The Changing Structure of the Foodservice Industry

We have already seen significant closures across the foodservice industry, and we expect this to continue over the next 6 - 12 months. Estimates vary from market to market - the NRA for example, estimates that 15% of restaurants could permanently close in the US. In Europe and the Middle East, estimates of permanent closures have been talked about around 30% and even as high as 50%.

This means that we will see a lot of foodservice space come back to the market. Much of this space will be low value, underperforming retail and leisure locations. Some of this may never revert back to being foodservice, but in reality, like in every economic downturn, shedding some of the deadwood is both inevitable and can act as a long term positive by creating a stronger and more dynamic and efficient market.

In the most prime locations, where space comes back to the market, re-leasing space should be relatively straightforward as demand will be maintained. The middle ground, the “rump” of core foodservice locations on our high streets and in our shopping centres will be hit hard in the short to medium term, but could come out of this looking stronger than ever.

An increase in space combined with slower expansion from the larger operators will create a medium-term oversupply of restaurant space. This will force a correction in what has been becoming an overinflated rental market. As Chris Miller of White Rabbit put it “Downturns are where most successful hospitality businesses are made… rents are likely to adjust down and landlords will provide more favourable terms to attract the few surviving active players in the market. Expect to see capital contributions and turnover rents to attract best-in-class operators.” (City AM)

This was supported by a recent article, from Head of Retail Valuation Advisory for EMEA, Christian Luft, who suggested that “there are clear indications of an increase in turnover rent leases being contemplated and negotiated in the UK and across Europe where traditionally this has been more commonplace.”

“Independents” Day

One of the key positives that we hope to see over the next few years is an increase in the range of quality foodservice operators on our high streets and in our shopping centres. This won’t be immediate, but independent, innovative and entrepreneurial operators will be at the heart of the recovery of the industry.

Existing, established foodservice brands are going to be focussed on survival, for many this includes the closure of a significant number of units as they rationalise their portfolio. For the short term, their expansion plans will be limited, and this, combined with a wide availability of fully fitted restaurants on the market and with landlords needing to be more flexible on their rental terms, creates an opportunity.

For the progressive landlord, who can spot opportunity and who is prepared to share risk and work in partnership, there are thousands of foodservice “brands” who have the skills, product and following ready to take those spaces. The Food Truck and Street Food boom of the past 5 years has created a ready pool of entrepreneurial foodservice businesses who would make great additions to the high street restaurant line up. Some might not be quite ready, but over the past few years we have already seen the likes Pizza Pilgrims and Vincent Vegan successfully make the move from Street Food to bricks and mortar.

The post pandemic landscape may well create a perfect storm for more to follow, seeing a rise in the range and style of offers and moving away from the ubiquitous foodservice brands who had started to dominate the foodservice market.

Food Halls

One other area that may well benefit from this is the Food Hall. There have been lots of discussions about whether the “new normal” can work for a Food Hall, and whilst it may be tough to create social distancing, this requirement cannot last forever.

The reason that Food Halls will continue to be successful is that they are a great stepping stone for Street Food and Food Truck operators to move into bricks and mortar.

Rather than having to find a quarter of half a million dollars to fit out a restaurant, new market entrants can move into a “permanent” location for a fraction of that cost by taking space in a Food Hall. We expect Food Halls to continue to grow in the medium term, as they provide the incubator for new businesses, whilst also providing a combination of great value and high quality.

Investment in Foodservice Real Estate

The JLL Global Real Estate Perspective report highlighted that, as a result of the pandemic, investor strategies have “focused on defensive, operationally-critical sectors which are aligned with secular trends. This will continue to benefit industrial, multifamily, data centres and other alternative assets.” 

As one of the hardest hit sectors, hospitality investment, both in terms of direct investment and at the Real Estate level, is expected to decline, certainly in the medium term. This is unlikely to be an issue from a Real Estate perspective, as we have already highlighted, there is likely to be an oversupply of foodservice space for the foreseeable future and therefore new developments are not going to be as critical to expansion within the sector.

What will be critical is the reinvention and reimagining of existing spaces to make them attractive both to consumers and potential tenants. This will include tenant mix strategy, location planning, configuration and activation of shared spaces.

Mergers and Acquisitions

With increased pressures on operators of all sizes, we anticipate mergers and acquisitions to continue across the sector. The challenges in the industry mean that investment in the sector will provide great value. A great example of this is TowerBrook, who recently paid ￡109.5m for Azzurri Group, the operator of ASK Italian, Zizzi and Coco Di Mama, less than half the ￡250m that Bridgepoint paid for the business in 2014.

Whilst we see a growth in the number of the mergers and acquisitions within the industry, we expect to see this in the development of multiple brand portfolios. As consumers look for more experience from their foodservice visits, they will naturally move away from ubiquitous brands. The total growth potential for any brand will therefore decrease. This will lead to the development of restaurant groups with multiple brands, which will still allow for economies of scale on purchasing and central staff costs but also allow for flexibility in delivery. This is less likely to be the case in the Fast Food sector where convenience and value are the key consumer drivers.