Market Growth Monitor: total number of UK licenced premises remains stable despite market challenges

Site numbers steady as pressures mount

Britain’s number of licensed premises remained level in the year to September 2017 despite rising challenges for pub and restaurant operators.

Research for this new edition of the Market Growth Monitor from CGA and AlixPartners shows there were 122,783 licensed premises in Britain in September—a very modest drop on the total three months ago and a likewise modest increase of less than 0.1% on the tally in September 2016.

This data suggests that while some restaurants, pubs, bars and other licensed premises have been forced to close by mounting costs and other issues, new openings are still springing up to take their place. Most of these have been restaurants, whose numbers increased by 1.6% in the 12 months to September. By contrast, Britain’s number of drink-led pubs and bars has fallen by 2.3% over the last year.

It has been a difficult year for many licensed operators, with several key input costs rising. Food costs have increased sharply over the course of 2017, thanks in part to the weak pound making imported items much more expensive. People costs have risen too, following the introduction of new Minimum and Living Wage levels. Property costs, especially hikes in rates experienced by many businesses, are a third concern.

Layered on top of these challenges is uncertainty about the outcome of the government’s negotiations to leave the European Union, and the knock-on effect on migrant labour in particular. Consumer confidence has remained patchy, and the sector’s own optimism has been dented too. CGA’s Business Confidence survey in November revealed that just 30% of leaders felt optimistic about prospects for the eating and drinking market over the next 12 months.

But despite all these negative factors, the Market Growth Monitor shows that many operators are still in expansion mode. Growth is most obvious in the casual dining space, where there is a steady flow of new openings from small to medium multi-site groups, and a constant influx of new and dynamic concepts. Franco Manca, Wahaca and Giggling Squid are just three examples of mid-sized brands that have been rolling out new openings at a good pace over the last few years.

Some bigger names, like Nando’s and Wagamama, continue to expand fast too. But other top-tier brands are finding trading increasingly tough, thanks to the double whammy of soaring costs and intense competition from casual dining upstarts.

On the pub and bar side, there is a distinct split in the fortunes between venues focused on food and drink. Among food-led pubs, there was a modest 0.9% decline in numbers in the 12 months to September—and over a five-year measure, their total has actually risen, by 5.3% to more than 18,000. The number of drink-led pubs, on the other hand, is 2.3% lower than it was at September 2016, and it has tumbled by 18.3% over the last five years. Drinking pubs and bars can still do very well if they provide a distinctive offer that responds to demand for on-trend drinks like craft beer and gin, especially in London and other big cities. But these Market Growth Monitor figures show that other drink-led community pubs continue to close at a steady rate.

Our Monitor also indicates an ongoing migration of licensed premises to town and city centres. The number of licensed premises on high streets rose by 0.6% in the 12 months to September, while the total in suburban areas fell by exactly the same proportion. Liverpool (8.5%), Southampton (8.3%) and Manchester (7.8%) were among the city centres seeing notable growth.

AlixPartners view

As we look to the next 12 months, we see little to suggest that the prevailing conditions discussed in the latest edition of the Market Growth Monitor will change.

At a site-expansion level, the prevalent macro trends continue: a contracting pub market and the measured growth of foodled outlets. Although the market’s long-term fundamentals – including consumer demand – remain robust, the sector’s immediate trading performance is what positive operators are politely calling “soft.” Many parts of the market are currently under pressure; like-for-like sales growth has slowed in a competitive environment. When combined with the backdrop of sustained cost inflation, profit growth is becoming harder to come by.

Ultimately, 2018 will be a year of change, with companies continuing to adapt to face the challenges the current environment has brought. For some, it will be a matter of refining strategies and growth plans, and moving on marginal sites. For others, more significant action will be required to deal with loss-making sites. One aspect that operators will welcome is the natural rebalancing of power between landlords and tenants that follows when demand for new sites decreases.

Market focus: London

A tale of two cities

London is by far the most important British city for restaurant and pub operators, with more than five times as many licensed premises as any other city centre. But Market Growth Monitor data reveals it is a market of sharp contrasts, between the core of the capital and its outer regions.

In inner London, the number of licensed premises has increased by 0.8% over the last year—but in outer London it has fallen by 0.9%. Both trends have been driven by restaurants, whose numbers in inner London rose by 3.1% in the 12 months to September, but fell by 0.3% in outer London.

Central London growth is being fuelled not by big brands but by small and medium-sized managed restaurant groups. In inner London, the number of restaurants managed by small groups has soared by nearly 75% in just five years, while the number of sites from medium groups has virtually doubled. In stark contrast, the number of restaurants managed by large groups has fallen by more than a tenth.

This shows how new restaurant concepts are flooding into the heart of the capital, and how many of these new arrivals are going on to roll out multiple sites. It reflects consumers’ insatiable demand for something new: fresh and differentiated concepts rather than established brands. In inner London now, small groups account for 60% of all managed restaurants; large groups run just 23% of them.

But the splits are totally different in outer London. Here, small groups operate only 30% of all managed restaurants, while large groups run 53%. This shows that big brands are most popular in suburban areas, where concentrations of families and lower-earning professionals are much higher.

As anyone who has eaten out in central London recently will agree, there is a remarkable variety of eating out options in the capital. Market Growth Monitor data shows there are 244 different restaurant brands in inner London now—compared to 109 in outer London.

This rich diversity, coupled with relatively high incomes in the capital, means people use restaurants much more often in London than in other cities. CGA’s BrandTrack consumer data shows that nearly seven in ten London based consumers now eat out at least weekly—20 percentage points more than the next most frequent region, and a 15 point increase in just five years. Eating out has become deeply entrenched in London’s psyche.

It is young adults who are leading the way in this trend. With plenty of disposable income in their pockets, 25 to 34 year-olds are more frequent eaters out than any other age group—even more so than 18 to 24 year-olds, who, at an earlier stage of their careers, are more likely to feel the pinch of London’s high rents and prices.

Londoners are also much more promiscuous in their use of restaurants. They have visited an average of 4.6 new brands over the last six months, BrandTrack data shows—nearly twice as many as the 2.5 new brands experienced by people living outside of the capital. They are also much more likely to visit new places based on recommendations from friends.

All of this means that London has tended to trade better than most other parts of the country in recent years. Coffer Peach Business Tracker data reveals a 2.2% increase in the like for like sales of leading managed pub and restaurant groups in London over the last 12 months—double the rate of 1.1% outside the M25. And new openings are set to continue in hotspots like the City, where the City of London Corporation has reported a record number of applications for alcohol licences this year.

But growth in London comes at a cost. Rents and rates have risen to eye-watering levels in many parts, especially the West End. Food costs are rocketing, people costs are higher, and Brexit is casting a long shadow over hospitality’s workforce, which depends heavily on EU migrants. But with so much competition in the eating-out scene, securing consumers’ loyalty might be the biggest challenge of all. London’s battle for market share, already intense, is going to get even fiercer in 2018.

About the AlixPartners CGA Market Growth Monitor

This quarterly Monitor provides a snapshot of pub, bar and restaurant supply in Great Britain. All the data is drawn from CGA’s Outlet Index, a comprehensive, continually updated database of all licensed premises. The Market Growth Monitor is delivered in partnership with AlixPartners.