Food & beverage: are we past the peak?

The shift towards 'experiences'

The last five years have seen a boom in the growth of the food and beverage (F&B) property market in the UK, while the retail market has been struggling and become highly polarised in terms of occupier demand. Property consultancy Cushman & Wakefield have estimated that between January 2014 and January 2017 the number of clothing and footwear and white goods shops decreased by 2,185 nationally, while the number of restaurants and cafes actually increased by 2,998 – up 9%. A number of analysts and commentators have recently been questioning whether this level of growth in the F&B market is sustainable, especially since we are now in an environment of falling consumer spending as households are being squeezed by a combination of rising prices and stalling wage growth. In addition, F&B operators are facing tougher times ahead as a result of higher inflation, business rate increases in some areas, a rise in the living wage and potential curbs on their future ability to attract and recruit staff from the EU as a result of Brexit.

The key question is whether the strong growth seen in food and beverage spending over the last five years was due to an ongoing structural consumer shift away from buying retail goods towards seeking ‘experiences’ or whether it was just a cyclical trend, which has already peaked and is now tapering off. In a recent research report which analysed the results of a survey of 95 major F&B operators against future consumer spending forecasts in the F&B sector, Cushman & Wakefield concluded that at a macro level, total value growth in the eating out market can easily sustain the projected growth in outlet numbers.*

Eating out spend growth versus modelled required spend

Source: Cushman & Wakefield, Oxford Economics, Q2 2017. Additional modelled spend requirement is the spend required to support additional F&B units based on survey (actual & projected). 2017 and 2018 are forecast estimates.

Growth across the spectrum

Growth in the eating out market is expected to be 3.8% in 2017, well ahead of total consumer spending, with the eating out market forecast to increase 17% by 2021 and be worth over £103bn. Food and beverage operators plan to open nearly 3,000 new sites by the end of 2018, according to Cushman & Wakefield research, with multiple coffee shop brands such as Costa, Starbucks and Caffe Nero, as well as casual dining operators such as Nando’s, Pizza Express and Wagamama and the smaller chains owned by private equity investors such as pizza operator Franco Manca and brasserie chain Côte, all planning further expansion.

In this environment, consumers have become increasingly adventurous in their spending habits. Growth has been driven by, on the one hand, young millennials and urban professionals, who are more mobile, tech-savvy and likely to have less structured lifestyles than their older counterparts. They prefer casual, trendy concepts and street food brands. On the other hand, families often prefer the traditional casual dining brands.

Careful analysis still needed

However, national trends mask significant local differences in a dynamic and constantly evolving market. Savills, in their recent report on the UK casual dining sector, state that they too are not unduly concerned about saturation at a macro market level and they expect the growth in branded new restaurants to continue.** But they have some concerns at the local market level, where there are at times more restaurants appearing than there is the consumer spend to support them. Some operators will therefore inevitably struggle in the most saturated locations, and some multiple chains have already reined in their expansion plans in markets where supply exceeds demand, or they have been forced to up their game and become more innovative to continue to attract customers.

On a city level, London’s West End is ranked the top growth city for casual dining, despite already being the most mature and competitive market in the UK. But whereas 180 new restaurants open in Central London each year, 35% of them close down in the first two years, so there are concerns about capacity. However, beyond the M25, there are more expansion opportunities for the leading brand operators as those markets tend to be less saturated and less competitive. Major regional cities such as Manchester, Leeds and Birmingham, are all ranked in the top ten, while affluent cities and market towns such as Bath, Cambridge, Guildford and York, rank highly too.

From an investor’s perspective, there are a number of reasons why investing in the sector provides good opportunities and diversification benefits away from traditional retail assets. However, clearly working with tenants to understand their businesses models and pressures on their margins, in addition to understanding how their propositions sit with the competition and local catchment area spending dynamics, are essential.

Getting the balance right in a portfolio of tenants with good covenant strength and track record whilst also allowing for newer, creative F&B operators to appear, making our high streets and shopping centres more dynamic and exciting places to shop, eat and drink, requires a proactive approach from landlords. This is reflected in well-designed unit fit-outs and offering shorter, more flexible lease terms to those tenants, particularly the newer brands, who cannot commit to longer leases.

Property at Canada Life Investments

For example, at Canada Life Investments, as landlords of the Regent Arcade Shopping Centre in Cheltenham we are planning to sub-divide and reconfigure the ex-BHS store and re-let the space to aspirational restaurant and casual dining operators. The strategy is intended to increase the average spend of shoppers at the scheme by increasing the average dwell time, and enhance the overall environment of the scheme to make it a more sustainable, sociable space. This strategy complements the retail offer in this type of town centre scheme, as Cheltenham is a strong town with a fairly affluent catchment area and above average levels of consumer expenditure forecast on F&B and retail goods.

Outlook

The growth in consumer expenditure in the national F&B market looks set to continue, but at a slower pace than the exceptionally strong one seen in recent years. As consumers’ available expenditure will be squeezed at the same time as they are faced with an overwhelming amount of choice of eating and drinking formats and establishments in a very dynamic, competitive marketplace, there will inevitably be ‘winners’ and ‘losers’ as some F&B operators will be forced out of the most saturated locations. Only the best and most innovative formats offering great quality food tailored to the local market, good value for money and excellent customer service are likely to do well. While London will continue to dominate the rankings in terms of occupier demand prospects, other major regional cities and towns outside the M25 also offer good growth prospects and potentially better value to investors. But, as ever, detailed research and local market knowledge are crucial to avoid investing in any potentially oversupplied markets.

*Source: ‘UK Food & Beverage Market: Sustainable Growth?’ Cushman & Wakefield, H1 2017.

**Source: ‘Casual Dining in the UK 2016’, Savills.  

Important Information

The information contained in this document is provided for use by institutional investors, professional investors and professional advisers and is not for onward distribution to, or to be relied upon by, private investors. No guarantee, warranty or representation (express or implied) is given as to the document’s accuracy or completeness. The views expressed in this document are those of the fund manager at the time of publication and are subject to change at any time without notice. The contents of this article are not intended as investment advice. This document is issued for information only by Canada Life Investments.

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CLI00841 Expiry 10 July 2018

Joanna Turner

Joanna Turner

Head of Property Research

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