Restaurants vs. recession

3rd March 2010, 12:08pm

In January, the Office for National Statistics credited hotels and restaurants with making the biggest contribution to national economic growth during the last three months of 2009. But how has the industry really coped in the face of recession? Clare Riley examines the situation.

The facts are plain and simple. Until Q4 2009, the UK economy had contracted for six consecutive quarters, signaling the longest period of recession since records began in 1955. The final months of 2009 saw the economy grow by a much weaker-than-expected 0.1%. Newspaper headlines clung onto to the technicality that the UK had emerged from recession but city analysts described it as a major blow to those hoping for recovery. Shadow chancellor, George Osborne, summed it up by calling for realism, telling the BBC: "Let's be clear – this is about as weak growth as you can get."

By all accounts any economic recovery, including the restaurant industry, looks set to be frail and slow. It's this that forms the subject of a new report published at the start of this year.

'Downturn in Dining', compiled by Dutch investment bank Rabobank, assesses the impact the recession has had on the European foodservice market and tentatively predicts that the industry will not return to 2007/08 levels of growth until 2013. It adds that the sector has seen the worst decline in volumes since 2001.

One common denominator throughout 'Downturn in Dining' is the notion that eating out is now firmly embedded in European culture, particularly the UK. The simple fact is that eating out is not a luxury thing to do anymore and as consumers become more time-strapped they look to the market to make their lives more convenient. Backing up this theory are the hard facts. Between 1996 and 2008, the amount we spend on eating out rose from 4% to 33.7% of total food expenditure. Quick service restaurants (QSR) continue to grow on average by 4.4% every year and chain concepts grow 8.4% every year, according to Rabobank.

And it's chain restaurants which are fast becoming the front-runners in the fight against the recession. They have benefited from consumers who refuse to give up eating out entirely and instead opt to tighten their purse-strings. The report explains how the switch to quick service concepts continues to affect the more traditional operator: "Full service restaurants (FSR) in Europe will be subject to both trading out and down. FSRs will be negatively impacted as consumers forego the most expensive meals…In addition, FSRs tend to suffer from a lack of flexibility in these times as they are unable to compete with QSRs and other sectors below a certain price point."

So what methods have British high streets implemented to entice those diners who pre-recession would scoff at the idea of stepping inside a Pizza Hut?

Well for a start, chain operators have upped their game and become very clever at using web-based promotions to increase levels of trade, particularly targeting weekdays when footfall is typically lower. Peter Backman, managing director of analysis firm Horizons, says this kind of marketing has been the key to survival.

"On the whole, the eating out sector has performed much better during the downturn than anyone would have expected," notes Backman. "Most observers expected more casualties than we have seen, this has largely been down to the effective costcutting measures that operators have employed, heavy discounting through money-off vouchers and '2for1' schemes which have kept consumers eating out."

Discounting began in earnest at the end of 2008 as restaurant operators anticipated a steeper than usual post-Christmas downturn and some 30 restaurant chains started discounting their offers with vouchers via the Internet. The result, not surprisingly, was a surge in consumer interest, fuelled by media coverage of the offers.

But the nature of these offers has changed over time. At the start of 2009 half of all offers were of the '2for1', '£10 off' or '50%' format; six months later they made up 55% of all offers. Meal deals were less than 10% in early January and by June they were over 20%. And the offers have become more focused. 'Free coffee', for example, grew from less than 20% to over a quarter during the six-month period.

Backman suggests that while some operators have been happy to follow the herd in their discounting strategy, others are now appraising the profit impact of the offers. "The result has been that shrewd operators have been reducing their reliance on scatter-gun 'sell it cheap to get the customers in at any cost' strategies in favour of plans that deliver a balance of volume, profi t and improve customer loyalty.

"We cautioned against seeing these deals as an inevitable long term factor. Instead we say that when better times return, consumers will not be so driven by the offer of these sorts of deals. Recent rationalisation of discounted offers seems to be bearing this out. What seems to be happening is that these offers are morphing into a more intelligent approach to issues such as increasing margins through targeted offers, and building customer loyalty through point's collections schemes," he says.

Negotiating deals with suppliers has also been crucial to increasing profitability. Backman calls it 'menu engineering' or in other words improving the margins on dishes by altering or downgrading the raw materials used or the weight of the raw materials. So a 10oz steak has become an 8oz and Aberdeen Angus and Wagyu beef is now listed more frequently as steak.

Pub companies have become particularly good at this. At Ember Inns a 'chargrilled gammon steak' last year became 'half a chargrilled salmon steak' and at Beefeater a '5oz rump steak' became a '4oz rump steak'.

The menu at Brewers Fayre, which previously featured an '8oz sirloin steak' has now omitted mention of the weight. Likewise, Harvester reduced the price of its fl ame-grilled salmon by 3p, and where previously it was advertised as being 8oz, now makes no mention of its weight.

Operators also substituted cheaper ingredients. The Edwards pub chain, for example, previously sold a black Angus, which was substituted with black pepper beef, and Spirit stopped mentioning the quality of the beef used in its cheese & bacon burger, which once boasted being made from '100% prime beef'. Wetherspoon's rump steak, once advertised on the menu as being from South America, no longer mentions its origin and the price has come down by £1.40.

Backman adds that by tying these methods together, chain concepts are surviving: "Operators have worked hard at reducing their costs by negotiating good deals from suppliers, putting more cost-effective dishes on their menus, ensuring they weren't over-staffed, and keeping food wastage to a minimum."

The recovery from the recession will be tricky to gauge. But it hasn't stopped analysts such as Horizons and Plimsoll second-guessing the fight that lies ahead.

Plimsoll Industry Analysis suggests conditions in 2010 will be much brighter for the eating out market. It says that restaurants are slowly emerging from the malaise of the last two years. More job losses and consolidations of businesses are expected with around 5,000 more jobs needing to be axed for companies to return to profit.

"Over the next two quarters we anticipate that with slightly upbeat market sentiment the market will continue to grow for the next six months. Sectors that will do well include branded mid-spend, branded restaurant and quick service restaurants as well as managed pubs," says Backman.

The message for everyone involved in the industry appears to be that the next few months will be very trying, with a mixture of good news and bad news. With economic growth of just 0.1%, the danger of another dip still remains very real.

And so as we continue through the various rounds in the fi ght against the downturn, what's the one thing restaurateurs can do to help themselves stay on top? "The key to potential success is competent management that can focus on the job of satisfying customers better than the competition," says Backman.

Simple then. Let battle commence.

Related Articles:

• 19 Aug 2011 - Pizza Hut unveils fresh changes to its restaurant experience
• 12 Apr 2010 - Pizza Hut targets pay day diners in nationwide ATM campaign