The future of leisure - Legal & General

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The future of leisure - Legal & General
2018 Legal & General Investment Management, Real Assets – The Future of Leisure

    The future
    of leisure

For professional investors and their advisers only
The future of leisure - Legal & General
Legal & General Investment Management, Real Assets

               By definition, leisure means free
               time, but is evolving to include
               socialising, networking, experience
               and entertainment – are you ready
               for the future of leisure?
The future of leisure - Legal & General
2018 The Future of Leisure

Contents
 The future of leisure
                                                                   2
 The future of leisure: key messages
                                                                   5
 Setting the scene: the UK leisure property market
                                                                   9
 Who will be the leisure occupier of the future?
                                                                 15
 What will leisure property look like in the future?
                                                                 39
 What will be the implication for leisure owners?
                                                                 43
 Our conviction themes
                                                                 47
 The long-term future of leisure
                                                                 50

                                                                           1
The future of leisure - Legal & General
Legal & General Investment Management, Real Assets

The future of leisure
What does “leisure” mean now and how might that change in the future? By definition,
leisure is time when one is not working; free time. Statistics tell us we are spending more
than ever filling this time with recreational activities as technological advances mean many
mundane tasks can be automated away and any lifestyle blog will tell you that it’s no
longer spare time but “me time”.
But what actually do we do in our free time, and where      or the latest technology to heighten our cinema
and when? Glance down a high street or around a             experience.
leisure park and you will see a line-up of familiar
fascias, which suggests our recreational time is still      Yet leisure operators are rising to meet this challenge.
underpinned by “traditional” activities: bowling, the       Never before has the leisure occupier base been as
cinema or a meal in a restaurant. Look harder and you       diversified and dynamic as it is today. Business plans
will see evidence of the significant evolution within the   are orientated towards the future, with an eye on
sector, where watching a film is now a multi-sensory        what’s next and what’s after that. The evolution is being
experience, foods from around the world are available       played out across all types of leisure property, whether
at our fingertips and “contactless” has replaced            that be an out-of-town park, a scheme in a city centre
“please sign here”.                                         or a standalone unit. Importantly and refreshingly, it
                                                            is not just a London story: regional markets are just as
There is a big macro-trend driving this market              vibrant.
movement: experience. The leisure sector is attracting
one and a half times more discretionary spend than          This means that the owners of leisure property need
retail and is growing twice as fast1. As sales fall away    to be as responsive and forward-thinking as their
on the high street, we appear to be investing more in       occupiers. What space will be required to realise the
experience and less in possessions. Participation has       ambitions of their occupiers? How can the wider
become the most modern of talking points and an             physical environment help create a future-proofed
important building block of social capital. And we’re not   location? Where will leisure interact best with other
afraid to pay for it; Generation Ys spend £419.5 million    areas of the commercial property market to build the
a month on live experiences and events2.                    best destination?

Alongside this our leisure time has evolved from a          Our “Future of Leisure” report aspires to address
static, one-stop event to a journey involving multiple      these issues with a varied toolkit including interviews
touch points; a meal and a visit to the cinema, or a        with some of our core leisure occupiers, insight from
trip to the gym followed by a coffee with friends. This     leading market agent Savills and a glimpse into the
reflects the widening of our social Venn diagram as         future from consumer visionary The Future Laboratory.
the groups of people we spend our free time with            The report aspires to answer four key questions:
expands to include not only family and friends, but
also colleagues and casual acquaintances. This means        •• How will consumer demand for leisure services
our motivation has also changed: leisure time now             evolve?
means to socialise, to network, to experience, to be
entertained – to have “me time”.                            •• Who will be the leisure occupier of the future?
This expanding definition of leisure is placing greater     •• What will be their physical space requirements?
demands on operators and owners of leisure property,
whether that be a refreshed restaurant menu, more           •• What are the implications for owners of leisure
adrenaline-filled and competitive gaming environments         property?

