As someone who spends more time than most in London’s vast array of restaurants, I am able to witness a flow of customer traffic in the service industry that belies what one might expect during a financial crisis.
Each morning Londoners are confronted by the latest shocking newspaper headline that unequivocally spells doom for the British, European, and international economies. Yet, London’s restaurants are booming, which suggests that now – presumably unlike the Great Depression – people are spending money and having a fun time doing it.
Restaurant Business Ain’t Easy
In truth, a large amount of restaurants have been forced out of business because of the current economic difficulties. Still some that have not gone out of business have done very poorly – by and large these are the ones with massive overheads in terms of food and alcohol costs, rent, and quality chefs on moderately high incomes.
Indeed, during brighter economic times restaurants did not have to be as concerned with overhead because as long as your food, service, ambiance, and location were good and your prices were relatively competitive, you stood a pretty good chance of breaking even.
However, in today’s climate, restaurants are faced with customers who are significantly less confident about their personal finances. As a result, restaurants must give customers an utterly fantastic reason to give them business, either in terms of offering customers something of a superior quality, something legitimately unique, or an amazing promotion. This – however – seems to be beyond many restaurant owners.
The sad fact for restaurants unwilling or unable to adjust their business plans is that a far smaller portion of society can afford to splurge on food and drink without the fear of overspending. This means that a once thriving pool of customers who did not mind paying full price for a meal has dwindled significantly.
Additionally, all potential customers, even those with money, are looking for value for money from restaurants with unprecedented gusto. This is not only because of general financial unease but also because historical promotion rates of 50% off the bill, which was once an extremely aggressive discount, have adjusted up to a minimum 62% discount. In today’s climate, customers effectively expect a massive discount on their meal, even at nice restaurants.
Therefore a restaurant whose break-even point is £60K – not necessarily unrealistic for some of London’s more decadent restaurants – with a scant customer base willing to dine with them at full price, but who must offer a 62% discount to have any hope of attracting any customers at all, are in a scary position. Without managing this situation properly, said restaurant might only bring in £30K, which accounts for a £30K a week loss. This adds up to £120K in losses a month, or £1.5m a year, something that even Gordon Ramsay could not afford.
The point is that this industry is extremely fickle and one in which a single restaurant stands a chance of losing millions of pounds with the slightest change in the economic climate.
Boom, Boom, Boom
So how are things booming? In London we have a number of sophisticated online third party companies that let willing restaurants tap into new routes to market. The financial crisis notwithstanding, people in London still want to go out for a drink and nice meal perhaps just as often as in pre-recession times, indeed perhaps more often.
Promotion companies such as Living Social and KGB Deals combined have literally millions of email addresses of London restaurant goers and will happily introduce any restaurant to their followers so long as the restaurant in question will offer a 62% discount and give them between a 30% and 50% commission.
Naturally, this presents restaurants with a great opportunity for exposure, but does it for turning a profit? The answer is no, if restaurants want to continue having massive overheads with menus made up of expensive ingredients. However, for the restaurants willing to massively – and strategically – cut their costs, making a profit through a 62% promotion paired with a heavy commission payment is there for the taking.
Then there are restaurant promotion sites that invest heavily in a range of online advertising and therefore generate massive numbers of web visits. Consequently, they are the perfect platform for restaurants to get their name out to the masses – and those with the best customer reviews and most aggressive offers can easily stand out from the rest and generate some very good business.
Of course, restaurant owners savvy enough to know how to manipulate search engines, social media, and other 21st century online tools to generate business can massively de-emphasize advertising with third parties and still do extremely well, indeed better than their competitors, through their own means.
Adaptation for Success
What we have seen across the London restaurant scene is almost Darwinian as those – and only those – who can adapt their businesses will survive. For the less savvy there are promotional partners; for the savvier there are highly sophisticated online marketing strategies. Both ends and everything in between are required to massively cut costs, but as I witness daily, this does not necessarily mean that customers get a poorer quality experience compared to what was common in pre-recession times.
Economic uncertainty notwithstanding, the restaurant sector is thriving. This week, not only did UK financial analysts confirm this, but they even indicated that it gives reason to believe that a new recession may be averted.
The UK’s service industry – of which restaurants, bars, and hotels make up a significant part – is off to a fast start in 2012, far better than what was expected.
According to a Markit/CIPS UK services PMI poll, January 2012 has been the service industry’s best month for growth in almost a year and saw the hiring of workers at a four-year high, both of which cast doubt over a 2012 forecast of recession.
Markit’s Chief Economist Chris Williamson said, “The situation is certainly a lot brighter than seen in the final quarter of last year, when the economy contracted 0.2%. A slide back into recession is now looking increasingly unlikely.”
Markit’s survey indicated that UK business activity rose to 56 in January, up from December’s 54. Fifty is the mark that separates economic growth from shrinkage, and January’s number beat the 53.5 predicted by a Reuter’s pool of economists. Fifty-six is UK’s highest rating in 10 months.
Williamson added, “As to how sustainable this upturn is, it is particularly encouraging to see the upturn in business confidence. This rise in business optimism fueled the largest increase in employment for nearly four years, adding to hopes that this upturn may prove to be more than a flash in the pan and can start to look like a sustainable, job-creating recovery. Much uncertainty persists, but this is nevertheless a far better start to 2012 than almost all were expecting to see.”
David Tinsley, UK economist at BNP Paribas also believes the service industry’s fast start casts doubt on forecasts. “As we have been saying for a number of weeks, there has been a distinct and unmistakable improvement in the UK outlook of late. And it's unlikely that the UK will enter recession.”
On the other side of the fence is Howard Archer, economist at HIS Global Insight. “The economy still faces very challenging conditions and is far from out of the economic woods. Indeed, relapses in activity remain a very real risk given major headwinds that notably include still pressurized consumers, rising unemployment, reduced government spending, and the ongoing uncertain euro-zone sovereign debt situation.”
The growth surge in the service industry and the consequent optimism notwithstanding, the National Institute of Economic and Social Research think-tank is still predicting recession – contraction of 0.1% this year, which is down from its fall 2011 prediction of 0.8% growth.
Ultimately a positive January led by the service industry, while not necessarily a sign of good things to come, is good for the UK economy. It is also a sign that UK consumers will want to dine and drink out frequently, even in an unstable economic climate, and it is those restaurants and bars that can cater to the current market’s idiosyncrasies that will do very good business in 2012.