European and Food Service Outlook 2012

Serving Up Growth

MAY 2012

The 2012 AlixPartners European Restaurant and Foodservice Outlook

© 2012 AlixPartners, LLP

2


The food may differ on the two sides of the

Atlantic, but the dining trends are largely the

same: in Western Europe, as in the U.S., consumers

are hungry for value and convenience, and they

are waiting for signs that economic conditions

are stabilizing before returning to spending freely.

As restaurant sales seem to stabilize, the

outlook for Western European dining appears

positive—even as consumer confidence remains

low, unemployment high, and considerable

uncertainty surrounds the impact of austerity

measures. In this environment, consumers across

Europe say they plan to spend less per meal in

the coming year. This makes it as important as

ever for restaurant operators to focus on brand

differentiation and consumer relevance to

drive revenue growth. A clear understanding

of consumer preferences, global and regional

supply-chain execution, and the competitive

landscape in each country will be critical in the

contest for dining dollars across Western Europe.

SETTING THE TABLE: THE MARKET IN EUROPE

In Europe, socio-cultural trends, like dining

more outside the home, appear to be offsetting

economic pressures and even driving restaurant-

sales growth in countries like France, the UK,

Italy, and Germany. Consumer trends that swept

the U.S.in 2008—such as interest in trading

down from one restaurant segment to another

(e.g., Casual Dining to Fast Casual, etc.), in

discounts, and in health and wellness—appear to

be reaching the mainstream in Western Europe.

Overall restaurant sales in Western Europe—

which declined for four consecutive years—seem

to be stabilizing, up 0.9% in the past year. While

not as robust as the 1.8% sales surge in 2009-

2010, growth continues at an incremental pace

(figure 1). While the overall outlook is positive,

European consumers have been spending

1%

0%

-1%

-2%

-3%

-4%

-5%

-6%

FIGURE 1: WESTERN EUROPE FOODSERVICE SALES

Source: Euromonitor 2011

0.0%

-3.1%

-5.1%

-3.3%

-1.6%-0.7%

-0.2% 0.1% 0.2%

Foodservice and Drinking Places YoY Yrend

2007 20092008 2010 2011 2012 2013 2014 2015

Serving Up Growth

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cautiously and may continue to do so this

year, as they look for stronger, more concrete

signs of economic recovery, according to our

survey1. Several factors appear to be contributing

to consumer caution in Western Europe: declines

in disposable income, looming tax increases,

high rates of inflation and unemployment, and

reduced access to credit. In this environment,

consumer-dining intentions appear to be

headed toward overall decline; we expect a 2%

to 3% decline in spending-per-meal intentions

in the UK and France, respectively (figure 2).

There are winners and losers in every segment,

but the full-service segment has borne the

brunt of the impact; declines began in 2007

and are likely to continue throughout 2012.

Other segments are faring better: Quickservice

(QSR) and Fast Casual continue to expand,

drawing in customers with lower price points,

speed, variety, convenience, and perceived

value. Overall, however, the environment has

forced companies to deleverage and conserve

cash, and still, 35% of companies studied are

in “fiscal danger” (figure 3). This, in part, has

kept M&A activity focused on smaller-sized

transactions (figure 4).

Serving Up Growth

Planned Consumer Spending - Next 12 Months

Source: U.S. Bureau of Labor Statistics, U.S. Bureau of Economic Analysis

FIGURE 2: PLANNED DINING AND CONSUMER SPENDING IN THE U.S., U.K., AND FRANCE

Dine out more Dine out less Dine out same

15%

30%13%

33%17%

32%

55% 53% 50%

Planned Dining Occasions - Next 12 Months U.S. U.K. France U.S. U.K. France

Spend more Spend less Spend same

14%31%

17%31%

19%34%

55% 52% 47%

FIGURE 3: COMPANIES IN FISCAL DANGER

Source:Cap IQ, AlixPartners analysis of publicly available data, and Altman-Z analysis

1 AlixPartners surveyed a demographically representative group of 2,000 adults in the United Kingdom and France (1,000 in each country) from March 17-23, 2012 about their dining habits and plans, with a focus on frequency, destination, spending, preference, trends, and marketing.

