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Last Updated: Sunday, 29 July 2007, 16:03 GMT 17:03 UK
Why restaurants are the new pubs
By Gavin Stamp
Business reporter, BBC News

La Tasca restaurant
La Tasca and other restaurants have been on the menu themselves

The arrival of the "gastro pub" in the 1990s shattered some of the old class distinctions between pubs and restaurants.

Most people wouldn't think twice now about having a meal in a pub or having a drink in a restaurant bar before moving on somewhere else.

Until recently, however, this kind of fraternisation wasn't so appealing in the boardroom.

With a few exceptions, pub operators ran pubs while restaurants groups ran restaurants and rarely did the two worlds of sawdust and silver collide.

This is all changing.

There is now a bit of a grey area between pubs and restaurants but it is still a different business model
John Hutson, Wetherspoon's chief executive

Pub chains have suddenly developed an appetite for their country cousins and are dining out on them with growing relish.

Brewer Greene King is currently in talks to buy seafood chain Loch Fyne Restaurants, which, despite its Scottish origins, is mainly based in the south of England.

No smoke but fire

Should the deal come off, it would follow similar takeovers such as Laurel Pub Company's 123m purchase of tapas chain La Tasca and Ultimate Leisure's 28m acquisition of restaurant business The Living Room.

"It has all happened in the last six to seven months," says John Hutson, chief executive of pub group J D Wetherspoon, of the recent flurry of activity.

Two women share a drink in a pub
Many pub groups regard the smoking ban as a watershed

The pursuit of branded restaurant chains by pub firms is the "new fashion", he adds.

"It has started accelerating. With the end of smoking, there is an assumption that pub companies will need to have more reliance on food in the future."

The timing of the deals - immediately before and after the English ban on smoking in enclosed public spaces - is not a coincidence, says Laurel's chief executive, Paul Symonds.

"There is no doubt in my mind there are huge volumes available to quality food providers," he says.

Although the most apocalyptic warnings of wholesale pub closures seem far off the mark, the industry is resigned to a short-term drop in sales now tobacco has been stubbed out.

Many pubs will not be affected, but others will be hit and firms are looking for alternative sources of revenue.

Growth by numbers

Yet John Hutson believes the deals are not simply a knee-jerk reaction to the ban, reflecting instead a more "long-term, strategic" trend in the leisure industry.

Food now accounts for a third of sales at firms such as Wetherspoon's and Mitchells & Butlers, which owns Brown's restaurants, and this has altered their business equation.

Social and demographic trends are favouring restaurants, whose customers are generally older and wealthier, while many "wet only" pubs are struggling.

According to researchers Market & Business Development, the number of pubs in the UK is forecast to fall 3% by 2012 while the value of restaurant trade will rise 8% by 2011.

Whitbread: Brewers Fayre, Beefeater
Mitchells & Butlers:: Brown's, Harvester
Laurel Pub Company: La Vina, La Tasca
Private equity: Pizza Express, Chez Gerard, Ask Pizzas, Cafe Rouge, Strada
Independent: Carluccios, FishWorks, Prezzo, Restaurant Group (Garfunkel's, Edwinns)

But even the most successful restaurant groups have historically found it difficult to grow.

Some have overcommitted themselves by opening too many outlets in expensive city centre locations while others have stagnated after failing to find the right sites.

Vulnerable to shifts in culinary and consumer tastes, few standalone restaurant businesses - Carluccios being the most recent exception - remain stock market darlings for too long.

Many prominent firms - Pizza Express, Cafe Rouge and Ask Restaurants included - have ended up being snapped up by private equity investors.

But large pub operators can offer these companies what financial buyers find it hard to - premises that can be occupied quickly.

Laurel has pledged to double the number of La Tasca outlets by converting some existing pubs with rather dated concepts like Hogshead, while Greene King is likely to take the same approach.

The tapas chain has "only scratched the surface" of its potential growth, Paul Symonds says.

"La Tasca's growth aspirations in the past have been relatively modest as it has been hindered by the availability of quality locations.

"But we own an enormous land bank of sites with the potential to convert to La Tasca. We own lots of quality sites being run in some cases as not particularly contemporary offers."

Successful ingredients

Restaurants once had much lower profit margins than pubs - due mainly to higher staff costs - but this too has begun to change.

As a result, pub groups' growing interest in restaurants seems unlikely to be a flash-in-the-pan phenomenon.

This all sounds like good news for consumers.

But, at the same time, the pub groups' involvement does not guarantee success.

JD Wetherspoon pub
Wetherspoon's says it will stick to what it does best

Pubs remain a volume business, often driven by consumer habit and convenience.

Restaurants, on the other hand, are more fickle creatures, whose success is more dependent on word of mouth and the input of a handful of key individuals.

"There is now a bit of a grey area between pubs and restaurants, but it is still a different business model," warns John Hutson.

"We think it is hard enough to do one thing. We are sticking to what we do best while ensuring that our food offer evolves over time."

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