A CEO’s take on the effect of the recession on UK restaurants

The Restaurant Group plc operates several hundred mid-market restaurants in the UK, trading under familiar names such as Frankie & Benny’s, Chiquito and Garfunkels. I came across a really useful piece of research evidence whilst looking through their Annual Report and Trading Statement for 2008 in which the CEO of the business outlines the potential effects of the UK recession on strategy - and how the recession is viewed as a net positive for the business!

There has been much media commentary on the woes of the UK restaurant sector over the last couple of years. Eating in, it is often said, “has become the new eating out”. So were the UK’s mainstream restaurants left largely empty as a result of the recession? Apparently not.

Andrew Page is TRG’s CEO and his operational review in the 2008 trading statement contains a very useful summary of the effect of the UK recession on the restaurant sector. I noted down some of the key points here:

The positive long-term trend in eating out:

- Eating out has become an increasingly popular pastime for large parts of the UK population in recent years with growth trending at levels ahead of long-term GDP growth
- Industry is supported by favourable socio-economic factors such as an ageing population, more females in work and levels of disposable income significantly higher than in previous generations
- Eating out, particularly at popular price points (£10-£16 spend per head), is a relatively “small ticket” item for most people
- For many customers, a restaurant meal at those price points has become a habitual part of their lives and something that they are reluctant to give up altogether (though they might reduce the number of times they purchase)

The threat posed by the UK recession:

- Eating out represents, to a significant degree, discretionary spend and as such can be flexed according to consumers’ disposable income and confidence.
- Two key macro-economic drivers for consumer spend which tend to influence the restaurant market are interest rates and employment levels.
- Interest rates have been held at an all-time low during 2009, but have not yet fed through into sustained higher disposable incomes
- Unemployment (rising) will act as a drag on consumer spending for 1-2 years

Factors that have enabled TRG to withstand the economic downturn:

- Distinct market positioning in segments (mainly out-of town restaurant locations; many next to cinemas where attendances continue to boom)
- Affordable price points (and avoiding the deep discounting that has pervaded large parts of the market)
- Product offerings which have wide appeal to most socio-economic groups
- A commitment to delivering great hospitality to customers

Is the recession an opportunity or a threat?

A really interesting quote at the end of the CEO’s statement suggests that Andrew Page sees lots of positives for his business from the economic downturn:

“Whilst the short-term outlook for the UK economy and consumer-facing businesses is trickier and may make life difficult for many companies, we believe that beyond the short-term it is likely to have a cathartic and positive effect upon our sector. The reasons for this are two-fold: firstly, some operators will withdraw or significantly downscale their plans and secondly, it is likely, for some time, to deter new entrants. Combined, these factors should act as a brake on restaurant supply and the positive impact of this is likely to be felt for some time. Looking forward, companies with sound finances and strong market positions will emerge from this recession in a significantly enhanced position.”

Two really important insights for students studying the recession in that quote above.

(1) A deep recession such as that experienced by the UK in 2008-2010 has the effect of accelerating the decline of weaker competitors in a market. It becomes a question of “survival of the fittest”. That is nearly always good news for the best businesses in any market or industry
(2) Lower market sales and profits act as a barrier to entry - new entrants are less likely to enter a market whilst conditions are weak.