605040302010

0

% of Companies by Distress Category & Segment

Café/Bar and Others

Casual Dining Fast Food Fine Dining

Healthy Watch On Alert

43%

37%

20%

39%

46% 50

%

40%

35%

15%

25%

50%

50

40

30

20

10

0

605040302010

0

4


In general in Western Europe, as in the U.S.,

cautious spenders continue to respond to

discounts and promotions. Independently

owned restaurants have traditionally dominated

Western European dining, but chain restaurants

appear to enjoy the advantage in this environ-

ment, as they can leverage economies of scale

on fixed costs and mass purchasing, have larger

media budgets, and often have longer hours of

operation than their independent counterparts.

And, looking ahead, we expect this advantage

only to increase amid heightened price

competition and volatility in most major

commodities.

Though food quality remains very important to

customers, many appear willing to cede service

and experience to save money. In addition to

perceived value, the importance of health and

wellness is growing, particularly in France.

Serving Up Growth

FIGURE 4: EUROPEAN RESTAURANT M&A ACTIVITY AND DEALS

GROWING LOCAL: COUNTRY-BY-COUNTRY ANALYSIS

Source: The Deal Pipeline, AlixPartners analysis (only transactions w/ reported value shown)

European Restaurant M&A Activity

Deals by Transaction Value ($ MM)Total Deals: 54; Total Value:~$2.4 Bn.

Deals by Country - 2011 (Total: 54); Value ($MM)

40302010

0

$2,000$1,500$1,000$500$0

0 - 10 10 - 100 100 - 500

Spain, 4, 8% ($586)

Germany, 4, 7% ($415)

All Others, 7 13% ($96)

U.K., 39,72%($1,316)

90

80

70

60

50

40

30

20

10

0

$3,000

$2,500

$2,000

$1,500

$1,000

$500

$02007 20092008 2010 2011 2012 YTD

$2,776

$2,108

77

45

5954

11

50

$773

$2,161$2,412

$94

# of Transactions Transactions Value ($ MM)

$65

$574

$177335

127

5

© 2012 AlixPartners LLP

Diners also seem increasingly responsive to digital

marketing tactics: more consumers overall are

taking to the Internet and social media outlets

to find dining-related deals and information.

Digital media is especially impactful with younger

consumers, and going forward, we expect mobile

devices to present considerable opportunities for

reaching customers.

In France, as in the U.S., “eating away from home”

has remained flat since 2007; however, restaurant

spending has grown by some 9% (taking

share from hotels, restaurants, supermarkets, and

other channels). While the French market is still

dominated by independent restaurants, chains

are rapidly gaining ground (figure 5). Today, QSR

represent 68% of the total market and continue to

grow, making the segment particularly attractive

to new entrants (Speed Burger, Jack’s). Fast Causal

has also emerged with strong growth, thanks in

part to consumer interest in healthy fare.

Just 27% of French diners say they dined out at

least weekly over the past 12 months; looking

ahead over the next 12 months, they say they

plan to reduce this frequency, as well as how

much they spend per meal, slightly. Fast Casual

and Fine Dining restaurants are exceptions

to the rule: consumers expect to visit these

restaurants slightly more frequently than they

did in the last 12 months. Nevertheless, and

somewhat surprisingly, French diners name

Price as the most important factor when

selecting a restaurant, followed closely by

Food Quality. Menu Variety is a distant third.

Accordingly, the top reasons French diners

choose to stay home include the cost of

restaurant meals, followed by concerns over

their current financial situations and the future

economy. Interestingly, some 60% of French

diners view healthy menu options as Important

or Extremely Important—far more than diners in

the U.K. or the U.S. And in France, as in the U.S.