1 Source: Deloitte
2 Source: Wagamama & Canvas 8

2
The future of leisure - Legal & General
2018 The Future of Leisure

So, are you ready
for the future of
leisure?
Let’s go!
The future of leisure - Legal & General
Legal & General Investment Management, Real Assets
The future of leisure - Legal & General
2018 The Future of Leisure

The future
of leisure:
key messages
The future of leisure - Legal & General
Legal & General Investment Management, Real Assets

The future of leisure:
key messages
The leisure occupier                                         The leisure property
The best operators optimise location, occasion and           Destination is everything! But it needs to be managed
channel to connect with their customers
                                                             Stock selection criteria should emphasise flexible
Brands look for locations where their vision will work and   space, visibility and accessibility – this is what fit-for-
they can embed their backstory                               purpose means

Concepts will thrive in the right location, but beware of    Reformat spaces for flexibility and make connections
unmarketable ideas or those that don’t translate             through technology

The skill of the owner will be in selecting brands that      The importance of (re)investing into schemes cannot
are truly democratic and which are location-specific         be understated; short-term pain for long-term gain

There needs to be a reimaging of the owner/occupier          Units will have to work harder and become more
relationship, particularly around covenants                  efficient to remain profitable and sustainable

Rents must be affordable for all; understanding              Don’t overlook infrastructure; use physical architecture
what is viable now and in the future is a key asset          to create a sense of place
management skill
                                                             Consider off-pitch locations or repurpose space to
Efficient occupiers (rent to floorspace) will be a key       maintain interest
metric for sustainable income

The biggest risk to future growth will be occupiers
unable to find the right location and the right property
                                                             The leisure owner
                                                             Occupational knowledge should be the key to
                                                             investment decisions

                                                             Dare to be different! The mid-market is being squeezed
                                                             across the sector because people are craving the new

                                                             Owners should consider dialling down the importance
                                                             of covenant, instead focusing on concept vs. catchment

                                                             Owners will place greater emphasis on curating space
                                                             AND occupiers; taking best in practice from the retail
                                                             sector

                                                             Leverage off localism and talent spot great local
                                                             traders; these can be successful anchors alongside
                                                             big brands

                                                             There must always be time for a conversation

6
The future of leisure - Legal & General
2018 The Future of Leisure

The leisure consumer
Leisure activities are no longer the preserve of special
occasions

But the model has changed: consumers of leisure want
to be in control – but also entertained

Leisure time is now segmented into a “journey” – of
which retail is often a key feature

The best operators are adapting to this, with initiatives
such as “pay on entry” or cashless payment systems

This aligns operational models with the big macro
trends of experience and personalisation

Owners of leisure property should track both
international markets and the changing regional
consumer

They must also engage and enthuse local communities
to foster civic pride, and repeat visits

Click here for The Future Laboratory Report on page 50

Leisure activities are no
longer the preserve of special
occasions. The best operators
optimise location, occasion
and channel to connect with
their customers. This means
space should be reformatted
to be flexible and make
connections through
technology.

                                                                                    7
The future of leisure - Legal & General
Legal & General Investment Management, Real Assets
2018 The Future of Leisure

Setting the scene:
the UK leisure
property market
Legal & General Investment Management, Real Assets

The UK leisure property market
Leisure property in the UK can be found across a                                    This report focuses on what we consider the “leisure
wide spectrum of formats and locations and is often                                 investable universe”; good quality leisure-dominated
included within retail-dominated schemes. The total                                 assets, including in-/out-of-town schemes and
universe of all assets that included a leisure element                              standalone leisure units. The defining characteristics of
was around 6,150 schemes in 2017, amounting to                                      each type of leisure property are detailed in Table 1.
530 million square foot of gross lettable area. This
represents a 21% increase in the number of properties
since 20093.

There are four main types of leisure property
     Table 1
                                                                                                     Average gross                   Average number
 Type of property              Characteristics
                                                                                                  lettable area (sq ft)                  of units

Out-of-town leisure           Cinema-anchored scheme with 2 to 4                                          115,422                              9
park                          restaurant units, a large car park and often
                              some “D2” units eg. a gym, bowling or bingo

In-town leisure               Located within town/city centre. Strip of                                   114,663                              10
scheme                        leisure units or specific scheme. Often cinema
                              anchored

Standalone leisure            “Big box” leisure eg casino, standalone                                      21,486                              2
units                         cinema or bingo hall, perhaps with
                              accompanying restaurant/bar

Leisure scheme with           Hybrid scheme of leisure and retail units                                   257,738                              37
some retail                   dominated by leisure. Can be located in or
                              out-of-town
 Source: Savills. Note that hotels, or small schemes where the majority of floorspace is attributed to a hotel, have been excluded in this report

