Did smoke signals lead to the wrong investment decision?

Here’s a great example of how an industry might take a too optimistic view of a change in legislation.

Students of AQA AS Business Unit 1 will soon be learning about how changes in legislation can affect demand in a market. The tricky part for a start-up or small business is to work out whether the expected change in demand after a change in legislation will occur, and if so by how much.

Many teachers will use the example of the introduction of the smoking ban. The ban was taken as a signal by restaurant and pub operators to invest in the catering facilities, and many new entrants in the eating-out industry sprung up in anticipation of higher demand.

The logic was simple. A smoke-free environment would attract customers who were previously put off by the prospect of a meal out accompanied with foul-smelling clothes on their return home.

However, an interesting article in the Guardian suggests that the expected increase in demand for eating out at smoke-free pubs and restaurants has not occurred.

A combination of the credit crunch and shifts in consumer tastes towards fast-food (perceived as better value) and eating-in have led to disappointing demand. The returns on that investment for many operators will be poor.

Some good stats in the article, including:

£6,200: The average outlay of a pub in England in preparation for the smoking ban.

60%: Share of JD Wetherspoon’s revenue now generated by food-related sales.

270p: Farm-gate price of a kg of beef - a 23% rise since the beginning of the year (suggesting that catering outlets will face pressure on their profit margins from rising raw material costs)