Midmarket dining matures

20 April 2006
Midmarket dining matures

When Clapham House snapped up 30 Tootsies restaurants for £25.3m two weeks ago, the group almost doubled in size overnight. The deal means that the founders, former PizzaExpress directors David Page and Paul Campbell, are now well on their way to achieving their aim of a national rollout.

They're not alone. A number of casual-dining companies are now reaching middle age and are going for critical mass, fired up by the lure of economies of scale and the fact that many, like Clapham House, have strong management teams in place.

FishWorks plans to increase its 10 restaurants by four sites a year for the next four years, Ma Potter's aims to increase its
15-strong portfolio by 10 over the next year, and La Tasca, which has 56 restaurants in the UK and three in the USA, is heading for 100 and spinning off brands such as La Viña and Sam & Maxie's.

Other healthy pipelines can be found at Strada, Yo! Sushi and Wagamama.

But in this highly competitive market, one group's success is often another group's downfall, as the fate of Urban Dining demonstrates. Observers believe the £31.3m purchase price it paid for Tootsies in October 2004 was too high and put undue pressure on management. Increases in rent, rates and wages over the past two years, coupled with diners' reluctance to pay more, meant that when menu prices rose, profits dropped.

Organic growth No wonder many analysts reckon it's safer to grow organically than through acquisition. Shaun Gomm, manager at Deloitte corporate finance, says the trend towards organic growth is also spurred on by rising prices. Sale price multiples (the profit-based calculation that determines a company's price tag) have grown from a depressed 5% or 6% of earnings before interest, taxes, depreciation and amortisation (EBITDA) to 9-11%.

While this is an indicator of confidence in the market, companies such as Tragus Holdings and La Tasca have been deterred and have chosen the organic route. "Some valuations are too expensive for me - why pay if you can create your own?" says James Horler, chief executive of La Tasca. "We know the landlords and can create a brand to meet the needs of the consumer."

So what's driving the growth in the casual-dining market? Gomm maintains that it's high consumer demand. Spend on eating out in the UK is about 35% of the weekly consumer budget; in the USA, that figure is closer to 50%. This gives operators here the confidence to believe that the British market will continue to grow. Most reckon Britain will catch up with the USA in 10 years.

Operators see opportunities everywhere, particularly in shopping centres, where Gomm points out they can get a 40% return on capital employed, compared with 25% in the high street. He adds that brands such as Prezzo are even picking up units in non-core high-street sites, getting low rents and still pulling in customers.

Meanwhile, listed companies are being driven to expand by the stock market. "La Tasca could expand to 100 sites," says Gomm, "but the analysts will want to know what they plan to do three years after they have achieved that."

Horler is already on the case. Recognising that Spanish food wouldn't attract families in the growing leisure and retail park market, he has launched bar, grill and smokehouse brand Sam & Maxie's. It's more of a premium offer than those found on most parks, and the first opened at Stevenage Leisure Park, Hertfordshire, this month.

"The single-brand rollout, such as Pizza Express, is not right nowadays," says Horler. "The market has developed and needs different offers for different sectors. We want to be less exposed."

Several operators are looking abroad - at the Middle East and the USA, in particular. According to Horler, there's still an opportunity for innovative groups that have reached critical mass in the UK to cross the Atlantic. The US market is showing increasing demand for premium casual dining. La Tasca has three wholly owned and managed La Tascas in the USA trading well, with number four to open in June. Meanwhile, Yo! is looking for franchise partners there.

Cautious But some remain cautious. Ron Sutcliffe, financial director at Town Centre Restaurants (owner of Auberge bar and restaurant and Café Giardino), is surprised that restaurant groups haven't learnt lessons from those companies that have expanded too quickly.

"We've been there, historically," he says. "We started on a rollout when we went public in 2000 and overstretched ourselves - and lots of others will do the same. They're encouraged by investors who want to see a rollout. They haven't learnt."

This more cautious company will, over the next 12 months, add five outlets to its 40-strong café brand, which has a presence in 30 shopping centres. It will add to its 13 restaurants only if and when opportunities present themselves.

"There's a lot of competition out there," says Sutcliffe. "Consumers may go somewhere for a year - and then they'll want to try something new."

Certainly, competition is likely to get stiffer over time, and growth may become a matter of survival of the fittest.

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