Serving Up Growth

Source: Publicly available data, Gira Conseil, AlixPartners analysis Source: Publicly available data, AlixPartners Analysis

Chain Marketshare Growth in France (¤bn) French Restaurant Marketshare Growth in France (¤bn)Independent RestaurantsChains

QSRTSR

2008 2009 2010 2005 2006 2007 2008 2009 2010 2011p 2012p

83%

17%

81%

19%

80%

20%

FIGURE 5: EVOLUTION OF FRANCE’S RESTAURANT MARKET

13.0 13.5 13.9 13.7 13.9 14.6 14.6 14.6

24.5 25.7 27.6 28.9 30.2 31.5 32.8 34.3

37.541.5 42.6 44.0 45.4 47.4 48.9

39.2

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Serving Up Growth

FIGURE 6: U.K. RESTAURANT EBIT MARGINS COMPARED TO U.S. PEERS

30%

25%

20%

15%

10%

5%

0%

2010 2011

U.K. Restaurant Chains2011 Average: 16.4%2010 Average: 16.1%

Punch (w/ Spirit

Demerger)

M&B Whitbread JD Wetherspoon

Greggs Gondola Holdings

The Restaurant

Group

Greene King U.S. Average U.S. Average w/ McDonald’s

Source: Publicly available company filings and annual reports

and the U.K., high-income single males between

the ages of 18 and 24 dine out most frequently.

In the United Kingdom, 32% of respondents

say they dined out at least weekly over the past

12 months; in the coming year, they, like their

French counterparts, also expect to reduce

slightly their frequency and per-meal spend.

British diners cite a worsening of their current

financial situations and the cost of meals out

as the top reasons for staying home, along

with concerns about the future economy and

its potential impact. When they do dine out,

British diners cite Food Quality, Overall Price,

and Location as key decision drivers.

Despite consumers’ gloomy outlooks, the

restaurant industry in the U.K. has significantly

outperformed the FTSE-100 since 2009.

Average EBIT margins are better than those

of U.S. peers (figure 6), and M&A activity

in the U.K. has been and continues to be much

higher than in the rest of Europe. However,

P/E ratios for leading U.K. chains are lower

than those in the U.S. The main reason for this

is the rather dismal overall economic climate

in Britain, which contributes to a challenging

outlook for all restaurants there. Disposable

income has declined; 2011 saw the steepest

drop since 1977, and the year ahead looks

tough. As in France, the Full Service segment

may be hit hardest as consumers trade down

to less expensive Fast Food options or simply

eating at home. Still, not everyone is suffering:

restaurant chains such as Wagamama and

Nando’s are growing significantly faster than

the U.K. industry average.

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In Germany, the good news is that, even though

the number of units has declined, restaurant

sales have increased. From 2011 to 2012,

revenue in the restaurant industry increased

by 2.9%. As in other parts of Western

Europe, independent restaurants continue

to dominate, but chains are growing at

a faster rate; Independent Full-Service

segment revenue has dropped by 27.8%

since 1999, while chain restaurant revenue

grew by 10.1% in the same period. Fast

Food restaurants overall have seen increases

in revenue since 2007, and chain restaurants

in particular fared well with 23.7% revenue

growth (figure 7). The top five restaurant

chains in Germany in terms of sales include

three U.S.-based and two European brands,

namely, McDonald’s, Burger King, LSG,

Nordsee, and Subway.

Serving Up Growth

FIGURE 7: INDEPENDENT VS CHAIN RESTAURANTS IN GERMANY

Source: Euromonitor

Chain Full-Service RestaurantsIndependent Fast FoodChain Fast FoodIndependent Full-Service Restaurants18,000

16,000

14,000

12,000

10,000

8,000

6,000

4,000

2,000

01999 2001 20052003 2007 20102000 2002 2006 20092004 2008 2011

Independent

Chain

Source: Publically available information and AlixPartners analysis

FIGURE 8: ITALIAN RESTAURANT MARKET: TYPE AND SALES TRENDS

Italian Restaurant Market – YoY Sales Trend % Italian Restaurant Market by type of restaurant (€bn)

14%

12%

10%

8%

6%

4%

2%

0%

-2%

-4%

-6%

20012000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

93%

7%

Traditional Restaurants

Fast Food Restaurants

Chained Full-Service RestaurantsIndependent Full-Service RestaurantsChain Fast FoodIndependent Fast Food

Value € Millions

8


In response to these consumer trends, we

expect companies to continue mass localization—

the customization of menus by country and

by micro-segments of populations. Companies

that develop products that support lifestyle

changes will benefit; food trucks and pop-

up dining are examples of successful industry

responses to changing consumer demand.

