Peach Report

Staying upbeat despite the economic challenge

6 July, 2010

by Peter Martin and Tom Holman

The bad news is that we haven’t had the income squeeze yet – so it’s going to get tougher

Public spending cuts, low consumer confidence and rising unemployment could hit pubs and restaurants hard over the next few years – but opportunities for growth will be there for companies that can set themselves apart from the competition. That was the optimistic message coming from Peach Network’s Finance Forum in London.

Company directors and industry experts gathered to digest the impact of George Osborne’s emergency Budget and struck a generally upbeat tone - with speakers agreeing that while the Government’s measures would hurt business in many parts of the UK, long-term prospects for the eating and drinking-out sector remained positive.

Setting the scene with his opening presentation, KPMG chief economist Andrew Smith was cautiously optimistic on economic prospects, pointing out that neither company insolvencies nor unemployment had yet neared the levels of previous recessions.

But he questioned whether the government’s eagerness to reduce public debt might compromise the economic upturn, and warned that its estimates for recovery may prove too hopeful. “I’m not convinced that we’re going to get the [projected] growth, and the big worry is that there’s no plan B,” he said. Plans rarely stayed on track, he observed.
But as Michael Turner, executive chairman of Fullers, the London-based brewer and pub operator, put it: “At least this Government has a plan, which gives us some warning and some certainty.”

“The bad news,” added Andrew Smith, “is that we haven’t had the income squeeze yet – so it’s going to get tougher.”

Although, the KPMG man was more cheerful about prospects for pubs and restaurants: “All the survey evidence is that people value eating out very highly.”

That view is, of course, endorsed by figures from the Coffer Peach Business Tracker, which shows major operators turning in reasonable like-for-like sales through the first half of 2010. The question is whether that will continue?

The FD view

The forum’s panel of finance directors echoed the healthy prognosis, and expressed hope that it was robust enough to withstand the rise in VAT announced in the Budget. Tragus’ Mohan Mansigani welcomed the deferral of the hike until January, which gives businesses time to plan for the change, but warned that it would put further pressure on prices in a marketplace that was already offering plenty of money-off deals.

“The increase in VAT has taken away some of the pricing opportunities,” he said. “We have a tricky balancing act of winning market share through discounting and protecting our brand.”
Despite the challenges, Mansigani and fellow finance directors Charlie McLean of Gaucho and Frank Bandura of Carluccio’s were optimistic about prospects for expansion over the next few years. Gaucho is looking overseas for opportunities – “It helps to spread the risk,” said McLean – but is trying to ensure that growth does not compromise the business’ values. Carluccio’s is also being careful about expansion, making sure that each new site is a good fit for the company. “We’ve always had a reputation for being cautious, and we’ll continue to be so,” said Bandura.

By bringing new sites onto the market at improved rates, the recession has opened up plenty of prospects for expanding companies. “This is the perfect time to be picking up assets that have fallen by the wayside,” said Bandura. But Mansigani pointed out that as spending cuts started to bite, some parts of the country would be more suited to new openings than others over the next few years, with prospects for growth in London and the south east much rosier than in many other parts of Britain. “Central London is a different country in my view,” he said. “But I’m less optimistic about the North.”

It was noted that Chancellor Osborne had been quoting the recent Centre for Cities report on the north-south divide when it comes to private sector job creation: “For every private sector job generated in the North and Midlands between 1998 and 2008, 10 were created in London and the South.” See City hotspots and blackspots revealed

However, not all parts of the country outside the south east are the same, and picking those that have been creating new jobs from those more dependent on the public sector will be key.

More confidence

Investors and analysts continued the bright outlook for forum delegates. “I’m quite optimistic about the sector,” said Ron Pearson of Bowmark Capital, an investor in the Las Iguanas chain. “It’s certainly going to be tough, but I’ve no doubt the best businesses will continue to thrive.” Restaurants will have to make sure their customers receive consistently good returns on their spending, he said. “Whatever your price point, it’s all going to be about value for money.”

Paul Hemming of adviser Zolfo Cooper pointed out that many good businesses were still being hamstrung by banks refusing to lend. “There’s a lot of innovation coming through, but getting money behind it is still very difficult.” Investment might instead come from private equity or hedge fund specialists, suggested Mark Sheehan of Coffer Corporate Leisure. “The hedge fund industry is awash with cash at the moment.”

The finance forum ended with more cautiously upbeat views from Orchid chief executive Rufus Hall and Fuller’s Michael Turner. Both looked back ruefully on England’s performance at the football World Cup, the sales impact of which was lower than expected. “As with every World Cup in my experience as an operator, it was disappointing,” said Hall. “What we won on the swings we lost on the roundabouts – our drinking pubs did well, but the food-led outlets were down.”

But both were upbeat about the years ahead, despite the challenges presented by the Budget. “It’s good to see some firm planning from the Government because it means we can make plans of our own,” said Turner. “We can live with things like the VAT rise if we know they’re going to happen.”

For the Orchid group, with sites spread across the UK, the biggest threat of the next few years will be job cuts. “We’ve had a taste of what unemployment can do,” he said, referring to redundancies in the north east, which have impacted on Orchid pubs there. “The key is to understand local geographies and economies.”

Despite the positive outlook, questions remain. Flagging up the VAT increase in January in advance is good, but it will encourage consumers to keep spending this year, and particularly in the run-up to Christmas, no-one can confidently predict.

Then how will the VAT increase play on affordable luxuries like going out, compared to spending on bigger ticket consumer goods, into next year? Where will job cuts be most felt? Will London escape?

However, the experience of getting through last year seems to have given the sector more confidence to face the future – and despite media predictions, eating and drinking-out spend didn’t fall off a cliff in 2009.