Slowdown in the Casual Dining Sector – A blip or a sign that “Winter is Coming”?

Alex Doman

Do the recent difficult series of results in the casual dining sector, with Fulham Shore the latest example, reflect the industry as a whole?

The announcement last week of Franca Manca-owner Fulham Shore’s profit warning and subsequent plummet in share price – is just the latest in a long string of difficult results in the casual dining sector.

This has led to many industry analysts scratching their heads about whether the swathe of negative results are company specific, or reflective of the industry as a whole.

For example, Russ Mould an investment director at AJ Bell, recently said: “Whether Fulham Shore’s problems are company-specific or indicative of a wider problem in the restaurant industry (and for that matter any business dependent on discretionary consumer spending, be it retail, travel or media) remains to be seen.”

However, as predicted at the beginning of the year, 2017 has proven to be the year that chickens come home to roost in casual dining.

This is because of a three-pronged assault on profitability:

• Sky-rocketing wages and business rates

• Higher import prices and a more difficult hiring market as a result of Brexit

• Long-term changing consumer preferences.

Our view is twofold:

1) that consumer confidence has been hit and discretionary consumer spend is going down. As Oliver Harvey, macro strategist at Deutsche Bank, argued in his recent paper “Winter is Coming” – consumer spend is slowing and it is likely that this is the beginning of a longer slump. As can be seen from the below graph, growth in household spending is indeed on the decline.

2) that lower consumer confidence will affect businesses and industries unevenly. In casual dining terms, those most likely to be badly hit are single-concept/internationally-inspired restaurant chains with exposure to London and the South East.

For this reason, we suspect businesses like Jamie’s Italian, Yo! Sushi, and Bella Italia are likely to suffer. This is because of their exposure to the South East and non-prime sites; which means more competition, higher business rates and a tighter labour supply. Those reliant on importing most of their food are left exposed to FX risk. Add on top of this the Darwinian pressure created by delivery – which diminishes the important of location and increases the importance of great tasting food.

In contrast, restaurants with great propositions in either high-density sites or areas with high demand and low supply should perform well.

All in all, we believe 2017 signals the beginning of a period of creative destruction.

Conclusion – Winter has arrived for the Casual Dining Industry. The question is how long will this Winter be?

We have entered an exceptionally difficult period for the Casual Dining industry. Lots of brands have ambitious expansion programmes in their plans. This is probably ill-advised. That is unless you have a great proposition – think Nando’s – and the right site for your business model.

Alex Doman

Alex is an engagement manager with Stone & River, focusing on strategy, proposition design and innovation for consumer facing organisations.

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