What is the structure of the leisure property market?
The leisure property market is weighted towards                                     number of units and average floorspace is illustrated
smaller schemes, often standalone units (Chart 1). This                             in Chart 2. There is a clear inverse correlation between
will typically be a casino or other “big box” leisure                               number of units and the number of schemes; 88% of
operators such as bingo halls or a cinema. The average                              the leisure universe is composed of schemes with ten
size of these developments is small; around 20,000                                  units or fewer.
square foot. The distribution of leisure schemes by

3 Source: Savills. Excludes high street blocks, fragmented town centre ownership and supermarkets

10
2018 The Future of Leisure

The majority of leisure schemes are small, with just one or two occupiers
   Chart 1                                                              Chart 2
       % of units                                                   600                                                    Average area    500,000
                                                                           Schemes (#)
                                    3%                                                                                     (sq ft)
                                                                                                                                           450,000
                                           11%
                                                                    500
                                                                                                                                           400,000

                                                                                                                                           350,000
                                                                    400
                                                                                                                                           300,000
                                                    13%
                                                                    300                                                                    250,000

                                                                                                                                           200,000
                                                                    200
                                                                                                                                           150,000

                                                                                                                                           100,000
             73%                                                    100
                                                                                                                                           50,000

                                                                      0                                                                    0
                                                                           1-2   3-5      6-10   11-15 16-20 21-30 31-50 51-100 100+

                Out-of-town leisure park   In-town leisure scheme
                Standalone leisure units   Leisure/retail scheme           Number of schemes (LHS)         Average floorspace (RHS)

 Source: Savills                                                     Source: Savills

Over two thirds of the leisure investable universe                  The large majority of the leisure universe is
is located out-of-town, whether that is on a leisure                located out-of-town
park, standalone scheme or in a hybrid leisure/retail
development (Chart 3). Standalone leisure units                         Chart 3
are weighted towards out-of-town locations whilst                         100

leisure and retail schemes are more likely to be found                                                                                28
                                                                          80
in urban, town centre locations. 11% of the leisure
universe is located in Greater London4. Development                                      77                     81
                                                                          60
of new leisure property has been limited, despite the
                                                                    %

increase in consumer spending and widening diversity                      40                                                          72
of the occupier base. Much of the growth in leisure
units has been outside of the defined investable                          20
                                                                                         23                     19
universe; in shopping centres, on industrial estates or
                                                                           0
in mixed-use locations such as office schemes.                                      Leisure                 Standalone             Leisure/
                                                                                   universe                leisure units        retail scheme

                                                                                                 In-town         Out-of-town

                                                                     Source: Savills

4 Source: Savills

                                                                                                                                                11
Legal & General Investment Management, Real Assets

Who occupies property within the leisure universe?
The occupier base of leisure property can be grouped into the following:

Occupier base of leisure property
     Table 2

                                                   Characteristics                                             Example fascias

 Cinemas                                           Multiplex or boutique, ancillary retail                     Odeon, Vue, Cineworld

 Food & beverage                                   Restaurants, cafes, pubs                                    Nando’s, Pizza Hut, TGI Fridays

 Big box/“D2 traditional”                          Bingo, bowling, casinos, gyms                               Hollywood Bowl Group, PureGym

 Big box/“D2 emerging”                             Urban golf, trampolining, escape rooms                      Junkyard Golf, Vertical Rush, Oxygen

 Other                                             Ice rinks, arcades                                          Local operators

 Source: LGIM Real Assets

The leisure investable universe is dominated by “big                                  “Retailers are very supportive of having leisure
box” operators such as cinemas, casinos, bowling                                      operators included within a scheme; they can increase
alleys and fitness centres on a square footage basis,                                 dwell time, footfall and add a sense of vibrancy. Food is
which can be located comfortably within larger out-of-                                particularly important for “selling the dream”.”
town schemes (Table 2). But as can be seen in Chart 4,                                SIMON RUSSIAN, HEAD OF RETAIL, LGIM REAL
typical “leisure” occupiers can be found across the                                   ASSETS
wider property market. Around 60% of cinemas are
located within the leisure investable universe, which                                 “There has been a dramatic shift in owners” attitudes
means the remaining 40% must be located within                                        towards leisure operators within retail schemes; they
“non-leisure” assets – perhaps anchoring a shopping                                   are far more open minded and willing to consider
centre5.                                                                              new concepts across a variety of different locations.”
                                                                                      KIDZANIA
Similarly, the majority of restaurants and gyms are
located outside specific leisure-type properties,
which demonstrates how the sector has become
an increasingly integral park of the consumer offer
in more retail-centric locations. “Quick food and
beverage” such as fast food units and coffee shops are
heavily weighted away from typical leisure locations.

