Where from here? Peter Backman’s view.

Where from here?

In the wake of the response to the Covid pandemic, and what’s now happening in the market as a whole, foodservice sector analyst and consultant, Peter Backman (pictured) – who comes into regular contact with sector operators, suppliers, investors, analysts and the press at home and abroad – raised some questions and potential answers in sharing his views with BSA members via a webinar held at the end of January.

THE WHY

An important element to understanding where things were going was to understand the ‘why’, Peter Backman emphasised, the hope being that it would make things much easier.

Working internationally over many years as he had, he had also come to learn that what happens in the UK is often not very dissimilar to what’s happening in other countries. In detail, there were certainly diff erences, but when it came to the overarching picture, there is often a lot of commonality too.

Covid had clearly made some huge changes, he acknowledged; the questions being how much, and what has been permanently changed, and how much are we going to go back to where we were (or fairly close to it)? What’s going to be driving future growth and change, and what does that mean for companies in the various foodservice markets?

FOODSERVICE ON THE EDGE OF COVID

Peter Backman also posed the question what was foodservice like a couple of years ago? Having been through such a disruptive process in recent times, this is an important consideration, he felt.

Between 2018 and 2019, he reported, there were signs that the whole eating out food market had stopped and changed at that particular moment in time, in turn meaning that in 2019 the market was not growing very much, having been going through a period of rapid growth prior to that point and at least since the great recession of 2009 to 2011.

Come 2019, this growth was really slowing down, said Peter Backman. In running a ‘tracker tracker’ – a device which looked at a range of data and information from numerous sources about the market in a single tracker – it had revealed to him not so much a market that was stable but one that was slowing down, and even declining (particularly when it came to pubs, restaurants, QSR – the ‘destination eating market’). Thus, the world had been ‘slowing down’ anyway, acknowledged Peter Backman, then Covid hit, and a recession was entered into.

In referencing recessions of the past by way of informative insight to change, Peter Backman referenced the growth periods, followed by the lack of growth periods, characterised by ‘saw tooth’ periods of growth that had taken place over time but always in an overall up and up direction – slowing a little in the great recession of 2009/11, but still continuing upwards afterwards up until 2020, just as you might expect (although the market growth then dipped, and in a few instances dipped below zero in terms of change, he reported).

WHAT HAPPENS IN RECESSIONS

The 1981 recession was a cyclical recession, he felt, ‘a bound to happen’, and it happened. It was a time when franchising started to grow as a way of expanding the market, he refl ected, and a time when fast food really took off (KFC, McDonalds and the pizza chains).

The early 1990s saw another cyclical recession; the beer orders aff ected the beer market in that no brewer could own more than 1000 pubs, he recalled. With many brewers owning far more than that at the time, they sold off their pubs (these outlets expected to become much more than outlets for brewery beer, and giving rise to the pub food sector). This change had already begun, but received a huge impetus in the 1990s, he proposed.

By the early 2000s, the dot com bubble was bursting; a consumer confi dence crisis, and not a notable drop for the foodservice sector, but it gave rise to the break-up of the portfolio model, Peter Backman claimed, which was how pubs had been growing through the nineties. People who owned pubs also owned restaurants and often owned leisure sites too (David Lloyd owned by Whitbread, for example). From 2000, large chains started to grow as private equity got into the market.

Then followed the banking crisis of 2009/10/11, becoming a time when private equity really took off , and funding the casual dining growth in particular. Each recession had its own nature, but gives rise to a diff erent style and leading type of operation, Peter Backman pointed out. So the question now is what is the recession of 2020 going to give rise to? It is possible to get some clues, if not necessarily the full picture and answer.

Immediately, however, with Brexit out of the way, there was a need for companies to get their momentum back, rebuild their balance sheets and do things that are going to set them on a fi rm footing for the next ten years until the next recession comes, he

suggested (one thing being fairly certain from the growth fi gures that there tended to be a recession every ten years).

Looking at the evolution of the market in the fairly short-term, 2019 saw growth dips coming when expected and a boost at Christmas, for instance. Then come 2020, came the major dip in growth that had been seen in so many diff erent markets.

By 2021, things had started happening. For the fi rst two or three months, the foodservice market was basically in lockdown, but doing delivery which was keeping it going. Hospitals, healthcare and alike was operating at fairly normal levels, education was in operation, but most sectors were closed down.

Then, from April into the summer, the various restrictions were being removed and by August the market was looking quite good, Peter Backman stated. Britons were staycationing and things were going along quite happily. September and October levelled off (October getting to within touching distance of performance levels of 2019, infl ation having helped that somewhat).

