Chain operators are rushing to secure new sites as the renaissance in the UK foodservice sector continues apace. In this special piece from commercial property consultant CBRE’s ‘In restaurants’ spring 2015 report, experts from the company discuss the crucial trends that are shaping where future kitchens will be built.
Unlike retailing and other areas of shop services, the post-2007 global downturn had no appreciable effect on catering expansion activity in the UK, even if it hasn’t necessarily seemed like that for the industry. Catering, though, has proved to be the most resilient part of the shop property market and branch numbers have continued to grow strongly.
Stock-shedding by distressed retailers and service operators — banks in particular — has accelerated chain catering expansion. Meanwhile, a growing influx of new entrants from overseas has turned London into a crucible for culinary change, something that is now rippling out into catering markets nationally.
Seb Howard, CBRE’s head of central London leisure, says the sheer variety of operators has altered the landscape: “The London restaurant market is filled to the brim with new concepts, new operators, new entrepreneurs — some from overseas, some home-grown. Independents and chain brands from across the world have flooded in. Core offers of old might not have changed much: pizza, pasta, burgers, burritos, sushi etc, but the range of concepts — and the quality of offers emerging — certainly have.”
London stands out for being a melting pot where cuisines from all over the globe come together. And the sheer weight of new entrants trying to get in is having a major impact on restaurant space supply and costs.Howard adds: “A Shake Shack or Five Guys, for example, can typically pay two to three times the premium affordable by a McDonald’s or Byron, say, highlighting the way perceptions of quality and novelty — rather than meal price alone — are being used to grow market share. Premiums for A3 units in Argyll Street and Long Acre, for example, are both now running at over £2m.”
As consumer tastes become more and more sophisticated, the fast-food concepts of yesteryear are evolving into ‘fast casual’ dining — less formulaic, more targeted. The mass-market fast food takeaway offers of the past are still popular, but the healthy-eating media barrage of recent years is gaining more and more traction, changing consumer behaviour. Fast food continues to have an important role in the industry but, increasingly, the demand is for higher quality fast food. For example, burrito operators Chilango and Chipotle have created much healthier burrito offers. The same is happening with kebabs, burgers, pizza and pasta. It is a qualitative change that is now rattling through the industry. Location is becoming less of an issue for destination offers.
Quality restaurants are popping up all over London, aided by internet browsing and navigation apps that make finding places simple. And with the proliferation of new restaurants, consumers are becoming more adventurous. A lot of the old-style catering is still there but, like the now largely extinct greasy spoon cafes of old, unhealthy offers are wilting under the onslaught of higher quality catering concepts.
But there are other trends shaping the industry too, not least the internet. The locational dynamics of catering are changing. Steven Stedman, head of London retail, explains: “Because it is so easy these days for consumers to find their way around city centres with their mobiles, the old advantage for restaurants of congregating in prime, high-visibility tourist/visitor pitches is declining. Quality period environments — quieter places, more conducive to quality restaurants and leisure shopping generally — are much more likely to be found off main drags than in prime pitches these days. That is why quality catering and leisure shopping are rippling out into backstreets that could not have supported the trade even a decade ago. The internet has broken the shackles binding city centre catering activities to high pedestrian traffic locations.”
That does not mean that prime positions are no longer of premium value — they are — but big units are so rare, and traded at such high premiums, that few players can afford them. The internet has made a much wider range of property viable for mainstream catering purposes. Without the internet, much of the catering expansion we have seen in central London over the last decade would not have happened.
A Shake Shack or Five Guys can typically pay two to three times the premium affordable by a byron or McDonald’s”
Rebeca Guzman Vidal, central London retail at CBRE, suggests that customer demand is everything when it comes to catering. She cites office workers as a prime example: “Five years ago, office workers were content with a nice Pret or Itsu. But even that is changing. Fast-food/takeaway brands are making way for a casual café culture in some areas. In some ways, things are going full circle. It is no longer just the speed of service that office workers or shoppers are concerned with — they want a personalised, quality service. We expect the same quality catering to be available at work as we would choose in our leisure time.”
Lifecycles are also getting shorter. A few concepts achieve longevity, most do not. Consumers are constantly looking for something new, suggests Howard. “We used to depreciate over seven years. Now it is nearer three to four. Consumers are increasingly fickle — the scale of choice is so huge.”
It is not so much that operators go out of business due to changing tastes. It is just that the cycle of rebranding as new concepts are introduced and old ones are refreshed or die is shortening. Tired restaurant concepts are a headache for landlords. ‘Covenant’ is a bit of a double-edged sword in markets like catering that thrive on new concepts. A tried-and-tested chain brand has covenant, of course, but in many cases in upscale leisure shopping areas they are not the occupiers landlords seek. Landlords of landed and commercial estates are increasingly inclined to ditch hypothetical covenant worries and opt instead for introducing an entirely new concept by an established high-end chef, often from overseas, with a strong track record in concept creation.
In these cases, a 12-month rent deposit is often acceptable to landlords in lieu of covenant. It is a win-win strategy for both sides. Landlords see their shopping/catering mixes reinvigorated and restaurateurs get an opportunity to secure plum properties that they could not have afforded in the past because they would have been snapped up by run of the mill domestic chain operators.