Similarly, North American Fast Casual concepts,

such as Chipotle, Freshii, and Pinkberry, have

succeeded in Europe by giving customers

what they want: products that combine flavor

and nutrition adapted to different times of day

for both on-the-spot eating or to take away.

Other reasons for success: flexible menus and

a presence in bustling spaces (town centers,

Italy remains a region linked to tradition and local

gastronomy, especially in rural areas. As a result,

traditional restaurants continue to be in high

demand and dominate the €47.5 billion market

(figure 8). Independents outnumber chains in

all regions, but chains are growing fast, as in

the rest of Western Europe (figure 9). In the Fast

Food segment, chains have grown 30% over the

past five years, while independents have grown

just 3% in the same period. Across all segments,

the average revenue per transaction at a chain

restaurant is €32.2, compared to €33.9 for

independent counterparts—a 4.3% difference.

WRITING THE MENU: SATISFYING CONSUMER TASTES

Serving Up Growth

FIGURE 9: CHAIN V INDEPENDENT RESTAURANTS IN ITALY

200

180

160

140

120

100

801999 2001 20052003 2007 20102000 2002 2006 20092004 2008 2011

Chain

Independent

Chain Full-Service RestaurantsIndependent Full-Service RestaurantsChain Fast FoodIndependent Fast Food

Source: Euromonitor

Rev

enue

Gro

wth

#

(in €

Milli

ons

as a

Per

cent

age

of 1

999

Bas

elin

e)

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shopping malls, airports and train stations).

Conversely, emerging European chains have

opportunities in the U.S., where they are

succeeding by placing ethnic themes and

modern interiors in prime, proven, urban

markets with limited advertising and media

involvement.

Meanwhile, older brands in Europe will

likely continue to modernize using a variety

of tactics: conversions, re-imaging, and

switches to modular concepts and new

formats. Regulatory actions may drive

nutritional transparency and a rise in healthy-

choice options, particularly with obesity

on the rise. Denmark, for example, passed

a “fat tax” on companies, and in the UK, a

ban on fast-food TV advertising that targets

children may impact consumer choices.

Serving Up Growth

Given the cautious consumer base across

Western Europe, consumer relevance is critical.

Restaurant operators must follow changing

customer tastes closely and align their offerings

with key emerging trends:

Convenience, Value, and Quality: Consumers

are demanding high quality, on-the-go options

along with easy ordering, value-pricing, speed,

and variety. Those that offer it are already

succeeding, and Fast Casual and QSR growth is

likely to continue.

Modernization: Reinvention can mean

relevance. To stay current, older brands should

explore conversions, re-imaging, modular

concepts, and new formats.

Social Networking: As consumers become

more mobile—accessing the Internet via

smartphones and engaging with social media

outlets—restaurants need to follow suit. Digital

and social media offer new opportunit ies

for innovation in ordering, payments, and

continuous communication with customers.

Despite continued, and in some cases

heightened, economic uncertainty, restaurant

operators can still grow market share. They just

need to know how to do it. Do you?

PAYING THE CHECK: KEY TAKEAWAYS

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For more information, please contact:

Eric Dzwonczyk

Managing Director

[email protected]

+1 (212) 845-4017

Francesco Leone

Managing Director

[email protected]

+39 348 2360183

AlixPartners conducts a broad range of surveys and research in industries around the globe. To learn more about

our publications, or to contact the AlixPartners professional nearest you, please visit www.alixpartners.com.

AlixPartners, LLP is a global firm of senior business and consulting professionals that specializes in improving

corporate financial and operational performance, executing corporate turnarounds, and providing litigation

consulting and forensic accounting services when it really matters—in urgent, high-impact situations.

Serving Up Growth

Francois Neveux

Managing Director

[email protected]

+33 1 76 74 72 14

Sanjay Bailur

Managing Director

[email protected]

+44 20 7098 7451

11


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Serving Up Growth

European and Food Service Outlook 2012

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