It’s a Wednesday evening and not one table is empty amid the clatter and chatter in the busy restaurant. In the open kitchen, pizzaiolos in stripes stretch dough and make the trademark pizza from prepared but fresh ingredients. At the door, a small queue forms as late arrivals wait to be seated.
This scene, straight from a London high street, might seem prosperous enough but before the night is out, a flurry of tell-tale print outs are unfolded and the bills are slashed in half.
According to market analyst Horizons, Pizza Express is the most popular place to redeem vouchers but the majority of well known names including McDonald’s, Domino’s and Pizza Hut are using this strategy to win business.
These kinds of promotions have become increasingly mainstream and formed what some are calling a “vicious cycle” that has locked high street foodservice rivals in a price battle that was previously only seen in retail circles.
In fact, this month’s VAT increase to 20 per cent has combined with food cost inflation and predicted fuel price increases to £6 a gallon to present more setbacks for a trade that once considered itself “recession proof”.
Similar challenges are facing suppliers to the likes of schools and hospitals, as the public sector is increasingly squeezed by government cutbacks and pressure on prices.
The situation can be traced back over the last 12 months, in a year that was bookended by severe snow and hit by the government, businesses and consumers reining in their spending.
At best, there was a bit of a bounce back in June and July but even then both margins and competition were fierce.
Fast forward to this month, and operators and suppliers are starting out in a way that is expected to characterise 2011. Many well-known operators are continuing to cut costs, re-engineer menus and lower bills with special offers, while consumers have changed the way they eat out and look unlikely to go back, this year at least.
David Burns, managing director of Fresh Direct UK, insists that the foodservice market is in “recovery mode”, following the challenges thrown up by 2010 in the shape of snow at the beginning and end of the year, repeated strikes and even a volcanic eruption.
He warns that those who continue to ignore increased costs and “recklessly discount in the hope that their suppliers will absorb the cost are quite frankly not living on the same planet as you and I”.
“If we don’t deal with this, I forecast more failures all round for growers, suppliers and on the high street,” he says. “While the foodservice market is quite resilient, there are limits to just how much suppliers and operators can absorb without having to pass on inflationary pressures all round. We used to say that eating out of the home was recession proof - well, we are about to put that firmly to the test in 2011.
“Margins have been hit severely all round as a result of price pressure and meal deals. I believe that most operators would like to get out of this vicious cycle, but I don’t see it happening in the short term.
“The simple truth remains that steak, chips and all the trimmings at £4.99 is simply not sustainable, nor are buy-one-get-one-frees. We all know who pays for BOGOFs eventually.”
However, many businesses that are leading promotions are taking this into consideration and adapting the way they work. In fact, many would argue that discount deals in restaurants and pubs have been key to keeping consumers eating out.
The latest report from Horizons shows two-for-one deals are the most common vouchers used by diners, with money-off coupons and meal deals coming in second. The study indicates that 16 per cent of consumers make use of vouchers regularly, while a quarter of diners who use these deals said they would have eaten elsewhere without them. Interestingly, the majority of consumers (55 per cent) don’t base their decision to eat out on a money-off deal.
Horizons development executive Peter Backman insists it is time to question how operators can use promotions more effectively. “We have questioned the value of discount vouchers before and this research vindicates our belief,” he says. “Vouchers are untargeted in that while they persuade a percentage of consumers to dine somewhere, they are also being used by more loyal customers who would dine in that restaurant anyway and don’t need to be persuaded with money-off vouchers.
“Deals in the eating out sector have become much more sophisticated over the past 18 months, but operators still need to work harder at attracting new customers, rather than purely rewarding existing ones.”
In fact, many operators are working with suppliers to secure the best offer in an increasingly competitive market.
Tony Reynolds, managing director of Reynolds, maintains that offering value for money will be key in the next 12 months but “that doesn’t have to mean cheap”. The experience as a whole, he insists, will be what matters.
“Operators who are running promotions of this kind have invariably adapted their business model to suit their offer and as long as profit expectations are being met, why would they change?” asks Reynolds. “Our customers are telling us that promotions are driving footfall and having a restaurant running at capacity can only be a good thing.
“Consumers in general are becoming more and more discerning and are not prepared to settle for second best, especially those who are eating out less. If they have a bad experience or feel unsatisfied in any way with their dining experience, it is even more unlikely they will return a second time. And of course, the increase in use of social media means that people now share their views with more potential diners than ever.”
A number of forward-thinking companies are innovating as they prepare themselves for what is likely to be another tough 12 months. Many believe it will be two more years before the sector can enjoy some real growth but they insist that they must invest now in order to raise their game when the time comes.
Fresh Direct, for example, has launched its new production kitchen to boost its food development offer, following a three-part investment of more than £1 million. The Bicester-based Fresh Kitchen chargrills a range of vegetables including peppers, aubergines and courgettes and will then extend into sauces, soups and stews, with an emphasis on high-end foodservice. The facility, adjacent to Fresh Direct, now encompasses all new product development and the team has expanded to allow for two more chefs. The team, headed by Adam Isted, is ready for business.
Another good example is the menu development team at Reynolds, which is working with customers to find new revenue streams to improve footfall and spend per head, focusing on the likes of breakfast, healthy eating and food to go.
So in an increasingly competitive market, what can operators and suppliers do to put themselves in the best possible position? “Be sensible, be realistic and be honest,” says Burns. “Talk to your customers openly about waste, inefficiency and processes that only add to supply chain costs. Never has there been a more willing and open ear.
“For both suppliers and operators, it might be that price rises are not an option, so we have to deal with operational performance, poor decision-making and poor menu planning. If we can deal with this now, all of us will benefit when we do come out the other end. Our businesses will be in better shape, as recession does have a way of fusing growers’, producers’, suppliers’ and customers’ minds together to get through difficult times.”
