High street pain could be an opportunity for some in the hospitality trade

Joe Lennon FCCA assesses the state of the high street and some of the prospects this may present to cash rich operators.

The high street has resembled something of a blood bath over the last year. Maplin, Toys R Us, Prezzo, Byron, Gibson’s Guitars, Carluccio’s, Jamie Oliver’s restaurant group and most recently House of Fraser have either gone bankrupt or are struggling amid serious financial woe. We’ve written previously about now many chains erroneously over expanded into the wrong locations in the belief that more outlets alone would generate growthThe hospitality trade has experienced various headwinds in recent years including soaring business rates, cost push inflation from the declining value of the pound and more regulation in areas such as payroll as well as significant changes in consumer purchasing habits. It all adds up to a somewhat bleak looking scene.   

However, as is often the case with capitalism, chaos can actually bring opportunity for financially efficient, well run businesses.

The restaurant trade is currently in decline

According to Propel.info licensed premises are now closing at double the rate they were 3 months ago with all UK regions experiencing decline. Britain now has 3,116 fewer restaurants, pubs, bars and other licensed premises than 12 months ago. This represents a decline of 2.5% on the previous year.

Reported by Market Growth Monitor from CGA and AlixPartners, community pubs account for the majority of closures with restaurant numbers also in decline. Fierce competition, escalating costs and flat sales have impacted the causal dining sector. Many of today’s consumers, particularly millennials and generation z are less loyal to brands than their elders which places real pressure on traditional and established restaurants. 

The Evening Standard reported instances where many luxury and casual dining restaurants signed up to what are referred to as percentage leases. These can be quite typical in retail and shopping centres; they work whereby you as the tenant pay a fixed base rent but also then pay additional rent as a percentage of your gross income when it passes a certain amount.

Unfortunately when you factor in pension auto enrolment, real time information reporting and other regulatory requirements, many have seen their margins eroded by a rising cost base. For restaurateurs to then have to give over more takings in the form of rent as turnover grew was simply too much for many. Some are now calling for this lease arrangement to be altered so that rental discounts are put in place when sales are below a certain level. 

Now landlords have the headache of empty properties – the opportunity

Given how volatile the situation is on the high street, landlords are faced with having to understand why their tenants are struggling and either come up with ways to help them or face the likely issue of how to fill empty properties. The problem they face is the current market is depressed which means many are having to improve the lease deals they offer to potential tenants.

Premiums, the price a tenant pays to a landlord to purchase a lease, are low and in many cases rent free periods available to make sites more attractive. Consequently now could be a good time for any cash rich hospitality business to be purchasing for expansion with a plethora of choice in terms of sites and opportunities.

We emphasise cash rich because while some locations are offering rock bottom rates in terms of premiums, it will be due to the high rental price. Rent free periods may help combat this.

If looking to expand, be sure to act quickly

The potentially great opportunities on offer from the high street woe may soon disappear though. Bank confidence in the hospitality sector is currently low and whilst banks are less willing to lend, landlords are struggling. Hence premiums are low. However, it only takes a few success stories for that to change, confidence to re-emerge and lending to improve.

Already many property investors are looking to alternative solutions such as broadening their occupier mix. They are considering other occupiers such as GP’s and dentists thereby reducing their exposure to retail administrations while keeping occupancy and footfall levels high.

Others are looking at bringing potentially more experience based brands to the high street, think cooking schools, table tennis bars, crazy golf and escape rooms. So the message to hospitality operators with ample cash who are looking to expand is, act quickly while the market is in your favour and don’t rule out unusual sites as the below case study demonstrates.     

A case study: Adam Handling  

An interesting example is that of Adam Handling as cited in Big Hospitality. The Scottish chef took on an unattractive Byron lease at the Hoxton venue. At the time he was looking to relocate his The Frog E1 restaurant in Shoreditch and put a bar into a new location.

The reason it appeared difficult was because the site location was effectively three venues up for sale in one square. However, Adam noticed how busy the area was and got creative in creating an opportunity that might work. His thinking was to get two restaurants into the same location and use the space to drive the customer experience.

The idea was if one restaurant was booked out then people would be able to choose the other. If they’ve been to one and had a great experience then they’d probably be tempted to return and try the other. The theory being restaurants actually want to be surrounded by other great restaurants.

Now he has The Frog E1 on the top floor for casual fine dining and downstairs is the Scots-themed Iron Stag with a bar and whisky-led drinks menu, cocktails on tap and a stage for live jazz. Admittedly in a different manner to the earlier examples but clearly Handling is creating an experience based restaurant location.  

Operators with expansion in mind will do well to remember that customers are likely to be looking for so much more when they eat out and dine. Hence the right location, combined with productive staff who help develop and drive the customer experience are essential ingredients to generating sales, repeat custom and improving profitability.

The content of this post is up to date and relevant as at 13/09/2018.

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