Then, in December, the market turned down again because of Omicron and an associated huge amount of mask wearing, social distancing and diffi culty in eating out. But what was notable, observed Peter Backman - although it did decline quite dramatically in December – was that it was nowhere near the situation in the early part of the year, tending to indicate that if that’s the worst that Covid can now throw at us, we should be concerned, but not hugely worried like we were, he felt. He wasn’t suggesting that Covid would not get worse, or that there would be another variant to take us back to the Delta days – who knows? – but the market had shown a remarkable resilience, he added.

Looking into 2022, Peter Backman went on to say that he felt we would be potentially be getting back to within shouting distance of 2019.

THE LAST YEAR

There had been huge uncertainty, Peter Backman acknowledged. Some sectors had been back to normal, whereas others are still eff ectively closed, although not totally (such as leisure and a lot of the hotel sector), with delivery having been a very notable feature of the whole Covid period.

It was still growing, but that growth rate shown in 2020 was defi nitely slowing down, reported Peter Backman, indicating that a lot of people given the choice of eating out or having a delivery, are going to eat out if they can. Investment was also starting to emerge in the restaurant and food to go sector, he reported, with franchised businesses growing rapidly in 2021.

On the other hand, workplace patterns have changed because people have not been going to work in the numbers they were in 2019. The pivot to retail that was seen in the early part of Covid has swung back although retail is still above where it was in 2019, said Peter Backman, but it was slowing down and losing a lot of the gains it had made in capturing business from foodservice.

There was a re-alignmnent in terms of property costs, which might seem arcane to many, but for many, many operators in the restaurant, pub and QSR sectors, the costs had got out of kilter in the twenty-teens and there is still a lot of pressure to try and bring them back to something more aff ordable for operators.

Working from home became normal, although that’s not to say it’s at levels we’ll see in the future, said Peter Backman. City centres, particularly London, have been emptied, leading to empty properties, but technology has been growing. A whole host of things had therefore been happening – some good for foodservice, but some of which had been pressures.

The sector had been through a wrenching 12 months, customers are indebted, although they have probably built up some savings too, but that’s not everybody, and right now there is a cost of living squeeze turning a positive bank balance into something less positive.

Operators had defi nitely become indebted through the period, he added, suppliers too, with supply shortages due to supply chain issues and driver issues. Staffi ng generally has been, and continues to be, an issue. There might also be over-capacity in the foodservice market, he felt – a feature of the twenty-teens driven by private equity in the market – although that over-capacity has probably now all been eliminated by CVAs, he suggested. However, that did not mean more new outlets would not start coming on stream again, leading to over-capacity once again in the next couple of years.

Fixed property costs have basically been eased for the last year or so (restructuring via CVAs, the government stipulating that landlords can’t evict tenants as before), delivery is on the rise, working from home has been shown to work and there is infl ation to contend with. This means a focus on cash, a focus on repairing balance sheets, capturing customers by technology (apps etc). The changes we are seeing fall under a number of headings – travel, working from home, delivery and new lifestyles.

The consumer has been changed, battered, possibly angry, and younger age groups have been motivated to enjoy their time, Peter Backman proposed; there more GIG workers, and there were a whole range of savers and spenders, and with more working from home, the delivery space has become very important.

At the same time, there are concerns that people take to heart and want to do something about, Peter Backman observed (sustainability, eating plant-based, local/ regional and seasonal food).

A common feature to a lot of aspects now, is travel, Peter Backman went on to outline, with a steady growth in travel. TFL travel into London has been growing, but is still way off where it was. Daily fl ights to the UK data published by Eurocontrol show a similar pattern, he reported, posing the question are we going to get to where we were? (the travel markets in December 2021 seeing a major dip).

Casual dining is in debt and lacks confi dence (a need for certainty as opposed to uncertainty, although delivery has helped a lot, as has tech), with quite a lot of changes to the names in it – some having gone or declined, but some newer faces emerging too or growing, but with question marks over whether or not they are located in the right place (city centres or shopping centres, both of which have suff ered during Covid), although some have now found themselves to be located in the ‘right’ areas (suburbs, for instance).

A further question that could be raised was the future importance of the brand, or were people now keener to have something more unique asked Peter Backman.

QSR operators have kept the sector alive and operational by showing immense fl exibility in off ering delivery through Covid, he added, in some cases allowing businesses to trade at pre-Covid levels, takeaway also helping when linked in with aggregator apps. As a result, the sector is in reasonably good shape and even the target of overseas interest (the US brands interested in the chicken sector, for example).

To some extent, independent operators were saved by delivery, he felt, but reduced trading levels led to lost cash, having also learnt to do delivery and takeaway a higher level than before Covid. The travel and leisure sector bounced back last year, but has suffered since, the shape of the bounce back uncertain and it remains to be seen how much foreign visitor business there will be come 2022 and 2023 given that it is now affected by work from home patterns and perhaps changed holiday patterns being experienced throughout the world.

