British restaurants hardest hit by economic climate

Posted by James Ferre on 5th February 2009

UK restaurants have been more greatly impacted by the recession than any other Hospitality & Leisure (H&L) sector, accounting for 45% of all H&L insolvencies in the quarter before Christmas, PricewaterhouseCoopers LLP revealed overnight.Not only are these businesses battling with the reduction of corporate entertaining, and consumer disposable income squeeze, but also innovative food retailer offerings and a culture of cooking programmes that encourage ‘aspirational cheffing’.

Restaurant menu

In a recent PwC poll, asking consumers what would be first choice if they were forced to cut spending, take-aways, fast food (14%) and eating out (11%) were top of the chopping list. While only half of these respondees would reduce their grocery purchases.

The impact of the downturn is clear in the firm’s quarterly insolvency statistics, as 32% more restaurants went bust in 2008 than the previous year. In Q4 of last year 141 restaurants became insolvent as more UK consumers chose to eat in, with value or uniqueness providing the greatest competitive advantages.

“In addition to a number of expected high-end restaurant failures, those mid-range restaurants that do not focus on either a value for money or a unique dining experience have been disappearing from our streets since last summer. This trend is likely to accelerate,” Stephen Broome, Hospitality & Leisure (H&L) Director at PwC, warned.

The market has been flooded with tempting ‘dine at home offers’ such as the M&S (Marks & Spencer) dine in for £10 offer, aimed very much at the lucrative weekend dining out market, and television schedules are filled with cooking shows, reinforcing the ability to stay at home to create a lower cost dining alternative.

Many restaurant businesses are fighting back by offering tempting off-peak price led deals and money off vouchers, and this will help prop up flagging revenues, albeit probably at lower profit margins, PwC advised.

Pubs are also finding difficulties in Britain as beer sales fall. “With beer sales falling to a record low and almost 40 pubs closing a week, up from the previous average of 36, we are seeing this trend continue to gather speed,” Mr Broome said. “The industry has been ravaged by a combination of negative factors over recent years, and the recession is likely to put further pressure on an already difficult trading environment.”However, there is a shred of good news in the recent PwC consumer poll that indicated that people were less willing to reduce their visits to the pub or indeed how much they spend when they are there, and would do so even at the expense of foregoing spending on take-away, fast food and eating out.

“Of course this sentiment may change as more consumers face job threats and experience a reduced income. But for those pubs that get it right, and there are many that do, there is still a loyal customer following to be enjoyed,” Mr Broome added.

Managing in a downturn
Businesses that take the time to fully understand and plan for the impact of the current recession can navigate a path that makes the most of the opportunities arising. For most this will involve developing and implementing a ‘back to basics’ survival strategy that probably includes selective, non-customer facing cost savings as well as an element of innovation in maintaining revenue and profit levels.

“Those who don’t know enough about themselves or markets they serve will be inclined to take the path of least resistance, leading to defensive and piecemeal actions which will result in reduced service levels and disgruntled clients. Most damaging of all, these businesses risk losing out to their competitors,” Mr Broome concluded.