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Future-proof your business in the digital age

Being a retailer or restaurateur in today’s marketplace can hardly be described as enticing, and even less so as a private equity owner of such a business. Both sectors are struggling for a variety of reasons, and it is a challenge which the private equity industry – having acquired a number of these retail and restaurant companies – must now address.

Out with the old, in with the new

In the UK, casual dining restaurant chains such as Prezzo, Bella Pasta and Byron Burgers, have all been hit by multiple whammies, most notably high business rates, hangovers from overly aggressive expansion strategies, wage inflation, staff shortages unsustainable debt, the rising cost of products and materials as a result of Brexit  and changing consumer behaviour, with customers increasingly paying for dining experiences over the traditional meal fare.

The demise of these restaurants is also being exacerbated through the proliferation of delivery apps such as Deliveroo, Uber Eats and Just Eats. These apps charge sizeable commissions eating into restaurants notoriously fickle bottom lines. In addition, some restauranteurs complain people ordering meals through delivery apps typically buy less than what they do if they are enjoying a sit-down dinner.

The rise of digitalisation has also piled pressure on retailers, with a number of high-profile casualties such as Toys R Us and Maplins already biting the bullet and going into administration. The failure of these organisations to address the threat of e-commerce and online retailers such as Amazon crystallised their demise. Digitalisation and the closure of traditional retail businesses is an issue which private equity needs to resolve.

A Financial Times article highlights that most private equity misconstrued digitalisation as a way to shed costs, enabling retailers to close surplus stores in favour of establishing inventory warehouses. Instead, the likes of Amazon simply facilitated price transparency, the article added, allowing consumers to compare and contrast the cost of goods across multiple providers thereby rooting out the weaker competition.

Too much debt, too little tech investment

A number of businesses have also incurred significant debts, meaning they are unable to spend money on technology at a time when digitalisation is gaining traction. Analysis by the Financial Times of 31 deals with a price tag of more than $500 million each found that 19 leveraged buy-outs totalling $43 billion had run into problems.

The onus for retailers over the next few years looks bleak. The Financial Times highlighted that $68 billion of US retail debt will fall due in the next two years, of which $20 billion is sub-investment grade, according to S&P Global. With interest rates on course to have several hikes in the US over the course of 2018, the retail industry could see further opprobrium and closures.

Future-proofing the business

Moving forward, private equity managers need to ensure that retail or restaurant businesses in their portfolios have a digital strategy, and one that is future proofed. A reliance on the old way of doing business is unlikely to be sustainable for mainstream retailers and restaurateurs. As such, those retailers embracing technology will be ones who gain a competitive edge, and it should be these organisations which private equity ought to be engaging with.

But what does that mean in reality? A BCG study in 2017 found that one third of restaurant users ranked digital sources as the biggest influence when discovering new information about restaurants, while digital reviews also had an impact on sales. The BCG study found 60% of restaurant users downloaded one or more restaurant apps, while 15% had downloaded at least three. The study added that 20% of diners made purchases using the restaurant’s website whereas 15% utilised its mobile app.

As big brands learn more about their customers’ dining habits from this data, it allows them to develop personalised offerings and experiences.

It also said that two thirds of diners were members of at least one restaurant loyalty scheme, up from 55% in 2014. As big brands learn more about their customers’ dining habits from this data, it allows them to develop personalised offerings and experiences. Having first mover advantage has certainly paid off with highly digitalised businesses such as Domino’s Pizza getting around 60% of its custom via online channels. Through digitalisation, restaurants will increasingly be able to compete with the big tech brands.

The traditional private equity expansion model has also been called into question. Looking ahead, private equity firms are likely to consolidate retail and restaurants businesses and channel resources into a more concentrated number of stores. Others believe the issue is less to do with curbing expansion, but rather growing businesses sensibly, and tailoring stores according to customer preferences in a given area – potentially using information gleaned from big data analytics.

A failure to adjust to this changed approach could pose problems for private equity managers and their institutional clients down the line. It is time to make the change and ride on the digital wave.

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