At Christie & Co we have seen first-hand the growth in demand for QSR fast-food outlets over the last 15 years. Much of this has been brought about by the introduction of technology driving the food delivery sector since Deliveroo entered the space in 2013. It has also been boosted by the wealth of new, exciting brands coming to the UK alongside home-grown brands keen not to miss out.
Prior to this the choice was the independent take-away on every street corner across the land, or the large international brands, with little in between. That has now changed and with the benefit of franchising new brands are growing at a phenomenal rate, challenging those well-established names that seemed invincible.
At the same time as this growth has been happening, the more traditional midmarket casual dining sector collapsed. During the 2010’s we saw High Street restaurant number grow, up by over 4,000 sites in the 3-years to 2018. This was when premiums paid for key sites exceeded £1m which was in addition to a fit-out cost of a similar sum. Not wanting to miss-out, landlords then sought to increase rents as the casual dining market scrambled for space.
We first saw the cracks in 2018 as the dangers of an over saturated market kicked in, and some well-known, successful brands succumbed due to their over expansion. This included the likes of Byron and Jamie’s Italian amongst others as CVA’s and restructuring took place. In many ways the arrival of the pandemic saved many similar casual dining chains creating a number of zombie businesses. However, normal business did not resume for many and the top 100 restaurant groups continued to post heavy losses until the end of 2022 with the number of chain restaurants falling from 32,000 to 26,000, wiping out the growth we saw 6 years before.
So, what has this got to do with QSR you may ask. Well, are we going to go down a similar path. From evidence we are seeing in the market, town and city centre rents have stayed stable driven by landlords looking to fill space left by vacating retail stores. Many have had to repurpose large department stores into multi-site venues, attracting smaller independents or one of the few branded chains expanding.
However, this is not the case out of town, especially when it comes to Drive-Thru main road locations close to retail outlets or high-density residential areas. Here rents have risen steadily as, pushed by the need to add sites and keep pace with the competition, operators have agreed ever increasing rents. And this is not just landlords following the market up, its due to the cost of development land and build costs which have escalated by over 24% since 2020 with materials rising by 43% in 2023. These costs are being recovered through rent at a time of high borrowing costs, in order to show a respectable rate of return. However, is the tenant seeing the same levels of reward for their efforts?
Many QSR operators have seen margins squeezed and some big names reported substantial trading losses, even brands that to date had been immune. With consumers demanding even greater Value For Money, and that’s not just a price thing, then operators have to be at the top of their game. A slight drop in service standards, refurbishment or quality and their loyalty is fickle in a market where new brands, food types and fads are never ending.
Will we see a 2018 Casual Dining Crisis in QSR? I hope not, and for now there is still demand for sites from new and expanding brands. However, if operators forget the fundamentals that made them successful, and profitable, then anything is possible.
