The View

3rd March 2010, 11:58am

The restaurant sector remains cautious

The current mood in the restaurant market is one of cautious optimism, as we head into a period of recovery. The increase in VAT and continued rise in youth unemployment is set to put further pressure on operators. Despite this, we hope that the steps taken by the majority of  operators over the previous 12 months — and the continued emergence of new concepts and entrepreneurs — will enable the sector to remain resilient.

Low interest rates have left many restaurant-goers feeling better off, with disposable income significantly higher for some than it was two to three years ago.

However, trading conditions remain challenging, with the majority of operators using special deals and promotions to maintain trade at healthy levels. Value consciousness is here to stay and customer expectations of value will ensure that promotional activity continues, with margins set to remain tight.

Supermarkets, with their 'restaurant style' meal packages, will continue to underpin the growing trend for dining at home. However, the main focus for restaurants is adapting to consumers' changing perception of value.

Consumers have become more strategic in where they plan to eat out. Brand loyalty is suffering, as consumers switch between operators, to take advantage of the best deal of the day or week.

Although the last 12 months has brought a surge in takeaway sales, we believe this growth will start to stabilise. Healthy eating and sustainability issues are still high on the consumer agenda. Casual dining operators will look to strip back services that customers no longer value.

The growing demand for all-you-can-eat concepts will also continue — highlighted by the success of Whitbread's Taybarn pub/ restaurants.

Transactional activity, which had slowed in 2008, remained sluggish last year. Appetite for medium-sized packages remained modest and – until debt and credit markets reopen – there is little likelihood of a return to the frenetic M&A activity, which characterised the restaurant sector pre-2007.

Demand for prime sites in key locations, such as London, Manchester and Birmingham remains strong. However, the lack of funding continues to curtail the volume of deals and number of developments in the sector.

The majority of national operators focused on paying down debt, raising new funds and streamlining their operations in 2009 but are set to return to the acquisition trail as this year progresses. Emerging operators, such as Jamie's Italian and Cote, were able to grow their estates and place their brands firmly in the minds of consumers in 2009, giving them a base from which to expand even further over the next few years. The lack of competition for high street sites also allowed for modest regional expansion.

We believe that we could see a number of smaller operators exploring possible mergers this year, in order to create economies of scale. The lack of private equity continues to hamper the chances of large scale consolidation.

Further distressed assets are set to continue to come to the market, as banks continue to come under pressure to recover the substantial amount of debt lent across the real estate markets.

The problems faced by some operators will continue to provide opportunities for others, with going concern businesses generating significant interest, as reopening costs are kept to a minimum. The eating out market is predicted to continue growing over the next year and beyond.

Operators will need to evolve and be sufficiently agile to keep up with consumer expectations, if they want to take advantage of that growth.

Are restaurants really so subjective?

Today, I'm going to talk about my own book. Relax. Not to 'sell' it – it's not that time of year – but to explain a bit about what we do.

In short, we have 50,000 friends (OK, on our mailing list), and each year we invite them to take part in the UK's only structured nationwide survey of opinions on restaurants visited over the year.

The participants are 'ordinary' people. Not 'ordinary' in the sense of being pulled in off the street, but in the sense that they are regular restaurant-goers.

The very fact of using non-specialist input causes disquiet in some quarters. We will always recall the first newspaper piece ever about Harden's. The food editor of the newspaper concerned, wrote – in terms of genuine shock and bewilderment – that we believed that if ten ordinary people told you a restaurant was a good restaurant… then it's probably was good restaurant. Erm, yes. We did believe that, and we still do. Indeed, we've never begun to understand the contrary view.

If they were ten mates of the chef, of course, it clearly wouldn't tell you much. And if there were another ten people who told you it was a bad restaurant, then it would be a different matter tell you it's a good restaurant, then, yes, it's a good restaurant.

But isn't judging a restaurant all subjective? Gosh, if I had a pound for every time I'd been asked that question. What we've actually established is that it's tosh: views on most places aren't 'subjective' at all.

There may be people out there who like their soup thick with salt, their steaks gristly and their chips flabby, but most people don't. Most food doesn't take different people particularly different ways. Yes, we all have our peccadilloes, but few are the people who would criticise a pudding, say, because they, personally, didn't have a sweet tooth.

When people talk about subjectivity (on the customer side) what they often really mean is variability (on the restaurant's side). Perhaps the kitchen goes to pot on the chef's night off.

Maybe the tables by the kitchen really do feel like Siberia? Who's to know about these variables without the input of diners?

Which is why, of course, we think the survey-driven approach works. That's not to denigrate the inspector driven approach which, to some extent, is important for all the national restaurant guides other than our own. But we would observe this: to make the inspector model work properly is quite unbelievably expensive. Not only do you have to find and motivate a workforce to do a job, but you have to pay an enormous bill for the privilege.

None of the national guides generate sufficient retail sales to make me see how the economics of doing the inspection job stack up.

Unless, of course, the money doesn't really matter. Maybe the competing publishers are in the guidebook game for some other reason? Well, we suspect some of them may be. There's nothing wrong with being in a business for some collateral purpose. But that really is another story.

Why you should be web savvy...