Howard elaborates: “If you were looking at a new scheme, a landlord might consider Ask, Zizzi, Pizza Express, Nando’s, Giraffe, et al. You know that they work. But if you hear that Jamie Oliver or Angela Hartnett, say, are looking at the scheme for a new format, but are only prepared to put a surety down of six to 12 months’ rent deposit as an alternative to a covenant or a company guarantee, landlords will now listen. Everybody wants exciting new brands and concepts — a point of difference. The safe chain option is not always the answer because you can potentially miss out on a much higher quality offer that could put you on the map for years and boost wider rental growth.”
So the mix and the way retail, catering and leisure blend to maximise estate or centre performance matters a great deal. Estate owners need to manage their mixes to sustain performance. An individual property owner is more likely to seek the highest current rent regardless of the impact the occupier selected may have on the wider area. This can, for example, result in the introduction of inappropriate junk-food operators into high-quality shopping areas, something which can tip otherwise strong pitches into long-term mix decline. That is why estate owners and major centre owners are so concerned with mix control.
Lease assignments often lie at the heart of mix control problems. Like owners of individual properties, outgoing occupiers are little concerned with the impact their lease assignment might have on the area as a whole: they are looking for the highest premium. To combat this, some of the landed and commercial estates are now including pre-emption rights within new leases. These leases are ‘outside the Act’: they allow the landlord to pre-empt the lease should the occupier later try to sell or assign the lease on the open market.
Attempts are now being made to add caps to leases to limit premium payments to two times the rent on retail shops and three times on catering outlets. This means, in extremis, that the owner can buy the lease in at a reasonable sum and re-let to an occupier of their choosing. Caps can cause problems for occupiers because — apart from being denied the open-market premium value if they assign — if the rent is say £200,000 per annum and their restaurant fit-out cost was say £3m, it is not a great deal if the premium received on leaving is restricted to just £600,000
and they want to get out after two to three years.
Operators with 300 branches are saying that they want to get to 500; those with 100 are saying they want 300”
Outside of London, the big cities remain the primary target initially for restaurateurs and fast food operators. David Muslin, regional shopping centre leisure at CBRE, says that many leading restaurant players are looking for 2,500 square foot to 5,000 square foot units and adds that bank space is often the target. “Fortuitously for restaurant operators, banks have been shedding high street stock for many years, releasing exactly the large floor-plate town centre stock large restaurant operators often seek,” he comments. “Of course, you need to secure change-of-use permission, but it is a lot easier going from A2 to A3 than from A1 to A3.”
But catering expansion is occurring elsewhere too: in high streets, shopping centres, fashion parks, retail parks, stores, railway stations, airports, car parks, food courts, motorway service stations, office areas, industrial and business parks, small towns, large towns, prime pitches, secondary pitches, tertiary pitches and roadside. It is happening anywhere there is sufficient passing traffic or appropriate locations for destination players.
“Operators’ consumer target profiles vary, so there are marked locational distribution differences between brands,” comments Muslin. “Some branch networks are much larger than others for maturity reasons or because they appeal to a very wide demographic. There is a general top-down approach to chain branch acquisition, as there is in retail, with operators focusing on gaining representation in the largest markets first.”
The rise in the tendency for consumers to eat out in the course of shopping trips remains a key expansion driver, steadily boosting the representation of catering in most towns and cities. It is a nationwide trend. Chains are always looking to fill in network gaps. Towns that might have been initially spurned in the early expansion stages tend to get picked up further down the line.
New developments these days almost always supply new, high throughput catering stock. In shopping schemes, the amount of space allocated to catering is increasing inexorably. Town and city centre regeneration projects are providing more catering stock too. Because of the growing importance of catering in the shop mix, owners are becoming more picky about who they let in.
“Everybody seems to be reinventing themselves these days,” Muslin says. “It is a mistake in this respect to get too sniffy about what we imagine to be ‘chain’ catering. We are often describing what we remember from the past, not what operators are actually doing today. For example, compare an original TGI Friday’s branch of the past with a new one today, or look at Byron. TGI Friday’s is constantly upgrading. Every Byron is completely different, tailored specially for each location. Because a brand has been around for a long time does not mean the offer is stale. Catering is constantly evolving.”
Chain operators dominate the provinces
Catering demand isn’t just booming in the capital. There is also a dominance of chain players outside London. David Muslin, regional shopping centre leisure at CBRE, explains: “Just 12 out of 194 restaurant brands, led by Pizza Express and Nando’s, currently control half of all chain restaurant branches in Great Britain. Fast-food markets are even more concentrated.
Four players out of more than 100 — Subway, McDonald’s, KFC and Domino’s Pizza — control 56% of chain fast food outlets in the UK. The concentration story in pubs is the same: half of all chain pubs in Great Britain are owned by just ten operators out of a total of 141.”
In shop markets, CBRE has seen a trend towards branch contraction — particularly in clothing markets — as chains migrate away from small units in small high streets in favour of fewer larger units, allowing broader merchandising in bigger towns and cities.
The catering business is not locked into big high-volume prime high street pitches in the same way: the locational opportunities available to chain restaurant operators are much wider than those open to chain retailers. Fast food chains have even greater locational choice. The end result is that catering operators continue to build huge, national branch networks. Muslin continues: “Operators with 300 branches are saying that they want to get to 500; those with 100 are saying they want 300. And so it goes on.”
You can download the full CBRE ‘In Restaurants’ Spring 2015 report at www.cbre.eu.