles of chain restaurants, pubs and bars? More than a third (38%) said the biggest problem was that there’s too much competition while all other reasons scored far lower. In second place was not having an understanding of customers (9%) and increasing rent (9%). Poor property decisions received just 3% of the vote.

There’s no lie is stating that competition is high. In late 2017 it was reported that since 2012 a net average of 743 new units have opened per year, and that in the preceding 12 months that figure had nearly doubled to 1,333, an increase of 44%. Prime pitches in key locations such as Liverpool One and Birmingham’s Bullring can now command huge rents, up to and beyond £55 per square ft. At the time of the study, the MCA warned that the number of sites risked outstripping demand. Given the outcome of the research, it would be natural to conclude that that prediction is reaching fruition.

Is competition the only reason?

According to Channel 4’s recent food documentary, ‘The Tricks of the Restaurant Trade’, over 50% of Britons are eating out every week. You might argue that with so many consumers looking for food options, that competition can’t possibly be the real reason for market difficulties.

The research explored this point further by posing a similar question, asking, not what the biggest issues in the industry were, but what the biggest issues facing their own business was. Using this angle, the respondents’ answers changed significantly. In fact, when voicing key concerns for the coming year it was found that the cost of labour scored highest, with 58% expecting to be troubled by it in the coming year. True, industry competition was still raised by 56% of respondents, but consumer confidence also scored high, with 35% citing it.

What does this tell us? Clearly, not all businesses associate their biggest issues with the rest of the market. Just 5% identified the cost of labour as the number one reason for struggles in the wider industry, yet it was the most popular response when considering their own business.

The price of labour

The problem of increasing operation costs (including labour) is compounded by its occurrence in a market where consumer confidence is purportedly low. UK consumer spending dropped to its lowest level in over five years during the first quarter of 2018 according to Visa’s UK consumer spending index; household spending was down 2.1% compared with a year earlier.

From April 2018, 2 million British workers received a pay rise of at least 4.4%, increasing the minimum wage from £7.50 per hour to £7.83 for over-25s. The increase amounted to more than £600 per year per full-time worker on basic pay – that includes most waiting and kitchen staff in the industry.

“The market has slowed down this year, this subdued growth coming as the industry faces multiple headwinds,” says MCA market analysis manager Peter Linden. “If we think back to the inflation rate of 2.7%, what this effectively means is negative volume growth.”

In short, if the annual growth in consumer spend has reduced, but the cost of running a food or drink business has gone up, profit rates are bound to fall.

So, in is it actually labour costs and not competition that lies at the heart of the problems faced by the industry? From the insights gathered during the research, it is clear that the question of the UK’s food and drink chain struggles cannot be solved with a single answer. While competition and the price of labour are going up, and cannot be avoided, businesses need to focus on off-setting their impact by giving customers enough of what they want to urge repeat spend – especially in this time of low consumer confidence.

One of those items, increasingly, is food ordering and delivery. While it isn’t encouraging people to eat in the restaurant, it is rallying them to spend. The problem here is that, while aggregators such as Just Eat and Deliveroo help chains fulfil orders, they can also hinder business profitability due to exuberant commission rates. For that reason, there’s perhaps a stronger argument for businesses to explore the benefits of their own branded platforms.

To conclude, while moving forward with new technologies such as mobile ordering is important to modern consumers, chains need to get their basics spot on – promoting singular customer service values and menus that attract the right audiences. To survive, businesses need to keep these goals in sight and not be distracted by novelty concepts – and they should make the most of the data gathered by their technologies to help them do so.

To find out more and download Preoday’s research, click here.

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