The recent budget has brought to a halt much of the international investment activity into the UK restaurant sector. We have witnessed a significant change of tone with the many international investors and overseas brands considering the UK, which had been experiencing peaked interest in the year leading up to the budget. This is particularly concerning given the momentum we had been building in sourcing and analysing substantial deals for Middle Eastern investors, including sovereign funds - and facilitating market entry projects for various North American and Middle Eastern brands. Unfortunately, the brakes have been applied, with almost all activity halting due to mounting concerns over profitability, mid-term disposable income levels and consumer confidence.
I am aware of at least three major deals that have fallen over directly due to the budget, with many more pausing earlier stage processes. The immediate outlook appears bleak as we grapple with an overbearing tax regime, shrinking economy and a government that seems detached from the realities of business. The hope for a change in government was seen as a potential catalyst for restoring certainty after the tumultuous period marked by a succession of Conservative governments and the fallout from Brexit. Regrettably, the reality is quite the opposite.
While the restaurant sector has encountered numerous challenges, North American QSR brands remain optimistic about expanding into the UK, inspired by the perceived success of well-known names like Tim Hortons, Slim Chickens, Popeyes, Five Guys, and Wingstop. However, it's important to recognise that these brands are benefiting from a strong US dollar and generally adopt lower-risk entry strategies, often choosing franchise agreements or joint ventures with established European and UK-based private equity firms. They view success in the UK as a gateway to broader European opportunities.
Yet, for many investors we speak with, there is a palpable sense of caution. They are adopting a wait-and-see approach, looking to gauge any potential policy changes that could influence the market. Others are keen to observe how existing businesses respond to these new fiscal realities. If the anticipated effects materialise—resulting in casualties among businesses — a silver lining could emerge from this turmoil. We may see increased availability of property and opportunities in distressed assets from otherwise strong brands. Such scenarios often present an attractive long-term investment play, where returns could be realised through overseas expansion or by capitalising on distressed assets.
London has long been regarded as one of the few global cities of choice for fine and contemporary dining brands. This reputation will certainly endure, albeit with more caution from investors and roll-out brands. As we navigate these uncertain waters, the city’s unique culinary landscape continues to attract attention, though the current environment may cause potential entrants to proceed with increased scrutiny.
Despite the current climate, it is encouraging to note that there remains a long-term interest in the UK restaurant market by overseas investors, viewed as a leader in innovation and entrepreneurship, particularly in the mid-market food-led concepts and experiential leisure sectors.
For the UK to reclaim its position as a preferred destination for investment, it will require a concerted effort from both the government and industry stakeholders. We must advocate for a more favourable tax environment, one that encourages investment rather than deters it. The current trajectory is unsustainable and could lead to long-term detrimental effects on our economy if left unchecked.
Perhaps unsurprisingly we’ve seen a significant uplift of UK brands looking to seek growth in overseas markets, not just through franchising arrangements but also considering developing directly managed overseas operations.
In conclusion, we need to hammer home the message to the government that these recent policies are detrimental not only to SMEs but also to inbound foreign investment. Operators must consider globalisation as a way to mitigate and spread the risks associated with operating in a single market. We should embrace our global leading position as innovators in the mid-market and actively pursue opportunities to export our brands abroad.
James Hacon is the managing partner at Think Hospitality Consulting, the restaurant industry innovators, strategists and dealmakers.
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