If 2022 was a year to forget for several operators in the hospitality sector, many will be looking to 2023 with cautious optimism. There are no silver bullets to change the difficult macroenvironment, but with some more positive medium-term forward indicators and the UK consumer being the resilient customer that it is – quality, service and value are all well rewarded. Looking through the lens of M&A in the sector, we look back at 2022 and forward into 2023.

2022: Diversifying consumer exposure – variations on a theme

Despite the more settled trading environment at the start of 2022, coupled with pent-up consumer enthusiasm off the back of 2021, the macroeconomic challenges really started to bite from the second quarter onwards. So while trading was very tough, did this lead to M&A activity being put on hold in 2022? In short, no – there were a number of M&A transactions successfully completed in the sector in 2022, although the “bar” was raised for many potential purchasers and for others, the sector was certainly out of favour.

Trade acquirers found they were winning out where there was a compelling strategic rationale. Both diversification and diversifying a business’ exposure to the consumer was key to trade acquirers as they looked to spread risk.

M&A is inherently risky and pursuing a transaction has to be balanced against other growth initiatives or capital allocation opportunities. Market conditions are such that well capitalised operators can access leases that would historically have been the preserve of retailers and on comparatively favourable terms. M&A therefore needs to offer more than “more of the same” and favourable lease terms. This can be exemplified in two deals the consumer team at finnCap Cavendish advised on in 2022, in the form of Barburrito’s sale to The Restaurant Group (TRG), and the sale of Peach Pubs to Revolution Bars.

In the case of the Barburrito deal, TRG could access a quick-service-restaurant (QSR) offering, thereby playing into a number of key consumer trends. The healthy, fully customisable menu that can be prepared quickly, at an attractive price point and its ability to travel well for delivery is a smart addition to TRG’s stable offering, particularly given the current market conditions that offer plenty of cost instabilities for operators. The Mexican cuisine category is also underpenetrated in the UK at present, giving TRG an attractive roll-out option in the current lease environment. The only other notable acquisition in the Mexican cuisine sector in 2022 was the sale of Chilango to Tortilla.

Furthermore, the Peach Pubs transaction with Revolution is another good example, albeit in a different way, of diversification. Peach’s focus on premium, food-led gastropubs in affluent rural locations adds a different product and customer base to Revolution’s wet-led city-centre bars while still offering back-of-house and central office synergy opportunities.

M&A in the hospitality sector in 2022 was a tougher place for private equity investors, who have the ability to invest across several different sectors. Currently, pressure on the consumer is pushing the sector lower down the priority list for these investors and investment committees are particularly sceptical of new platform investments where the business is directly reliant on consumer spending. The sector is not completely off the menu, but it makes it harder for private equity to compete with strategic purchasers that are able to extract synergies from a combination. However, that is not to say we won’t see private equity refocusing on the hospitality sector as 2023 progresses.

2023 – what comes next? 

M&A will continue to be relevant in 2023 and the transaction pipeline looks strong. Sellers have been encouraged by those deals that have happened during 2022 and there are certainly buyers for the right opportunity. Trade buyers will continue to set the same high hurdles and approach M&A with a strategic lens and significant due diligence. On the private equity front, firms have large amounts of “dry powder” that needs investing and as 2023 progresses, opportunities in the sector will become more interesting to these investors. Finally, while the capital markets have been in a difficult place in 2022, we expect them to reopen in the latter part of 2023 – with a recovery in share prices and sentiment, this will also help drive M&A activity.

Clearly the economic backdrop cannot be ignored and executing deals in this environment is difficult. However, we remain optimistic that 2023 will be a year full of M&A opportunities.

This article first appeared in Propel Hospitality.