Smart casual

The pandemic was the nadir for numerous casual dining brands in the UK, a sector that was in a precarious position before the pandemic due to high levels of debt and spiralling overhead costs, on the back of private equity driven oversupply of sites.

This predisposed condition, combined with structural factors such as extensive reliance upon on-premise sales, low digital maturity, and large concentration in city centres, saw the number of mid-market casual dining venues fall by 19.4% (from 6,625 known sites in March 2020 to 5,338 in April 2021).

On the back of the widescale closures seen across retail and F&B, and landlords being cognisant of the role F&B plays as anchors, leases are now at reduced rates from before the pandemic, and in some cases subsidies are also being granted to cover 50-60% of fit-out costs. Additional scrutiny is also being placed on leasing agreements, with restaurateurs now less willing to sign Authorised Guarantee Agreements that have left many casual dining brands legally liable for rents of sites they no longer occupy. This oversupply of space and heightened awareness of the impact of unforeseen events may push commercial lease structures to become less favourable to landlords moving forward.

Expansion opportunity
However, with more available cheaper rental space, some casual dining brands view current market conditions as an opportunity to restructure and expand. Loungers (seen above), the business behind the lounge and cosy club brands, has opened seven new sites this financial year and is expecting to return to its target of 25 new sites per year. Locations are targeted within regional high streets - as opposed to city centres - where they have benefited from increased flexible working. There has also been an influx of food halls looking to launch in vacant high street spaces. For example, a former Poundland in Lewisham is now Catford Mews, a food hall that hosts film and live-comedy nights. A similar story is seen in Sheffield, where a former cutlery factory has been repurposed as Cutlery Works food hall. 

Delivery upsurge
Future retail composition will also be dictated by the upsurge in delivery. Boosted during lockdowns, delivery platforms have seen continued growth this year despite the reopening of bars and restaurants. Deliveroo more than doubled the number of orders through its platform to 149m in the first half of the year (YoY growth of 110%). The company continues to expand its coverage across the UK and has signed up 10,000 new sites so far this year, increasing its base of restaurants by almost 30%. Despite the industry seeing explosive growth, delivery platforms have remained largely unprofitable and face further margin pressure; through the potential onset of regulatory constraints on driver compensation, and rising contentions surrounding commission rates, which typically fall between 15-30% of the price of a meal.

Dark Kitchens
In this margin-tight environment, dark kitchens have emerged as a new force; these venues forgo front-of-house space and are purpose-built to service delivery, and as a result, enjoy lower overhead costs. This model, however, is not new and is seen frequently in the pizza segment, where many restaurants have chosen either dine-in or delivery as their primary offering. Virtual food halls, where customers can order from various restaurants in one transaction, have also started to make their way over to the UK. For example, in Sheffield, consumers can pick different menu items across Jailbird Fried Chicken, Patty B’s Burgers, Dirty Herb Kitchen, and Mucky Pups in one transaction through the iBe Loyalty platform. These venues look to bring greater flexibility to user orders while increasing the efficiency of last-mile delivery operations, which currently suffer from poor route optimisation when making multiple pickups and drop-offs.

As consumers continue to place more emphasis on convenience, localised services that better serve those working from home looks to be a growing operating model. And the proliferation of delivery could ignite a restructuring of the restaurant industry into specialised delivery and non-delivery units.

Bikram Sandhu