Industry Update - Restaurants 2011

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The restaurant sector continued to prove resilient throughout 2011

Despite the ongoing economic uncertainty and reduced customer confidence, the restaurant sector continued to prove resilient throughout 2011.

A quick glance at the results announced by publicly listed companies such as Prezzo, the Italian restaurant chain, which delivered a rise in pre tax profits for the first half of the financial year of 22% and The Restaurant Group, which reported an 8% increase in pre tax profits for the 26 weeks to July 2011, would appear to indicate that the sector is in rude health.

The UK restaurant market is however a diverse sector and the evidence of the recent travails of Paramount Restaurants would indicate that some of the smaller Independent groups have been perhaps less able to weather the challenges raised by the current economic environment. The overall picture and health of the sector is clearly altogether more complex.

The larger restaurant groups have been able to drive organic growth in 2011 through a combination of economies of scale in purchasing, combined with targeted promotional activity. The latter has been an ongoing feature of the market place now for the last 24 months and Gondola Group through its Pizza Express brand in particular, has been at the forefront of this discounting revolution. It has also been innovative in its use of technology with the introduction of an online ordering and collection system, 'click and collect' the use of I-phone apps and
electronic discount vouchers sent direct to customer mobile phones. The interface with the customer is perhaps becoming ever more sophisticated but whatever the medium used, this culture of discounts is likely to remain a feature of the market for some time to come.

2011 has also been another year of expansion for the established mainstream corporate brands. There has also been continued growth in the Asian buffet sector, driven by emerging brands such as Red Hot Buffet and Cosmo and 2011 also witnessed the emergence of M&B as a major competitor in the restaurant sector. Highlighted in particular by its purchase of eight Old Orleans sites from Intertain for conversion to its Harvester and Miller & Carter Brands.

Whilst continued expansion within the UK market remains a key strategic goal, International expansion for a select number of the major players has also become a principle focus for growth.

• Yum has led the field with its expansion of the KFC and Pizza Hut brands in China and India but it is not alone in seeking to exploit these large and emerging markets.
• Gondola has recently teamed up with Bharti Enterprises to open and develop the Pizza Express brand in India and are looking at similar plans for expansion in China.
• Gaucho Grill, the Argentinian steak house is looking to open 15 sites in the Middle East.
• Jamie's Italian is also looking through the development of franchise partners to increase its International presence.

The ability to leverage these brands internationally and drive growth in these new markets, will become ever more important to the long term financial success of these brands particularly when viewed against the backdrop of an maturing, lower growth environment that is likely to continue in the UK for the foreseeable future.

The outlook and the challenges for 2012 will remain essentially the same. Whether growth is
achieved internationally or at home, the delivery of value and good customer service will be the cornerstone of success for all operators, irrespective of scale.

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