TRADING INTO A SUCCESSFUL 2011
Peter Backman, managing director of Horizons, picks out trends for the next 12 months.
There is no doubt 2010 was a tough year - and it’s likely to get tougher still as we move into 2011 and the government spending cuts kick in alongside the hike in VAT to 20 per cent and increasing food inflation.
The market was broadly flat in the last 12 months in what were exceptionally testing economic circumstances. The eating out market, which was worth an estimated
£32.2 billion in 2010, showed some areas of substantial growth, including home delivery pizza and for the breakfast market.
The snow at the beginning of the year and again in November and December hit trade considerably in the run-up to Christmas. Estimates have put foodservice losses due to the snow at between £500 million and £750m.
Adverse weather is something that can’t be accounted for, but there is plenty that operators can do to keep customers coming in. Most notably, this includes looking at pricing, controlling costs and offering what the new breed of customer wants.
Discounting has been a much-debated issue in the sector over the past 18 months. Some see it as essential to keep customers coming through the door, others see it as damaging. But while in the past we have seen rather ad hoc price discounting and meal deals, operators are now building databases and customer loyalty through tightly targeted offers, many making use of social media such as Facebook and Twitter to do so.
With food inflation rising, controlling overheads will continue to be an important element in every foodservice business. One way in which operators are doing this is by re-engineering menus to reduce portion sizes and cook cheaper dishes. There has been a return to home-style cooking on many menus, with stews, slow-cooked meats and pies making a strong reappearance.
Operators are also adapting their menus to provide for the new ways in which consumers are eating, such as offering sharing plates of starters and desserts and offering the choice of a smaller or larger portion for a main course. Some 40 per cent of consumers order a starter less often now, the same percentage have cut out desserts and a third of people order sharing dishes.
Horizons’ Menurama research has shown a shift away from formal dining to more casual eating out over the past 18 months. Our QuickBite data backed this trend by showing a nine per cent decrease in the respondents eating at table service restaurants between June 2009 and June 2010. Conversely, there’s been a five per cent rise in takeaway eating and a seven per cent rise in consumers opting for fast food, whether sit down or takeaway.
Consumers are now looking for a relaxed, less formal eating out environment, often where children are welcomed, where they can have just coffee and a sandwich if they want.
Operators are also widening their customer demographics to appeal to new markets. Switched on companies including coffee stores, pubs, fast food outlets, restaurants, in-store restaurants and contract caterers have geared up to take advantage of the growing breakfast and coffee business.
In fact, offering breakfast and opening at 7am has made Wetherspoons one of the UK’s largest coffee chains, selling more than 600,000 coffees and 400,000 breakfasts each week - up 40 per cent year on year.
Pizza Express is trialling a breakfast menu from a single site in Richmond and is expected to roll out the concept across its 370 restaurants. And in February last year, Newcastle-based Greggs started selling bacon rolls in an attempt to capture some of the growing breakfast market. It has since become the group’s best-selling sandwich line. McDonald’s, as part of an impressive repositioning, has become the UK’s biggest seller of coffee as coffee and breakfast are said to be driving sales.
During 2010, the eating out sector demonstrated its flexibility - working hard for what have been fairly small gains. Operators and suppliers need to be ahead of the trends in eating out. Never has there been such an emphasis on pleasing the customer in terms of service levels, pricing and innovation. And 2011 promises no let-up.
About Horizons
Horizons provides data, insight and consultancy to foodservice operators. Visit www.horizonsforsuccess.com for information.
GOING PUBLIC: COST CUT FEARS
The other face of foodservice is set for a tricky 12 months as those supplying the public sector will come up against a number of setbacks following further rounds of cuts.
According to market analyst Horizons’ forecast for this year, “government cutbacks will lead to fewer meals being served at lower prices in sectors as diverse as prisons and care homes, primary schools and teaching hospitals”.
The ringfencing of healthcare will not preclude reductions wherever possible. The “shift to nil cost catering” will continue, which in effect means contractors will be operating in a retail environment and making money from food sales.
A number of public contracts will be up for grabs by the end of the year and suppliers who intend to go after these opportunities are making preparations now.
Lincolnshire-based FreshDrop has changed premises after five years of sustained growth in the foodservice sector, moving from its site in Kirton Holme to nearby East Heckington, west of Boston, to a purpose-built site that features a 1,200sqft coldstore and increased access for the firm’s fleet of 10 vehicles.
The firm, which supplies independent businesses and the public sector on a 50:50 basis, intends to gain the accreditation it needs to compete for the next round of contracts.
Jonny King, managing director, maintains that the public sector will be “looking very sharply at price” but insists that while “national suppliers might have the edge this year, local suppliers will next year” as distribution costs come into play.
“The new site allows us to be cheaper and more effective,” he says. “I think the whole point of this year will be about being sympathetic to customers’ problems, because they are under the same pressures that we are.
“The best way to reduce costs is to reduce waste, with better menu planning, delivery schedules and more local supplies.”
ONES TO WATCH AFTER A PROMISING 2010
• Home delivery and takeaway chains have all reported a sales boost, while McDonald’s and Yum! Brands, operator of KFC, Pizza Hut and Taco Bell, all came back with positive results.
• Small- to medium-sized chains such as Apostrophe, Villandry and Le Pain Quotidien have taken the concept of a relaxed meeting place pioneered by Starbucks to higher-spend consumers.
• A less formal eating environment such as that created by Giraffe and Leon has achieved good results, making the most of midday meals in the working week and welcoming children.
(Source: Horizons)
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