Fast-food outlets weathering storm
John Mulligan discovers that aggressive marketing and value deals have helped shelter restaurant chains from worst of downturn
Published 11/11/2010 | 05:00
'I love recessions," Ryanair boss Michael O'Leary has quipped on a number of occasions over the past couple of years.
There might be few business people who'd agree with the sentiment, but in the aviation business O'Leary argues that straitened times herd penny-wise passengers towards low-cost carriers.
But at least one other business sector maintains it has reaped some benefit from the downturn, at least in Britain.
As more people stayed in over weekends rather than heading to pubs, Domino's Pizza in Britain experienced a surge in revenue, bolstered by its sponsorship of popular television shows such as ITV's 'Britain's Got Talent'.
Last year, publicly listed Domino's UK & Ireland, which controls the franchise here for the US brand, recorded a near 28pc jump in pre-tax profits and a 16pc increase in sales.
Cold weather had helped to spur sales during the winter.
However, in Ireland, it was a different story. Like-for-like sales at its 45 outlets here fell in 2009 as consumers kept a tighter rein on spending. Accounts for the company behind a number of the busiest Domino's outlets in Ireland, which are owned by Northern Ireland businessman Charles Caldwell, show that operating profits fell 30pc last year to €1.86m as turnover declined nearly 10pc to €22m.
Meanwhile, the latest accounts for McDonald's Irish arm show that its turnover fell more than 8pc last year to €85.2m (it includes revenue from 14 company-owned outlets and a percentage of sales from 64 franchised stores), while it managed to keep profits stable at €14.4m by cutting €5.5m from its administrative expenses.
The head of the division, John Atherton, has said that overall sales at its outlets in Ireland are likely to only be "slightly ahead" this year compared with 2009 despite having served an extra one million customers.
Consumers, he said recently, were trading down. A raft of international brands entered the Irish market or rapidly expanded over the past decade, including Subway and Quiznos, all keen to capitalise on what were then well-heeled consumers.
So, how are some Irish-owned chains weathering the storm?
The O'Brien's sandwich chain went into liquidation last year and was acquired by Graham Beere's Abrakebabra, which also controls franchises in Ireland such as Bagel Factory, Gourmet Burger, Yo! Sushi and Chick King.
Other individual businesses that flourished during the boom have failed, including Nude, owned by Bono's brother Norman Hewson.
Supermac's founder Pat McDonagh maintains that anyone in the sector who claims they are not being impacted by the recession is being economical with the truth, but argues that business has held up well despite that.
"A recession hits every business, but the quick service restaurant side hasn't been hit to the same degree as others I think," said Mr McDonagh, pointing out that part of the equation is down to both the location of an outlet and the operator themselves.
"You have main streets in towns around the country where shops have closed and people are drawn out to retail parks, while the nightlife isn't the same as what it used to be."
But the upsides are so far keeping things in balance. Mr McDonagh says this year isn't necessarily tougher than last and that Supermac's has been "more aggressive" in its marketing, including pushing its Irish pedigree.
In the past six months, five new Supermac's outlets have opened, while over the next two years Mr McDonagh expects the group to open a further nine or 10.
Its current tally is 97 units, which includes some kiosk-style outlets that operate as concessions in locations such as petrol stations.
"We're fighting harder to give more value to customers, and supporting local farmers and businesses. Margins fall when you discount, but one of the biggest challenges is still trying to keep wages at bay," he says.
Turnover at Supermac's Holdings climbed almost 9pc in 2008 to €63m, while pre-tax profits increased by a multiple of four to €5.2m as the company wrote off less of its investment in the US-based Claddagh Pub chain of casual dining restaurants, which Mr McDonagh points out are now trading profitably.
He adds that Supermac's sales are down "a couple of per cent", but is upbeat for the future of the business.
David Killeen, chairman of the Irish Franchise Association of Ireland, also maintains that while many food service businesses will be finding the going tough at the moment, they have not been impacted as badly as traditional SMEs.
"Any business out there at the moment has to cut its cloth. People's disposable income is down and they will think twice about having that skinny latte," he says.
"But at least in a franchised business, owners can bounce ideas off each other and they have support and systems in place that help them. Survival is the name of the game."
Mr Killeen also believes there is scope in Ireland for extra growth within the franchised food outlet sector and says there is continuing interest from people who've been either made redundant and have a lump sum, or who have become disillusioned with their existing jobs.
He adds that a new survey undertaken by the Irish Franchise Association shows that set-up costs have come down considerably since 2006, in terms of store fit-outs.
As the dark cloud of economic meltdown loomed large in 2008, Robert Pendleton was fearing the worst for his Apache Pizza chain that began life in 1989.
Two years ago, he fully expected to have seen the total number of outlets in the country whittled down to about 30 from more than 40 by now. That hasn't happened.
"Since 2008 we've closed three shops, but opened five. We've got 41 units altogether and another three are due to open early in 2011," says Mr Pendleton.
He adds that sales across the group fell by about 20pc in 2008 (group sales were about €13m last year), but that was because the first instinct, he explains, was to slash prices to retain custom.
The dramatic price cuts introduced in 2008 have largely been clawed back, while footfall has been maintained and is "significantly up" in some cases. He thinks the bottom for the sector is close and will probably be reached by the middle of 2011.
"In the first quarter of this year, like-for-like sales were down about 13pc. In the third quarter they were 2pc down on a like-for-like basis and we expect that in the current quarter they'll be neutral on last year," says Mr Pendleton.
"One of the big mistakes was just cutting prices across the board."
Now, instead of sweeping discounts, the company has altered its strategy to offer value deals.
"People are a lot more prudent with their money," he adds.
He says he has witnessed the first "green shoots" in the form of increased enquiries from potential franchisees about the business and thinks that by 2014 or 2015 his business could be back to a similar level of profitability as that achieved in 2006.
Meanwhile, Mr McDonagh sounds a warning that more pain could come in the sector.
"There's going to be fallout over the next 12 months, especially for those that are overstretched in relation to their borrowings."