Setting the trend

With theout of home eating market making strong headway last year the industry should be awash with enthusiasm. But that headline figure does not tell the full story

The UK foodservice sector broke through the £35bn sales barrier in 2005 after several years in the doldrums. The signs show that this progress will continue and should grow over the coming few years.

Comparison with Europe shows the UK performs comparatively well with an increase almost double the continental average and ahead of all the other main countries except the Spanish foodservice market.

However, even though the UK market is mature, the £503m sales increase in 2005 is disappointing representing as it does real growth of just 1.4%. This should be seen against the performance in the even more mature US market which earlier this year reported compound annual growth of 5.4% between 2003 and 2005.

The UK business can point to several mitigating factors for its relative lacklustre performance. For instance, the so-called Jamie Oliver effect, brought about by his negative portrayal of school meals, caused parents and children to become concerned over the quality of food being served. Conversely, several sectors of the market - notably the gastropub and coffee shop sectors - experienced growth well above the average.

Building on such successes, the Horizons consultancy is forecasting a modest growth in sales to 1.6% in 2006. This is despite the difficulties facing institutional sectors such as contract catering and school meals activities and the ongoing squeeze on turnover and profit in parts of the business where independent operators are an essential feature.

Positive signs should be noted within niche sectors such as the confidence in the fast casual division populated by a number of high street brands including Carluccio's, Yo! Sushi, and upmarket burger chains such as Ultimate Burger and Gourmet Burger Kitchen.

Overall, UK foodservice is emerging from a dark period when it lost its way after the boom years of the 1990s.

Since the start of the 1980s, the sector has increased the numbers of meals it serves by 1,599 million a year with the QSR sector alone putting on an extra 517 million meals over the period. But this growth has not come without pain. There has been a net loss of 11,200 outlets, or 4.1% of the 1,981 total, and this has been particularly felt in the self-run business, staff catering and pub sectors. However, these falling outlet numbers have been more than made for up by increased efficiency across the industry.

Last year the foodservice sector grew by 3.4% in like-for-like sales of food and drink over the prior year in real terms, that is in prices that reflect the amounts actually paid at the time. This increase is the latest in a run of success that
extends back over a generation. Twenty five years ago the industry had food sales of £7.1bn. Last year that had grown by a factor of almost three to reach £26.6bn food sales, plus a further £9.4bn of drinks sales.

This long term success extends across all sectors, from education, which doubled in size, to restaurants, which tripled its turnover over 25 years. The star though has been the pub sector which, seizing on several opportunities over the years, transformed its 1981 turnover of £700m into last year's £3.6bn, an overall growth of over four times.

However, taking a fully discounted, inflation adjusted view of the sales performance of the UK foodservice sector, we can see that sales of food grew by £7.6bn over the quarter century from 1981 to 2005, representing an average annual compound increase of a mere 1.3%.

Although food sales in the pub sector grew by £1,712m in real terms, this translates into a disappointing 25 year Compound Annual Growth Rate (CAGR) increase of only 2.6%. However even this performance is strong when set alongside the high profile QSR sector that has only managed a CAGR of 0.8% since 1981.

That is not the end of it because although these figures point to an ongoing increase in turnover, the market has slowed down substantially from its peak years at the start of the millennium. What lies behind this underperformance?
It is possible to highlight a range of issues:

• The impact on UK foodservice business of national and international disasters. Among the most notable are BSE, foot and mouth disease, SARS and 9/11.
• increasing competition for foodservice spend and the emergence of over capacity in the market, ie: too many seats chasing too few customers.
• Negative media images of some aspects of out of home eating. Jamie Oliver is being blamed, or takes the credit, depending on your standpoint, for turbulence in the schools sector and a knock- on effect across the whole industry when it comes to selling heavily processed food. The film Supersize Me did damage to the burger business and there are all manner of governmental warn ings of the dangers of some aspects of eating out. The Treasury, for example, has expressed con cerns about the cost to the taxpayer of treating the obese - not all of whom, it should be noted, got that way by eating out.

While no clear picture emerges, it seems that a complicated set of factors can account for the deteriorating position. It started in the early 1980s when management, especially in branded restaurants, experienced substantial growth. Expansion continued over a 15 year period - broken only by the recession of 1991/92.

Right up until the mid 1990s, two factors lay behind this performance. Firstly, the emergence of a consumer society in which eating out represented a significant driving force that met with consumers' desires for all things foreign and which represented quality, allowing them to show off their affluence and sophistication.
Secondly, the emergence of operators who were able to latch onto this growing consumer power. Brands as diverse as McDonald's and Harvester represented this development in its early stages. Later operators included Pizza Express and Pret a Manger.

Heartened by successes, these operators, and the others they competed against, began to take things easy, believing that although business was a continuing competition, they had broadly got it cracked. Complacency took over from innovation and enthusiasm. This led to the widespread belief that management could just make anything happen, and the consequent creation of concepts or brands that were either me-toos or had little chance of success. Foodservice operators forgot that they compete not with each other, but with the many other things customers can spend their money on.

A new set of factors has been appearing over the last five years which should lead to a return to expansion. Key among these factors are:

• The emergence of experienced, mainly young, managers within small and medium-sized groups.
• The spinning-off from larger groups of poorly per forming businesses into the hands of small teams of heavily incentivised managers able to nurture the brands back into life.
• The creation of larger groups more focused and less intent on continually growing a chain of poorly thought out, inadequately resourced concepts.

Turning from growth to operational efficiency, a much more benign picture emerges. A positive sign of how the total sector operates is by its steady improvement in efficiency as measured by the numbers of meals per outlet. Since 1981 this has grown from 26,608 to 32,778 in 2005 in an almost unbroken sequence of positive growth.

The future is promising, but the trick is spotting which trends and sectors are going to grow and which will go into decline.

• Peter Backman heads the Horizons research consultancy in London

Text Peter Backman Photography FDA