M&B’s tone points to tricky 2017; a tough year might hit some harder than others…

The factors driving capacity: cheap cash and new ways of raising it…

• Low interest rates have allowed casual dining concepts to flourish. Crowdfunding has also provided an avenue of funding for operators.
• This has resulted in growth for growth’s sake and the saturation of the restaurant market.
• Several operators have built substantial estates in as little as three years because of this supply push.

You can’t go from 0 to 50 units in a short time without picking up a few clunkers…

• Ed’s led the way and we know how that ended (with a distressed sale and 26 of its 59 sites getting shuttered); BrewDog has gone to 50 sites in five years (29 in the UK), Bill’s to c60 in three.
• There is also the US invasion to consider; Five Guys has gone from 0 to 58 UK units in just three years. Smash Burger, Shake Shack, and MOD Pizza are also rolling out.

Capacity growth is stalling

• Business investment confidence has taken a hit recently and consumer confidence is fragile.
• Hurdle rates are set to grow due to a cocktail of factors, including: NLW and NMW, the apprentice levy, business rates, currency movements, and supply chain inflation.
• Horizons’ ‘Ones To Watch’ survey earlier this month found ‘a decline in the number of new eating out brands… along with a slower rate of expansion for more established ones’.
• CGA data shows strong restaurant supply growth from 2013 to 2015. This has tapered off markedly since summer 2015.

Established operators have been trimming their estates:

• Restaurant Group identified 33 sites for sale or closure in its recent H1 update, while the asset value of another 29 has been written down.
• Wetherspoons has put up an unprecedented 99 pubs for sale since June 2015, many of which are London sites.
• M&B has recently put a package of 75 pubs on the market and Fuller’s has also placed some on the market.
• These moves might be driven, at least in part, in anticipation of a tricky 2017.