Higher growth sectors can be found where there is participation and costs are lower (cinemas, for instance, although they will probably still be operating below preCovid levels, Peter Backman thought, and the impact of Netflix).

In the cost sector, healthcare has been steady, education variable but currently ok, business and industry weak, particularly in city centres and central London because of working from home and changes in travel generally. The next few weeks should show how much of a return we’re going to see. There are opportunities for business and industry in delivery and operating central kitchens and the contractors are big in this market, having been badly affected by Covid trading patterns, but also now turning their attention towards delivery, and should they be doing it.

Distributors – wholesalers, cash and carries etc – the big players have really struggled with supply chain issues, and getting drivers, Peter Backman reported, but are in a reasonably strong position, whereas the smaller players are less strong, leading to a mixed pattern for the distribution channels (and in turn depending on which sectors have, or have not, been open).

A CRITICAL PERIOD

What are the changes that we have seen, and are going to be seeing, over the next few months as a result of everything that has happened?

Factors affecting this include the point at which the maximum of the population was immunised (which happened around October 2021) and ambient temperature (summer being better for business that winter, say), proposed Peter Backman. It was still not certain when the majority of places would be open again, but hopefully that would be clearer by the spring. Similarly, it remains to be seen how many city workers will be returning to their offices.

In September VAT increased from 5% to 12.5%, and come April it will be going back up to 20%, Peter Backman reminded. The furlough scheme came to an end in September, meaning that all the costs now fall on operators.

Government loans are due to be repaid and back rent is due, although landlords have been told to refrain from doing something aggressive by the government, but that’s going to change, said Peter Backman. Additionally, workers have been difficult to find, but he felt this could start to improve by the summer. Therefore, we are seeing quite a lot of ‘red’ at the moment, and April will be a critical period when VAT and the national minimum wage and NI go up, business rates will rise, the rent moratorium removal, and inflation.

Foodservice might be trading well – and indeed if it is trading well – that means that there will be problems for operators on the cost front, warned Peter Backman with potential corporate failures.

Peter Backman drew attention to his keeping quarterly track of the number of operators who are growing in percentage terms and in number of outlets, and the fact that in November 2016 the number of foodservice brands had grown to a peak then started to decline, but are on the up again more recently after Covid. Since Covid, come November last year, 11 of the outlets he tracks had grown to 50 or more stores, 24 had now got between 25 and 50 stores, six had gone out of business and 11 had seen decline in numbers (although they are already showing renewed signs of growth).

Coco di Mama, for example, is in a different position, however, becoming a virtual delivery brand, its bricks and mortar sites falling to 15 in November 2021 from 27 six months before, but you can get Coco di Mama from 131 other delivery only sites (Ask and Zizzi stores). Brands that are still growing also include Abokado, Ed’s Easy Diner, Euphorium, Tossed, Wrapchic and Wahaca (the most recent growing brands). The ones that are showing the greatest percentage growth in terms of outlet numbers are Thunderbird, Wingstop, Franzo’s and Franksters, three of which are chicken. Slim Chickens, Rio’s Piri Piri and Megan’s, Bar + Block are also showing an increase in number, also showing that chicken would appear to be flavour of the month.

DELIVERY

Delivery has disrupted relationships with customers, said Peter Backman, creating new markets, but having been doing that since well before Covid. It’s changed customers’ relationships and how they prepare food, he felt, and it’s changed operator business models too.

Traditional pizza delivery (Pizza Hut, Domino’s, Papa John’s etc) has been continuing to grow year on year. At the same time, the independent operator has apparently been doing less and less delivery, he reported, but in actual fact shifting their business primarily to Just Eat. So, overall, the amount of independent delivery business has been increasing, but at the same time Just Eat have been changing their business model to doing the actual delivery unlike before, but having come under pressure from the likes of Deliveroo and Uber Eats.

In summary, this sector is a complicated market, further complicated by seeing the UK market and it being part of an international business. Each player is international, the UK being a test bed, but at the same time leading the world in many ways in terms of how it operates. The US market is much larger and the Chinese market larger still. The market in Germany shows a different pattern, and so on, said Peter Backman. It’s an international market, the UK being part of it, and so we can expect to see a lot of activity from the major players via dark kitchens which are becoming an increasing feature of the delivery market (indeed, a lot of money is now coming into these from property companies, Peter Backman reported, with the elements of a property bubble going on). Dark kitchens and delivery are here to stay, although the amount of money going into dark kitchens is perhaps in excess of what is needed, he felt.

CLOSING QUESTIONS

In conclusion, Peter Backman recognised that foodservice has a long history of stability, some modest growth accompanied by a lot of innovation and change. Covid upended everything, and the world is going to be different. Is it going to be very different? How much has been permanently changed? What’s going to be driving future growth and change? And what will that mean for companies in each individual market? Finally, the most important question to pose, he suggested, was “what do I have to do to stay relevant?”