Going out for dinner this weekend? Chances are, you have a lot more choices than you used to.
And while that’s good for U.K. consumers, it could spell trouble for investors in restaurants, particularly if demand starts to slow.
According to figures from the Local Data Company, which tracks the number of retail and leisure outlets across the U.K., restaurants, cafes and fast-food chains have grown faster than any other category over the past three-and-a-half years.
Casual and family-focused dining chains in particular have been gorging on new space. The private equity buyers of the Byron, Zizzi and Hawksmoor chains all cited the ability to roll out new restaurants as part of the reason for the deals. PizzaExpress has also been expanding in the U.K., as well as China.
Their hunger for new sites is understandable. Over the last two to three years, British consumers have been happy to spend extra income eating out. In fact, it’s been a bugbear for the supermarkets that Britons seem happier to go out for a pizza than put one in their shopping baskets.
Shopping center operators are also in on the act, having realized that cafes and restaurants are not only a draw to consumers, but can fill empty units when stores move out. Catering outlets now account for as much as 30 percent of U.K. shopping malls, up from 5 percent before the financial crisis, according to retail property consultant Harper Dennis Hobbs. New developments can target an even higher proportion of food.
As my Gadfly colleague Shelly Banjo has argued, restaurants are the ultimate consumer discretionary purchase, and in the U.K. there are some worrying signs. Spending in restaurants and cafes has cooled recently, and some companies are feeling the effects. Restaurant Group, whose brands include Garfunkel’s, cut its profit outlook as it struggles with increased competition and a drop in visitors to retail parks, where many of its outlets are based.
The company said Friday it replaced its chief executive, Danny Breithaupt, after just two years on the job, as a new leader is needed to direct the second phase of a strategic review that started in April. This will include a review of the property portfolio and rate of expansion.
Dining chains also face competition from the growing ranks of companies that deliver to consumers’ homes. That includes everything from Domino’s Pizza — which has been performing well — to Just Eat and Deliveroo.
But with the economy wobbling, Britons are more likely to tighten their purse strings, and that may mean that having dinner out is the first thing to go.
The name of the game now for restaurant owners is to avoid suffering the same fate as Britain’s supermarkets, which kept up the pace of store openings across the U.K. around 2010, just as demand slowed and competition intensified from the German no-frills supermarkets. That ended badly, with profits tumbling and and big one-off charges as the value of property portfolios fell.
London may be somewhat immune to this trend — a pickup in tourism, fueled by the weak pound, could offset some of a downturn in domestic spending. But that might not be the case in other parts of the country, and that highlights the importance of taking action now, since much of the expansion in casual dining in recent years has been outside of the capital.
In a more difficult environment, restaurant operators need to make sure they have the sorts of concepts that consumers want, since, like fashion, food trends can be equally fickle. They don’t want to be left serving truffle-topped macaroni and cheese when Japanese gastropub fare is all the rage.
Chains would be wise to plan for a more difficult environment. A more moderate pace of new store openings would be more fitting for the current outlook than a headlong race for space, as would a preference for international expansion, where possible.
Restaurant operators should act now. Otherwise they face a bad case of indigestion.
©2016 Bloomberg L.P.
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