Private equity firms love a business in which they can invest. The UK casual dining sector has been a popular choice for private equity over the last 3 decades. On the face of it, the sector is attractive for its healthy margins, scalability and historical fragmentation. These are perfect conditions to build strong and valuable brands. Indeed, Morar’s BRS was developed to monitor brand development in the sector, and now covers 45 of the UK’s top casual dining brands in detail over time.
However, for many mature brands, the sector that once offered easy pickings is now proving harder going as more operators enter the market to serve increasingly brand-led diners.
In 2010, when we started tracking brands in the BRS, the number of brands an average diner would consider was less than 10, in 2016 the number is more than 15.
More brands have entered the space offering consumers a wider range of flavours and dining experiences. The biggest recent trend has been the authentic burger. In 2006 burgers were the preserve of a handful of global brands. Burger occasions now account for a large and increasing proportion of choices made by the 10+ million diners covered by the BRS.
The majority of new entrants are backed by private capital. They are often drawn in by the opportunity to rapidly scale popular concepts, from a clutch of sites to national chains within a short space of time. In towns across the UK diners are enjoying an ever expanding choice of branded restaurants due to the role of private capital in the sector.
For many of the older brands the influx of new brand entrants represents a serious challenge. We have seen that some legacy brands, who are bigger and less agile, have struggled to adapt to the changing environment. For example, consumers' stated intention to return to the pizza brands has declined over the last 3 years, whilst is has increased for the burger joints.
One response to the situation, seen in other sectors with similar maturity issues, could have been the development of customer loyalty programmes, customer information gathering and the development of thematic engagement programmes and innovation.
But for many of the legacy brands this investment proved less attractive than the far simpler activity of issuing voucher codes via the pubic internet.
The UK casual dining sector is a mature, slow growth market where one brand’s gain is often another brand’s loss. As more brands enter, legacy brands face a choice: innovate or lose market share.
Our BRS data shows that leading brands in this space discount up to 40% of transactions with vouchers, whilst the average is half this figure.
If market leaders are the most heavily dependent on discounting, then this confirms the need for new ideas in the sector and an opportunity to break away from incrementalism and a "quick wins" culture.
Even if legacy brands are having a tough time, the promise of healthy returns continues to attract new investors. And the upside of increased competition is increased choice for diners. Not only are new brands inspiring diners, they also create a thriving, dynamic marketplace. This unfolding drama is available to view through our BRS tracker.
For more information about Morar or the Big Restaurant Study (BRS), please get in touch.