Cappucino, latte or lemon grass chicken?
Healthy eating and more chains are the order of the day in the cafe and restaurants sector, writes John Sharma.
The cafe and restaurants sector recorded strong turnover/sales growth in 2006. Sales by cafes and restaurants grew by over 10% during the year to October 2006, compared with total retail sales growth of about 6.5% and little change in takeaway food retailing.
Restaurant turnover tends to peak during the December quarter, before easing in January/February.
Profit margins are slim
The latest detailed Australian Bureau of Statistics (ABS) survey (July 2005) found that operating profits margins were about 4% for the restaurant and catering sector as a whole on turnover growth of about 7% per annum (pa) over the period from 1998-99 to 2003-04. Within the sector, operating profit margin for cafes and restaurants vis-a-vis catering businesses were 3.4% and 5.4%, respectively. The divergence largely reflects the higher overheads incurred, such as rentals and leases, in running restaurants relative to catering establishments.
In terms of size, those employing 50 or more staff tended to be more profitable. Typically, operations having 50 or more staff are more likely to be restaurants operating in multiple locations or chain type operations, such as McDonald's or KFC. The ABS survey also found that costs increased faster than revenue – with costs up about 7.4% pa over the five years to 2003-04. The key cost drivers are: purchases (40%) such as food and beverages; labour (33%); and, to a lesser extent, rentals (11%).
Like most sectors, staff shortages are a key constraint. Restaurants are finding it difficult to recruit staff such as chefs, waiters and kitchen hands. The recent Workplace Relations legislation has been welcomed by the sector for the flexibility it offers. Whilst the new legislation may help in terms of costs, key challenges remain in terms of attracting new staff due to long working hours and perceived low pay and career prospects.
Healthy eating, more chains and Asian food
There are a number of key trends shaping the sector. First, health conscious customers are shifting towards healthier food. An example is McDonald's new range of salads and other healthy options.
While Chinese, Italian, Thai and Indian are already among the most popular cuisines, there is increasing demand for Asian food. Third, chains are gaining market share. At the end of 2005, 17 chains accounted for over 4,100 outlets and held an estimated 60% of the $9 billion Australian fast food market. By contrast, independent operators, including sandwich bars, fish and chip shops, chicken shops and other similar outlets, declined in number from nearly 13,000 in 1998 to 9,400 in mid 2006.
Franchising has supported the growth in the number of chain operations. According to BRW's franchising report, the accommodation, cafes and restaurant sector is the second largest sector for franchising activity (16% of turnover), after retail trade (50%) and before property and business services (12%). Examples include Subway, Boost Juice and Gloria Jeans.
Outlook – moderating growth
NAB Group Economics forecasts moderate growth in retail spending during the next year. Financial conditions facing households have tightened lately due to higher interest rates and inflation has picked up.
On the other hand, gains in wealth (both in housing and, to a larger extent, equity) and incomes (tax cuts, wages and job growth) continue to support household spending. Being a discretionary item, spending in restaurants may be negatively impacted – especially amongst relatively lower income consumers. On the other hand, time poor consumers, an increasing range and affordability of restaurant offerings, as well as wealth gains and ageing demographics will buoy some cafes and restaurants.
John Sharma is NAB's Industry Economist.