Independent pubs and restaurants across the UK are being replaced by chains. Has the market become saturated?
Companies: BOTB, FUL, HOTC, IDP, JOUL, CAKE, PHTM, RGD, RBG, SCS, SHOE
You might've noticed that across the UK, and especially in London, local and independent pubs and restaurants are closing down and being replaced by sites operated by chains.
While everywhere has always had a 'Spoons or a Frankie & Benny's, bar and restaurant groups like Fulham Shore (think Franco Manca) and Revolution Bars are taking their once London-focused operations around the country.
As more bar and restaurant groups enter the market, finnCap's latest quarterly note on the consumer sector, called Shopping Trolley, wanted to take an in-depth look at the current state of the casual dining market, and what it all means for investors.
They ask the question, has the market become saturated? It seems, their answer is yes.
"Despite recent profit warnings, an increasing divergence in reported performance between pubs and restaurants, and a recent reduction in eating out frequency and spend, existing food-led operators remain too focused, in our view, on trimming estate tails and slowing rollout rather than substantial capacity reduction – and combined with smaller PE-backed concepts scaling up and landlord pragmatism, net new capacity continues to enter the market. Given the severe cost and competitive pressures, as well as downside macro risks, we foresee more pain across the sector."
The note looks at the differences between wet-led establishments (ie pubs and bars) and food-led establishments (ie restaurants) and how a number of factors, including our habits as consumers, has led to oversaturation. It also looks into the data to determine which bar and restaurant groups are performing best.
By rating companies using a "Quality, Value, Growth and Momentum (QVGM) framework", finnCap's Slide Rule determined Fulham Shore to be their pick in the casual dining market.
Fulham Shore, the Group behind Franco Manca and The Real Greek has experienced a number of ebbs and flows in its share price in the past few years, including a blow last month caused by Managment's profit warning. Shares in the Group fell 25% in a day.
Revolution Bars has been on a journey of its own recently and is currently caught in a tug-of-war between rival bar groups Stonegate and Deltic in which we have covered extensively.
The note also touches on other economic indicators including mortgage approvals, consumer confidence and employment data.
We think its a great read for those with a vested interest in the hospitality industry and curious investors alike.
The full note can be downloaded here.