What's on the menu for 2020 and beyond?
We have a wealth of experience acting for landlord and tenants, sellers and buyers and operators within the food and beverage market. This article is a quick snapshot of the key emerging trends and the effects of the Covid-19 pandemic on the restaurant sector.
We act for a number of institutional investors with food operator tenants and also for a number of owner-occupiers of restaurant and leisure premises with a food and beverage offering.
In the short, medium and long terms, it's clear that Covid-19 is a game changer. The immediate impact has been closure and some operators who were already struggling and have not been able to recoup costs have been forced into financial difficulty and in some cases, liquidation. In the medium term, a huge creative effort is being mobilised to open outlets under restrictions and to make the transition period between lockdown and normality – for however long this lasts – work for operators. In the long term, the question becomes: what is going to change for good?
Before Covid-19 struck, for those looking to rent, there was good news. Institutional investors tend to have a relatively small food and beverage portfolio but we saw such landlords' interest in this area perk up as they were keen to review their strategy. There was pressure from tenants (and consumers) for buildings/developments to have a more wholesome and diverse mix of food options within new schemes, as well as higher quality and more distinctive offerings.
This applied not only to large-scale developments but also office blocks, shopping centres and town squares. It is hard to imagine this demand changing, but the two big questions will be "where is the demand going to be?" and "how are operators going to design their offering?". City centres are right to be worried: an explosion of agile working will hugely reduce lunch footfall. Any city centre operator which had been relying on a glut of commuters and tourists until now will have to radically rethink its strategy. Restaurants near residential areas might find themselves with a much stronger market all of a sudden.
Take me home
We have seen a colossal increase in the amount of takeaways (predominately driven by app-based operators such as Deliveroo and Uber Eats). This new technology has undoubtedly changed the food market and has had an enormous effect on F&B operations, from changes in the menu to ensure quality via delivery to the size of a kitchen, where/how delivery packaging is stored, and delivery drivers' access to the kitchen.
Covid-19 has only increased this demand and escalated the issue. As this fast-paced 24/7 food delivery becomes ever-more common-place, we expect to see these concerns at the forefront of developers' minds when designing sites which include F&B, such as schemes being designed with rear or underground access ways to kitchens so that delivery drivers do not imbalance the atmosphere which restaurant providers work so hard to achieve.
Increasingly demanded by landlords before the lockdown are "turnover rent" provisions in the leases of F&B units (meaning the landlord will take a proportion of the turnover generated by the restaurant above and beyond a "base" rent). The figures and the base rent are largely negotiable but the basic principle is: high base rent = lower turnover rent, low base rent = higher turnover rent. We expect landlords will want their share of takeaway business sales too particularly as we have heard from certain F&B business that income generated from online delivery sales can be as high as 15-30%.
Well-advised landlords do not want to limit their turnover rent to sales by dining-in-restaurant customers only. The outcome of this issue will depend on the negotiating strength of each party post-lockdown. If Landlords are struggling to let units because of a dearth of operators who can make their offering pay in a post-lockdown world, then it may take some time for turnover rents to become a staple of lease negotiations.
Also performing well before and during lockdown were 'single-product' food trucks and stalls which offer end-customers flexible food offerings (such as those seen in Chiswick Park, Devonshire Square and Broadgate). A stall or truck operator can utilise a small outdoor location with limited upfront costs and without long leases fixing them to that location. This is beneficial for the neighbouring business to have 'pop-up' trucks which move around and rotate to provide variety for end-users.
StreetDots, for example, offer flexible pop-ups which benefit both investors and restaurant-providers. The foot flow can be enormous at some of these locations with minimal hassle or overheads for the F&B operator. Expect to see an even greater and more strategic deployment of this format in a post-lockdown world where seated rooms are still working out how to isolate customers. Trucks can go wherever demand is greatest and are highly flexible and (provided there is room to queue) safe.
Before Covid-19 (but more than ever now) we saw that customers were less willing to drive to restaurants generally, preferring to eat locally or order takeaways via well-known apps. Consequently operators are choosing their locations based on dense residential population to maximise revenue from locals. Customers are increasingly identifying with "local" / "trendy" restaurants and wanting to support them. Touristic spots ought to come back into view long term, but there is continuing uncertainty about this market.
Technology is also a major consideration. Apps are being developed which allow customers in restaurants to order and pay from their phones without having to get up from the table. Another app will allow you to reserve a table, be given a timeline for when your table will be ready (so you don't have to wait in a queue). Technology within the restaurant industry is in its infancy and operators are paving the way to ensure further technology heightens our enjoyment of the food and, equally important, the restaurant experience.
The Brexit diet?
Gradually rising food prices and the risk of supply-chains being affected by potential food import tariffs and border inspections on EU products threaten to squeeze restaurant profit margins. However, with more focus on, and demand for local, sustainable produce and less waste, businesses are adapting their ethos to these broader commercial and economic changes.
Before Covid-19, more people than ever were eating or taking out, F&B businesses were expanding their market reach beyond dining in. Diversifying into deliveries, pick-ups and even providing locally sourced ingredients and instructions for patrons to cook restaurant-quality food at home (as London's celebrated Padella has recently introduced) appears to be providing additional revenue streams (this was great for tenants - and landlords alike if there is a turnover rent in the lease).
Look, but don't touch
Contactless orders, delivery and collection have been invaluable for the industry's survival, and will likely last much longer than the lockdown to promote business as well as social distancing. While the Chancellor's furlough scheme is providing some leeway to protect jobs and business' capital, some have been forced to close their doors. Some F&B businesses have taken to offering a different kind of service; selling produce from suppliers directly to consumers being a prominent example of such trends.
So, with phased reopening dates in July 2020 and with community benefit at the top the agenda, business models are being adapted. Although rent holidays and debt moratoriums are being offered in the short term, landlords can find confidence in consumers' demand and the ingenuity of their tenants' businesses: The industry is evolving in the face of adversity and F&B businesses are demonstrating real resilience in this period of socio-economic flux.
The appearance, process and location of restaurant offerings in a Covid-19 world, takeaway services like Deliveroo and Uber, and technology within restaurants are all having or going to have an enormous impact. Technology is yet to be fully implemented in restaurants but will play a large part in the change of the industry for not only 2020 (and all its concerns) but beyond.