Viewpoint: What’s whetting investors’ appetites?

Tough times haven’t put all investors off businesses in the hospitality sector. Claire Madden explains what the interested are looking for

With consumer discretionary spending squeezed, and many in the hospitality industry feeling the heat, it would be understandable if the appetite for investing in restaurant, hotel or pub businesses was fairly muted. But that doesn’t mean such opportunities are off the menu altogether. Some in the investment community are prepared to take a contrarian view and seek out good investment prospects that no-one else has spotted, in sectors that are temporarily unloved or overlooked by the majority.

These investors can see it’s not all doom and gloom in catering and hospitality, and leisure more generally. There are bright spots – not least, the easing of inflation and energy prices. At 2.7% up on last year, like-for-like sales in the casual dining market show resilience. Consumers are indicating they are far more inclined to prioritise visits to pubs, bars and restaurants over clothes, home improvements or holidays abroad if their disposable income is cut further, according to research from CGA by NIQ.

Plus, there is scope for expansion for those brands that are in a position to grow. More good sites at attractive rents are currently available on the market than there have been for quite some time.

Potential

Market conditions are just one part of the equation. Equally important – if not more so – is the strength of the business itself and its potential to succeed. The effects of the downturn are not being felt equally across the board. More than ever, investors are looking for agile operators who have: a solid position in the market; a sound business model; an offering with a distinct appeal that embraces the zeitgeist; an understanding of the latest consumer trends; and growth ambition (along with a way to achieve it).

For an investor, that might mean going for less well-known brands that dare to be different and are challengers in their space. They also need to consistently offer value for money (at whatever price point they are targeting), have a well-defined brand and values, and demonstrate strong customer satisfaction and loyalty. Businesses that will capture investors’ attention will be those that can identify and move into ‘white space’ (areas not saturated by other brands), and can continue to grow and stand out from the crowd with a differentiated experience.

Backing winners

All these attributes came into play when clients of ours invested in Wagamama back in 2010 – a time when the restaurant sector was suffering following the global financial crisis. Wagamama had identified the pan-Asian segment as a significant growth opportunity. Within eight years its venue count had risen by more than a third, and the business was sold to the Restaurant Group for a 3.4 multiple return.

This highlights a key point: investors in private businesses are in it for the long term, and should be savvy enough to realise that an exit from their investment will take place in a very different environment to the one in which they entered it. Research has shown that investing in a downturn is the optimal time to achieve superior returns when the economy recovers.

Several of our portfolio businesses are in healthy expansion mode right now. For example, Rosa’s Thai currently has 35 UK venues, up from 13 when our clients invested in 2019, while Starbucks franchisee 23.5 Degrees has just opened its 100th site. It all goes to prove that growth is possible even when others are closing their doors.

Investing is not simply about riding the crest of a wave in good times. It’s about finding ways to make good returns across market cycles, and sometimes that means going where others fear to tread – albeit with thorough due diligence and careful selection of investment targets. Just as it’s harder to make money in the restaurant business these days, it’s also harder to find good investment prospects. Harder, but not impossible. With some out-of-the-box thinking and a bold yet considered approach, investors and operators of hospitality businesses should be able to create value together, whatever the conditions.

Claire Madden is managing partner at Connection Capital

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