Tapping Into The Right Opportunity

This article first appeared in an issue ofPropel Hospitality – Propel.

Two of the questions we are most often asked by management teams are, "What is going to drive acquisitions and exits in the future?" and "What are investors focused on?"

Firstly, one of the fundamentals is how the market is being impacted by some of the macroeconomic pressures in play. Despite earlier easing, inflation has crept back to a degree, especially in food categories, due to crop disruption and adverse weather. Secondly, rising wages remain a major pressure point, and operators who have maxed out efficiency gains are now evaluated on how well they manage cost structures. Thirdly, supply chain resilience: investors are probing how businesses handle supplier relationships and mitigate disruptions, and to what degree this is a positive, competitive differentiator.

Added to this picture are the shifts in consumer behaviour and how those feed through to demand. Consumer confidence remains fragile. Disposable income is improving, but inflation and Budget anxieties have been keeping consumer sentiment cautious. We can see this in the household saving rate, which is climbing steadily. However, a silver lining is that if you look at the data, there is a sense that younger consumers are prioritising spend on food and beverage, and if they are cutting back, it's in other areas, such as retail. Ultimately, they'd rather spend money on occasions and experiences, which we're seeing come through in the data from the best operators, who are tapping into this trend and trading strongly.

At the same time, we believe the quality of at-home dining (supermarkets, delivery) is rising and intensifying competition, and dining out must now deliver a superior experience to justify the spend.

Widening that competitive landscape takes in quick service restaurants (QSR), coffee shops, and "affordable indulgence". QSR and coffee shops are innovating, expanding menus, and taking share from traditional pubs and casual dining. At the same time, brands offering higher perceived value at lower price points (such as Loungers) are thriving.

Casual dining has become more of a considered purchase, not a spontaneous one. The brands that win in this space delight the consumer, create great experiences, and drive repeat visits, but it has become much harder.

In terms of what are we seeing in the way of transactions, there has been a good level of activity over the past 12 months or so, and deal flow is back, with strong interest from both private equity and strategic buyers. Investment is clustering around value-driven and premium-positioned brands that stand out in the market. Cross-border growth is buoyant, with U.K. brands expanding into Europe and the U.S., and vice versa (such as Wingstop, Dishoom, and Pizza Pilgrims). At the same time, real estate-backed models remain popular, with investors favouring businesses with property assets or scalable site strategies (such as The Restaurant Group's (TRG) acquisition of the Oakman Group's freeholds). Lenders are also supportive and providing funding to accelerate roll-outs, boosting returns.

Companies in the aforementioned affordable indulgence category have also generated interest (such as Fortress taking Loungers private and Invus and Beringea backing Farmer J, plus Piper backing Yard Sale Pizza). Then there are those "established newcomers", which are looking to expand and attack a particular point in the market (such as Sticks'n'Sushi). Businesses like Flat Iron and Pizza Pilgrims are admired for their ability to maximise throughput and maintain strong gross margins. Investors want to see replicable models with lean cost structures and high return on investment per site, and an efficient but well-delivered proposition – as seen across many brands that have recently transacted – is key to this.

In an inflationary climate, scale isn't just a strategic advantage – it's a survival mechanism. Synergies from consolidation, especially in head office and procurement, are proving to be powerful value drivers. Just look at Big Table Group's acquisition of TRG's leisure division – a great example of a smart combination delivering profit growth.

But beneath the surface, pressure is mounting. Larger leasehold operators are often spending time juggling the demands of making more challenging sites profitable, and recapitalisation needs are looming. Many businesses have bought time through "amend and extend" discussions with their debt providers, but ultimately, debt will need to be repaid or refinanced, and the clock is ticking. If performance has dipped too far, refinancing isn't an option – and unless equity holders step in, lenders may only recover value through the business being sold.

Meanwhile, private equity is under pressure to return capital to its investors. As we know, hold periods have stretched from the typical three-to-five years to potentially seven years-plus, as volatility has clouded optimal exit timing. But investors' money must eventually be returned. For some funds, the choice is no longer "stick or twist" when it comes to exiting their investment – it's twist, regardless of market conditions. We expect an increase in necessity-driven transactions – where scale, capital, and timing converge to reshape the landscape.

It's also important to note that when investors are looking at new acquisitions, they're inevitably focusing as much on the pathway to exit as they are on how to value the business on day one. Therefore, the existence of companies backed by large institutional investors – such as the likes of TRG and Loungers – that provide both a future potential exit and also a vote of confidence on the fundamental appeal of the sector, is certainly very helpful for deal activity today.

Unless the Budget delivers more shocks to the industry or the economy, M&A deal activity is expected to continue. Investors will double down on brands that offer value without compromising experience and seek operators with tight cost control and agile supply chains. Concepts that tick the above boxes and appeal to younger consumers seeking occasions over possessions will prove popular.

Overall, multiple factors have driven the level of buoyancy in the sector, including some highly opportunistic deals, which we expect to continue at pace over the next 12-to-18 months. If sellers are sufficiently tuned into these factors and position their businesses appropriately, perhaps they can be the party that makes the most of the opportunity.

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