10/09/22: The Restaurant Group and its mission to limit price rises

What happened?

The Restaurant Group (TRG), which own a number of popular food chains, like Wagamama and Frankie & Benny's, is trying its best to limit the price rises onto consumers.

They also want to scale back on their home delivery services, whilst trying to stay competitive in the market.

Source: The FT

Why have I chosen this story?

TRG owns Wagamama's, and I've been there a couple of times. I think the food is great and I would recommend (my favourite dish right now is their popular Chicken Katsu Curry, I need to be adventurous and try out their other dishes though)!

I know many restaurants are increasing their prices, and the fact that TRG are trying to do the opposite, made me curious to see why and if this will work.

It would be nice to see the cost of their dishes remain the same, especially during this difficult economic climate

A little bit of context:

TRG is a British chain of restaurant and public houses, which operates approximately 400 pub restaurants and restaurants all over the UK. They also run Brunning & Price Limited, Chiquito and Coast to Coast, an American restaurant and Bar. TRG have over 10,000 employers too.

Source: Getty Images

TRG company reported £423.4mn in sales for the first half of 2022, compared to 2021. This summer's heat wave drew more customers out, and it benefitted its pub business.

In 2019, the hospitality sector brought in around £59.3 billion (around 3% of the total UK economic output) to the UK's economy. According to the Foodservice Equipment Association, their report says that for 2022-2025, the report forecasts the industry will 'rebuild slowly, with 2022 regaining 93% of 2019 sales to reach £91bn.'

The company also reported an 'adjusted pre-tax profit of £10.2mn for the first half, compared with a £19.9mn loss a year earlier.'

Why is TRG making this move?

Here are some possible factors:

-Soaring inflation. In July, the UK's inflation figure hit 10.1%, mainly driven by increase in food and fuel prices. The Bank of England, predicts that this figure is going to increase quite significantly (to 13%) in the next couple of months. Investment bank Citi has predicted UK inflation could surpass 18% in 2023!

The higher inflation goes up, the less spending power consumers will have to spend on their wants. Not to mention the fact that energy bills are going to go up on the 1st October 2022. I'll speak more about this in my S.W.O.T below.

Source: Pharmaceuticals Technology

Source: George Becker, Pexels.com

- They want to remain competitive. Fast food chain, McDonald's has increased their prices. I guess consumers will understand, since soaring energy bills and inflation, are affecting businesses too. However, I think that this will make Wagamama stand out from their rivals.

They could attract more customers, which means more revenue for the firm. However. once the energy price cap comes in next month, people could think twice about whether or not they should go to a restaurant and spend money, or cook at home to save money. However, let's not forget about Liz Truss' plans to offset the cost of rising energy bills. I'll also talk more about this in my S.W.O.T below.

According to CGA and Fourth's new business Confidence Survey, hospitality leaders plan to increase menu prices by a further 6% in the next 12 months.

Analysis, S.W.O.T:

Source: Wikipedia

S- Thanks to the new Prime Minster's energy plan, energy bills for a typical household are going to be capped to around £2,500 from the 1 October 2022. 'This will save the average household at least £1,000 a year based on current energy prices from October.' This is a decrease from the figure Ofgem predicted only a couple of weeks ago, which stood at £3,549. This cap will last for 2 years for households, and 6 months for businesses. It means that less money will go on their energy bills and they could save more money.

W- Businesses will only be shielded for 6 months. I'm assuming that prices go back to 'normal' once this cap ends. This could then mean that many businesses will have to increase their prices, in order to cope with the high bills once more. It's sort of like a cycle in a way...

However, there are calls that Liz Truss plans may not be as helpful to many households, and many could still face fuel poverty in the coming months.

O- Businesses, such as TRG could use this as an opportunity to think about their business needs. TRG have already postponed the introduction of their dark kitchens, due to a decrease in the amount of people ordering takeaways. Not every idea has been postponed though- they also plan to open between 14 and 16 new branches of Wagamama's in 2022 and 2023. More chains could be good for business. They can also look at what is doing well and what isn't doing well in the business, and make necessary adjustments.

T- A main factor that is driving high energy bills, is the war in Ukraine. Hopefully it will end very soon, and global oil and gas prices will fall. However, Russia has turned off Nord Stream 1, an important pipeline that brings in oil and gas into Europe-indefinitely. What if inflation persists? What if Citi's prediction (that inflation could surpass 18% in 2023) becomes a reality? Not to forget the fact that the UK could fall into a recession. Redundancies always come with recessions, and there's a chance that many employers could lose their jobs-including those at TRG.

A downside to the 'S' above, is although energy bills have been capped, somewhat temporarily, food inflation could very well be on the rise. Buying food to eat is very important and so this could become the new problem that many households face. Food banks in the Trussell Trust network have distributed over 2.1 million food parcels from April 2021-March 2022.

I don't want to be a pessimist, but these are factors that could happen in the future.

Source: I Mawassi

My Thoughts:

I think TRG are making a bold move, they're doing what most don't want to do or can't do. It does mean that they are going to have to take up a chunk of the costs. However, the 6 month emery price cap that business' will receive, due to Liz Truss and her plan to lower energy bills may help to shelter TRG and others from the high costs.

Will they still increase costs for customers in the future? Who knows, however, this could become likely if inflation is still very high in the next 6 months and/or the war in Ukraine is still going on, among other factors.

I think I will still eat at Wagamama to be honest!

Is this a smart approach or one that will have negative effects for the company in the long-term? I'd love to know your thoughts on this week's story.

Until next time, stay curious!