I spend a lot of my time on restaurant websites, assessing clients' needs, analysing websites and implementing internet marketing techniques, and it never ceases to amaze me how many ineffective websites there are.

Digital marketing is still a developing technique - in its infancy when compared with ageing communications tools such as advertising. But it is growing up at light-speed.

In the hospitality sector, your website is now your number one marketing tool and everything you do online must support this. A website is a facility to convert interest into sales. Much of your offl ine marketing activity will be encouraging people to visit your website. Once you get them there you need to convert those people to tangible sales, or at the very least collect their contact information so you can continue to communicate directly with them.

The rate at which visitors are converted to sales or to some other key objective is called the Conversion Rate. A small change in the Conversion Rate can make a big difference to your return on investment and turnover. There is much that can be done to improve your Conversation Rate. Using buttons, suggestive copy, banners and text links all help you direct site visitors around your website and to your booking engines or enquiry forms. Always ask yourself, "Is this going to drive sales?"

One of the beauties of online is measurability and the statistical data that the internet so readily provides. This key attribute can be used to fi ne-tune and optimise your website so that your Conversion Rate increases.

Different versions of a page can be 'A-B Tested' to determine which version is most effective. Using a free tool called Google Optimiser, two different versions of a website can be alternately displayed and the activity of visitors then compared. So version one might cause 100 people to click on 'Book Online', but version two might cause 120 people to click on 'Book Online', a 20% improvement. After running the test for while you can then choose, safe in the knowledge that you're using the best version.

When developing a new website try and consider everything from your visitors' perspective. What are they likely to be doing? Why are they there? What information are they seeking? Then consider your attributes that might encourage these visitors to buy from you. We call these attributes 'Persuasion Assets'. The trick is to place these Persuasion Assets in front of your visitors as they travel through your site, making it easy for them to convert into sales.

Present the information your visitors are looking for in the clearest and most uncomplicated way possible. This is another key point, as many website designers strive to create cutting-edge unique designs and do things such as place navigation menus in unusual places. Although this might make them feel valuable, it probably doesn't help your visitors travel around your website.

Links within copy text are also useful for website users; if they're reading about your great spa, why not allow them to jump straight to your spa pages by making the word 'spa' a link in your copy? Simple, direct, clear and obvious is always best. If you annoy or bore a visitor by trying to be too clever they will leave without buying and your website will be a failure.

Take a moment to look at your own website with all these points in mind. Is it intuitively designed? Is all the information where you'd expect it to be and is your business presented in the best possible light? Does it encourage you to make a booking? Test it on your friends and ask them to perform certain tasks while you stand behind them and watch. If they can quickly and easily perform these tasks then give yourself a pat on the back.

If they get lost or confused and take too long you need to take action as you are losing sales and missing a major opportunity.

Have restaurant vouchers gone too far?

Like other retail businesses the restaurant trade habitually discounts its prices in the fi rst couple of months of a new year. And it makes sense. January and February are slow trading months for most foodservice operators, so anything to boost customer traffic is a good thing.

But when the recession first took hold, the restaurant sector turned to discounting as a reliable way to boost trade. For the past 12-18 months customers have got used to paying discounted prices at most of their favourite eating out chains. As a consequence the trade has got itself into a tight corner. Some operators, like Carluccio's, for example, have held out against the tide of discounting throughout the year, fearing damage to their brand equity. But for those who's business is being boosted by customers attracted by discounts such as '2for1', it's going to prove difficult to stop.

The long-term value of these promotions remains questionable. They are not building loyalty to the brand as often they serve only to attract bargain hunters. Not only that but discounting eats into valuable margin.

On the plus side, sales via these money-off vouchers typically account for less than 10% of turnover, and this can prove vital additional revenue during quiet trading periods.

While the number of customers eating out has remained fairly stable throughout the past 12 months, spend per head is considerably down and consumers have certainly changed their ordering habits. A survey we conducted late last year revealed that 40% of consumers order a starter less often now when they eat out. The same percentage has cut out desserts and people now order sharing dishes to reduce spend.

Figures from our latest QuickBite survey of over 1,000 consumers, showed that in the run-up to Christmas consumers still upped their eating out spend as they normally do in December, dining an average of 3.28 times a week in December 2009, compared with 3.16 times a week in September. It seems the recession hasn't dampened consumers' love of eating out but has made them careful about how much they spend.

Price promotions do have a place in the market. Careful consumers are controlling their costs and discounting gives them a way of doing so. What's more encouraging though, is that throughout last year we saw restaurant operators becoming increasingly sophisticated with their discount offers as they recognised the marketing value of customer data.

During 2009 we witnessed the style of eating out discounts change from '2for1' to more targeted meal deal offers. On-menu offers have also complemented this change, allowing operators to use meal deals as a tactical weapon to cope with local competition. Rather than abandoning promotions altogether, I expect restaurant chains will continue with a far more targeted form of customer incentive as they start to realise the benefit of enhancing brand loyalty and building stronger customer relationships through offers.

The recession has taught us all to be more demanding – food must be good quality, service must be efficient and friendly and value for money is paramount.

Operators in the eating out sector need to accept the new consumer, ensure their operation is consistently good and adapt their menus to reflect these changes.

Targeted promotions can then be used to enhance customer loyalty, rather than to get people through the door in the first place.