Food for thought, are restaurants as challenged as retailers?

I am sure I enjoyed my evening discussing the economy with CFOs of restaurant companies more than EY’s catering team did - cooking for restauranteurs has to be a stressful process. For my part, I was able to relax, enjoy good food and take part in a fascinating discussion. 

Reflecting on the themes raised at the event, I was struck by how similar the challenges restauranteurs are facing are to those confronting retailers.  The two sectors are having to deal with a challenging macro outlook, especially slowing consumer spending and increasing cost pressure, and technological change that is creating pressure on business models. The impact of online shopping on the high street is widely recognised but the growth in home delivery from restaurants appears to me to have a lower profile, yet it could turn out to be at least as transformative as the shift to online retail.

The decisions for restauranteurs on their approach to delivery are, if anything, more complex than for retailers. There are more challenges around the quality of delivered food than retail goods for obvious reasons, while the demand for home delivery and in-restaurant services may often be at the same time - weekend evenings for example. In addition, distance matters in food delivery so it is harder for restaurants to rationalise their outlet numbers and maintain geographic coverage. 

I came away convinced that over time delivery will continue to expand as a share of restaurant sales and we will begin to see rationalisation of footprints of restaurant chains in particular. This impact is likely to be more significant in cities and large towns as this is where delivery works best - concentrated populations within easy reach of restaurants. Smaller, spread out population centres are less attractive for delivery as the distances to be travelled impact food quality.

But towns and smaller population centres will not escape the squeeze on restaurants. Slowing consumer spending growth, continuing costs pressures and growing shortages of both skilled and unskilled labour - chefs especially are in short supply - will mean restaurants in the UK’s smaller towns and communities will find conditions increasingly difficult.

During the evening’s discussion, it became clear to me just how closely interlinked the fortunes of the two sectors are and hence that the challenges of the retail sector are likely to increase the rate of restaurant closures. The process is as follows, as stores close, local income is lost (this is often a major part of total spending power in smaller places) and a reduced number of retail stores makes the high streets less interesting destinations, reducing footfall and lowering the demand for restaurants. This could easily become a downward spiral, less shops mean less restaurant traffic and this in turn means less visits to high street stores and so it goes on.

In my opinion, the turmoil in the high street that has been building in recent months is not a short-term cyclical event but a structural shift in the consumer market. While all high streets will be affected, stores and restaurants are likely to come under most pressure in the UK’s towns and smaller population centres. This in turn is likely to have significantly adverse consequences for local economies as these places tend to have less diversified economic profiles and hence lack the resilience of major cities

Despite the sterling work of organisations like the Centre for Towns, policy-makers are lagging in developing responses to the challenges of the high street. Now is the time for concerted effort to assess the situation in the retail and restaurant sectors and to consider what actions might be appropriate. For example, ensuring that competition between online and physical providers is fair, that the approach to business rates is sensible and that plans are in place to mitigate the potential consequences of Brexit such as higher food costs and labour shortages.