Bargains bring home the bacon but bite into profits

 
Marc Sidwell
Follow Marc
AS DECENT numbers for Nando’s reveal the chain moved into profit last year after three in the red, the cheaper end of the restaurant sector may be turning a corner. The latest figures from BDO indicate that operators including the Restaurant Group and JD Wetherspoon have seen an upturn in trade in September and October. In the second half of the year the Restaurant Group significantly outperformed the FTSE 100, with its shares rising some 30 per cent.

That may seem counterintuitive, given the state of the economy. And it is worth noting that these improvements come against a background of generally tough trading conditions, which over the last six months have been subdued, with spending in real terms falling.

However, it is clear that there are winners and losers within the sector, and favoured brands, especially those that can offer bargains to cash-strapped Brits, are coming out on top. JD Wetherspoon’s Tuesday steak nights are just what the hungry consumer ordered, with its shares likewise outperforming the index since July. A Beans Group survey this November found that among 18-24 year-olds bargain out-of-home brands like Greggs, Domino’s Pizza and JD Wetherspoon beat restaurant brands like Pizza Express and Nando’s in the popularity stakes, though these also both featured in the top 100 favoured brands.

However, Nando’s success last year wasn’t just down to consumer preferences. It was also a reflection of its acquisition of the Clapham House Group, which includes Gourmet Burger Kitchen and Real Greek, for £30m at the end of 2010. Consolidation makes sense in the face of tough market conditions, and Nando’s seems to have borne that out in practice. Expect the lesson to be acted on by more players in 2013, with BDO tipping French bistro concept Cote, in which Richard Caring recently cashed in his stake for £113m, and burger specialist Byron, owned by Gondola Group, as likely imminent sales.

But neither pleasing consumers with bargains nor spending on M&A are cheap ways to improve your bottom line, and restaurants with tighter margins will continue to feel squeezed. Sadly that’s not just down to the economic headwinds, with BDO warning that the continual dripfeed of new regulations and taxes is steadily increasing the cost of doing business, particularly in the pub sector. Despite a partial U-turn on the pasty tax, it remains a symbol of the added uncertainty the Treasury has added to providers of cheap eats. Other well-meaning initiatives, such as auto-enrolment, have also added complexity. George Osborne should be careful not to take too big a bite out of a sector that’s hungry for stability.