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  • Peter Backman

Does ‘un-stoppable demand’ always result in overcapacity?

There’s a memorable scene in the Loony Tunes cartoon series when Wile E Coyote runs manically over the edge of a cliff. His forward propulsion is such that he continues in a straight line, his legs spinning, but unsupported by anything until he looks down. He realises the game’s up and suddenly, amid a spectacular display he stops moving forward, gravity takes over and he disappears off the bottom of the screen.


Overcapacity is a bit like that.


Too many outlets for the demand

We have seen many bouts of overcapacity in the eating out sector over the years. Fish and Chip shops, ubiquitous across the nation in towns large and small, were once upon a time, the place of choice for millions of families for their weekly treat. Then in the 1980s, their numbers fell dramatically over half a decade, fuelled by changing eating habits and more options such as Indian and Chinese takeaways. Plus, pubs started serving food.


Pubs seemingly marched forward, their presence being felt on all high streets, in quiet country lanes and everywhere in between. Demand for their services seemed unstoppable. Then in the 1990s their numbers started falling dramatically when the market became saturated and demand for its core product – beer – started to fall.


And now, having seen the ever-onward march of casual dining chains, we are seeing their numbers being reversed through non-renewal of leases and rearrangement of leases through CVAs.


What ties all these together is overcapacity. It’s a difficult concept to measure but in essence it means ‘too many outlets for the demand’.


This, in turn, leads to exponential growth in competition. Overcapacity in the casual dining sector didn’t hit all operators equally and it particularly struck those least ready to withstand the competition. Perhaps they lacked in the financial or management resources to cope with the changing landscape. Others found that their offer was not distinct enough, or they failed to meet the changed needs of their core customers or their pricing was inappropriate. This isn’t an exhaustive list but gives an indication of the range of factors that went pear-shaped for operators such as Byron, Jamie’s and GBK.



How did it go wrong for Casual Dining?


Unlike Fish and Chip shops that built up their following over several decades, the lifetime of Casual Dining, as we know it today, is shorter having grown up over the last fifteen years since just before the onset of the Great Recession. Over that period there is no doubt that the number of restaurants built up, fuelled by demand and the desire of its owners to maximise benefits of the growing demand.


Suddenly, in 2017, the sector ran off the edge of the cliff and looked down.

What brought about this moment of realisation? To understand this, we need to look at the evolution of casual dining in the UK. There was (and still is) undoubtedly demand for something called “casual dining”. Investors spotted this demand and seeing a way to grow their portfolios through planned expansion, poured money into the sector. The result was initially a great range of choices for the customer, which fuelled more demand. This was followed by the realisation amongst consumers that casual dining offered great value for money, which generated yet more demand. The cycle seemed virtuous and unstoppable. More money flowed in, more sites were opened. But, some were in the wrong places and some committed to too much rent.


Then, the rules changed. Customers, for a variety of reasons, including fickleness, their awareness of a lack of differentiation amongst casual dining brands and having less money to spend, concluded that they were no longer willing to eat out in the same numbers at casual dining restaurants. The crucial phrase is “in the same numbers”. It’s not as if demand fell away spectacularly, it’s just that it fell enough to impact the balance of revenues and costs in a sufficiently large number of outlets to cause distress for them, and through the effects of the media spotlight, it affected the rest of the sector too.


The result was, once over the cliff edge, the legs stopped spinning and the fall came –and continues.


Lessons Learnt

Learning from Fish and Chip shops as well as pubs, we can expect the unwinding of the overcapacity in casual dining to continue for a while. This is because there are many vested interests that will resist change, not least property owners and investors who face losses should their badly performing investments start to crystallise. But, the forces of profit and loss are forcing reduction in capacity and this will play out over a long period.

Fish and Chip shops, pubs, casual dining. What’s next? The answer is to look at sectors where there appears to be a history of extensive growth supported by arguments that state that there is unstoppable demand. Of course, demand is stoppable when customers start to change and that is when sectors, heavily invested for growth, face their cliff edge moment even though their legs are spinning.


Overcapacity is inevitable in any part of human endeavour where success is easily replicable in the short term. For the long term, it is vital to have the right resources in place, or risk disappearing off the bottom of the screen.


If you'd like to know more about my views on overcapacity, please email me at peter@peterbackmanfs.com or call me on 07785 242809.

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