Despair for restaurant operators in a pickle over property

Restaurants on high street

Restaurant chains that fail to get their property acquisition strategy just right could see their growth plans crumble as it becomes impossible to compete profitably in an over-crowded market.

That’s the view of a leading commercial property specialist, who suggests the ability to pinpoint the most suitable sites, in the most opportune locations, will ultimately determine the success and failure of expansion-hungry operators.

Trevor Watson, executive director of Davis Coffer Lyons, said that while operators often lament an apparent lack of available sites, the truth was often somewhat different.

“Although operators will always complain at the lack of suitable opportunities to grow their businesses, you only need to look around at some of the faster growing emerging brands both in London and Nationwide – Five Guys, Loungers, Côte – to see that sites are available and can be created,” he wrote in the most recent issue of BDO’s Restaurants and Bars Report.

He said the discipline of rapidly rising rents and property costs is something that all operators need to keep carefully in mind.

“Rapid overexpansion into inferior sites in locations with excessive competition has certainly been a major issue for many restaurant and bar operators in the past, and no doubt will be so for some in the future,” he remarked.

London still remains the hottest market for restaurant property, but Watson says the dynamics are being impacted by a raft of independent emerging operators with strong concepts and operating styles that can comfortably pay the agreed rents and still generate substantial returns for their owners and investors. This is, however certainly not universally the case and some operators sign up to rental obligations their business is unable to meet.

“In these cases, the rents they have agreed can prove to be a burden,” says Watson. “The nature of the central London market at present however, is that there is nearly always another operator lining up to take the site. Whilst the cost of a fit out is potentially at risk for such operators, a high rent will not necessarily preclude a successful assignment; although it is likely to reduce any premium received.”

Many corporate operators are now choosing to divert their attention elsewhere in the UK because their brands will often have greater leverage away from fashionable central London districts, and as a consequence return on investment away from London is more attractive to them.

Affluent home county towns throughout the likes of Surrey, Berkshire, Buckinghamshire, and even beyond, such as Hampshire, have seen an explosion of casual dining facilities over the last five years, with branded operators viewing these markets as preferable to central London partly because of lower property costs in the commuter belt.

However, Watson admits he is “somewhat concerned” as to the sheer volume of openings in most of these towns.

“There is definitely a tendency for trade in these areas to be split too thinly between the new arrivals in many of these locations. As a result, many operators are now re-focussing again – this time on second tier smaller market towns, not only in the South East but throughout the UK. Property costs are that bit lower as is the quantity and quality of competition.”

He points out that market towns can generally only support one or perhaps two branded restaurant operators and as such, the likelihood of additional competition coming in is also reduced.

“Many operators have concluded that their growth strategy should be built around market town expansion rather than city centre and large town centre locations,” he said.

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