Serving up a recipe for success in lean times

News: Insight & Opinion | 7 August 2023

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Would you back a consumer business in the current climate? Here’s why we would…

It’s fair to say that, in general terms, investments in consumer businesses might not look like flavour of the month. The higher cost of living putting strain on consumer discretionary spending may make such opportunities appear too high risk for many people right now. But, as we often point out, it’s worth challenging what seems obvious, to find out if it’s really true and whether (and where) good opportunities may be hiding that no-one else has spotted.

While sectors like retail, leisure and hospitality are going through some lean times, not all businesses are affected equally. There are many nimble, well-positioned operators out there with strong business propositions that have displayed resilience over the past few years and are in healthy growth mode. That creates some excellent opportunities for bold investors to back them now, and capture an upswing in value over the medium term as the recovery continues.

Appetite for casual dining
The restaurant sector is a case in point. Trading conditions look tough at first glance, but on closer inspection, there are causes for optimism.

Spending on eating out is holding up well: like-for-like sales in the casual dining market are 2.7% higher than last year1. This growth is supported by a recent report2from CGA by NIQ which found that cutting back on eating out is a low priority for most consumers, with two in five (39%) consumers saying they would prioritise visits to pubs, bars and restaurants if their disposable income were to be cut further—a significantly higher number than those who would protect their spending in areas including clothing (28%), home improvements (27%) or international holidays (27%).

And while bloated chains such as Frankie and Benny’s, ill-defined brands like Le Pain Quotidien and those operating in a saturated market like Byron (burgers) have made headlines for closures this year. Challenger brand chains, with clearly defined values and a focus on contemporary healthy food are growing.

Case study: Investing in Wagamama post-financial crisis
We’ve got first-hand experience of taking a contrarian view and successfully backing carefully-chosen consumer businesses during a difficult economic climate. In 2010, in the wake of the financial crisis which precipitated decline across the whole restaurant sector, we invested in Wagamama, then still a relatively under-penetrated brand in the UK, but which had identified the pan-Asian segment as a significant growth opportunity. The injection of growth capital facilitated Wagamama’s expansion strategy, enabling it to increase the number of UK and overseas sites by over a third to almost 200 venues.

In 2018, it was sold to The Restaurant Group for £559million, delivering a 3.4x multiple for our clients. What made it a winner was its contemporary, value for money offering that was demonstrably different from the competition (with its communal seating and open kitchen layout), its clear focus on its niche and the strong brand loyalty it developed. The chain continues to perform strongly with like-for-like sales up 5% this year to date4.

Standing out from the crowd
Today, again, it will be those businesses that can stand out from the crowd, offer a differentiated experience at the right price point and demonstrate clear brand values that will build a loyal following of core customers who will keep coming back through thick and thin. And it’s those that can identify ‘white space’ to grow into that will be able to turn current market conditions to their advantage and put themselves in a good position to capitalise on demand as it increases. This means finding good sites in which to build a sizeable chain, creating strong brands in markets typically dominated by “mom & pop” family operators such as in Indian, Chinese or Thai cuisine, and offering something more contemporary and on-trend to what you might traditionally expect to see in those segments.

CGA Research and Insight Director, Charlie Mitchell states that consumers “want full value for money when they go out. In such a demanding and increasingly polarised market, it’s more important than ever for businesses to understand the latest consumer habits and priorities and deliver consistently memorable and good-value experiences that keep guests coming back.”

There are several examples of our portfolio businesses doing just that, with the result that they are not just surviving, but thriving by continuing to display meaningful growth. Take our co-investment in the MBO of Rosa’s Thai, in which our clients invested in 2019 alongside private equity restaurant specialist TriSpan. Rosa’s had 13 sites in London at that point: now it has 35(24 in the capital and 8 around the country).

Starbucks franchisee 23.5 Degrees, is another consumer brand in our portfolio which continues to perform strongly. It has just opened its 100th store (87 of which were opened since our clients first invested in the company), with more under construction and a pipeline of over 50 further possible sites identified.

We keep all the above factors in mind when sourcing new investment prospects, and that’s why we’ve identified the UK’s largest Indian themed premium restaurant chain as a restaurant brand which is set to continue winning in its market. This differentiated brand, which specialises in contemporary, healthy and affordable Indian food has grown steadily over the past seven years and has plans to cement its dominant position with a roll-out plan supported by a private equity manager specialising in casual dining operators.

It’s a brand beloved by its clientele with customer satisfaction scores outperforming its competitors, it has a strong founder-led social media presence and is perceived favourably for delivering a contemporary experience, good value for money and being ethical/environmentally friendly - exactly the kind of factors that will support its future growth from challenger brand to establishment player.  

When discussing restaurant investing, we of course need to touch on external headwinds, but there is cause for optimism even there: inflation is easing, energy prices are falling and for those with expansion ambitions, unlike in the boom times, there’s plenty of availability of good sites to choose from at attractive rents.

If a brand can negotiate these issues and stand apart from the competition, well, we think that’s a recipe for success.

1Source: Financial Times. Data from CGA by NielsenIQ
4Source: The Times, 20 July 2023