A “perfect storm” of rising costs are threatening the economics of the UK capital’s vibrant restaurant industry
Two unrelated activities in recent weeks have prompted me to re-evaluate my thinking about the challenges confronting the London restaurant community in 2017, and the impact on the many layers of the wine industry which supply or indeed depend on this market.
The first of these unrelated activities involved my moonlighting role as business adviser to a small but expanding group of London restaurants. The third restaurant in this group opened on schedule on 1st December. While successful in terms of launch and ensuing customer levels, its business plan has had to absorb significant cost increases compared with those envisaged when the project first kicked off in late-2015.
Many regular readers of Network News will be familiar with the escalating costs of restaurant operations – whether in London or San Francisco – but try these for a perfect storm:
- Business rates (local property taxes) set to rise significantly, especially in the London borough of Westminster, home to the West End where large tranches of London restaurants and hotels
- Commercial rents shooting upwards, especially in higher profile buildings and locations
- Increase in the minimum wage (now known as National Living Wage): to £7.50 / hour from April 2017 for over-25s, with a government target of £9.50 / hour by 2020. This has had two related impacts on staff economics: minimum staff costs for over-25’s have risen by nearly 30% in the last 6 years of near-zero price inflation (Source: Low Pay Commission Report, Spring 2016); and senior kitchen or front-of-house staff naturally expect salaries above these minimum levels, causing knock-on inflation of salaries all the way up the restaurant staff food-chain (no pun intended). In the restaurant group I advise, the staff costs budget for 2017 is nearly 20% higher than 2014 actuals
- Chef resources are stretched as never before, again particularly in London
- Brexit-effect #1: Although earnings levels are rising and therefore more attractive for European employees, there is early evidence of reticence among some non-UK European staff currently working in hospitality in the UK to commit long-term to this labour intensive industry. The most acute effect of this is (as always) at the chef level, with demand for talent in this area now comfortably exceeding supply
- Brexit-effect #2: Wine costs are already rising as the pound declines in value against wine-producing country currencies. With many respected commentators predicting more exchange rate volatility following the triggering of Article 50, the exit procedure from the EU, wine costs will most likely continue to rise and margins throughout the supply chain will once again be squeezed
- Brexit-effect #3: Uncertainty. No-one truly knows how consumer spending habits will fluctuate as 2017 unfolds. London particularly may be insulated in the short term, with increased in-bound visitor spend driven by weaker sterling. However these higher visitors levels over the last few months may be just a short-term bounce
- The best sites for restaurants especially in London are changing hands at increasingly large premiums. The business I am involved in finally settled on a premium of £400,000 for a 120-seater site in London W1. This business will need the net profit from nearly 50,000 covers just to re-coup this start-up cost. Elsewhere, premiums of over £1 million are not uncommon.
So, who would now consider opening a restaurant in the UK, particularly in London? Apparently 200 people or organisations did open in London during the 12 months up to November 2016, according to Harden’s annual report published on 23rd November 2016. A new peak figure since Harden’s started tracking restaurant openings/closures 26 years ago, far exceeding both the previous record of 179 in 2015 and the 2008 pre-financial-crash peak of 158 openings. But closures also peaked at 76, 20 more than in 2015. So, net new openings in London in this last twelve months were 124, only one more than in 2015. I tend to agree with Peter Harden’s prediction that churn will increase and net new openings will decline.
In the first couple of weeks of the New Year, several high-profile 2017 London openings are already being trumpeted, often turbo-charged by very effective PR campaigns. Not least among these is Robert de Niro’s multi-million investment to create The Wellington, an 85-bedroom luxury hotel with two restaurants and a member’s club spanning three buildings in Covent Garden. Sadly, this high-profile investment will force the relocation of the much-loved and iconic Joe Allen’s and possible closure of its sister restaurant, Orso.
On the flip side, first news of 2017 London restaurant closures has hit the headlines. The Jamie Oliver Restaurant Group has just announced the closure of four London units, blaming Brexit effects and lower footfall. While commentators questioned Brexit effects as the primary cause for these closures, it would be prudent to expect more closures in 2017 than in 2016 as we progress through the inevitable uncertainties of the coming 12 months.
However, I’m not yet ready to abandon my long-held posture as a paid-up member of the “glass-half-full” brigade. London will remain a dynamic global hub for the food service and bar communities. Here’s what’s keeping that glass at least half-filled:
- A rising reservoir of pop-ups will continue to feed exciting new offerings into the London restaurant openings roster
- Investors will not suddenly turn away from London. One high-value investor told me “money is queuing up”
- Property owners and developers will be working overtime to attract premium names among restaurant operators. Flagship developments at Kings Cross and Victoria Nova will ultimately offer over 40 eateries and bars. Meanwhile, Covent Garden and Soho are not going to relinquish their claims to be the must-visit hubs of trendy and offbeat dining opportunities
- Beyond these central London flagship post-codes, E1 continues to flourish with conventional and edgy dining; Marylebone, Borough Market and Chiswick are now established destinations for foodies … and celebs. Where next: Flat Iron Square? Canary Wharf (now emerging as a residential quarter)? The area northward of Dalston and Hackney toward Woodberry Down and Stamford Hill? And an outsider: Ealing?
- Overseas visitors are not going to stop coming to London, particularly if sterling continues to low-ball against their own currencies
- People from outside London will continue to visit the capital, and will still want to enjoy the vibrancy and diversity of the Metropolitan food and drink scene
- And Londoners themselves are not about to stop going out en masse – at least not yet
So, while predictions are risky at the best of times, here goes: net new restaurant openings in London in the 12 months to November 2017 will be in the range 90 to 110. And our small restaurant group will open its fourth location. Let’s review again in 12 months’ time.
Author: Brian Howard