5 Note this analysis does not cover high street locations, which would also be a significant part of the provision of some leisure-style occupiers, such as cafés
   and restaurants.

12
2018 The Future of Leisure

Leisure operators can also be found outside of typical leisure schemes
    Chart 4
    100
                15

                           40           41               41              41
    80                                                                                  45          50          53
                                                                                                                               57
                                                                                                                                            62
                                                                                                                                                      64

    60
                                                                                                                                                                   80
                                                                                                                                                                                93
%

                85         60           59
    40                                                   59              59
                                                                                        55
                                                                                                    50
                                                                                                                47
                                                                                                                               43
                                                                                                                                            38        36
    20
                                                                                                                                                                   20

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                                                     % in leisure investable universe                    % in wider property universe

Source: Savills

                                                                                                                                                                                        13
Legal & General Investment Management, Real Assets
2018 The Future of Leisure

Who will be the
leisure occupier
of the future?
Legal & General Investment Management, Real Assets

Cinemas
The “here and now”                                                                                                                                                                           income from advertising revenue, booking fees, sales
                                                                                                                                                                                             of 3D glasses and auditoria rent increased by 36% to
Leisure schemes are often anchored by a cinema, which                                                                                                                                        £173 million in 2015, illustrating the number of ways
usually contributes the largest proportion of contracted                                                                                                                                     operators are diversifying their income streams.
rent. The on going success and longevity of cinemas
is one of the great successes of the UK leisure sector.
Despite the emergence of structural treats such as
                                                                                                                                                                                             Life on the ground
cable television, Netflix and other digital-screening                                                                                                                                        In 2016 there were 766 cinemas in the UK, with a total
platforms, box office revenues have continued to                                                                                                                                             of 4,046 screens. Around 60% of these cinemas are
rise year after year. This is due to a relentless focus                                                                                                                                      located within the leisure investable universe, with
from operators on improving the viewing experience,                                                                                                                                          the remainder being in retail schemes, independent
introducing innovations such as 3D/4D screens,                                                                                                                                               operations or situated in owner-occupied units.
moveable seats and IMAX technology.
                                                                                                                                                                                             Within the leisure investable universe, the majority
In 2017 UK box office revenue reached over £1.3 billion,                                                                                                                                     of cinemas are located within larger leisure schemes,
a 60% increase over ten years6 (Chart 5). This                                                                                                                                               either in or out-of-town (Chart 6), with only a small
demonstrates the on going demand for film screenings                                                                                                                                         minority in standalone sites. Notably, the majority of
within a “traditional” cinema environment, despite the                                                                                                                                       multiplex cinemas are in leisure-specific assets. This
apparent rising popularity of digital content. Average                                                                                                                                       underlines the importance of a leisure-dominated
annual expenditure on trips to the cinema reached                                                                                                                                            scheme for cinema operators, but also suggests
£19.18 per person in 2016, a 52% increase in a decade7.                                                                                                                                      there is potential for others to challenge for market
                                                                                                                                                                                             share. This is now being borne out in reality by the
                                                                                                                                                                                             boutique cinema market following strong expansion by
Flat cinema admissions have been                                                                                                                                                             operators such as Everyman, Curzon and Picturehouse.
compensated by rising non-ticket                                                                                                                                                             By 2017 there were 58 boutique schemes in the UK, but
expenditure                                                                                                                                                                                  only four reside within leisure-specific assets – a sharp
                                                                                                                                                                                             contrast to the multiplex market.
                          Chart 5
                          1,400                                                                                                                                 200

                          1,200
                                                                                                                                                                180                          Location of cinemas within the leisure
                                                                                                                                                                160
                                                                                                                                                                                             universe
Box office revenue (£m)

                                                                                                                                                                      Admissions (million)

                          1,000                                                                                                                                 140

                           800
                                                                                                                                                                120                            Chart 6
                                                                                                                                                                100
                           600                                                                                                                                  80

                           400                                                                                                                                  60                                           69
                                                                                                                                                                40
                           200
                                                                                                                                                                20                                                                                87
                             0                                                                                                                                  0
                                  2000
                                         2001
                                                2002
                                                       2003
                                                              2004
                                                                     2005
                                                                            2006
                                                                                   2007
                                                                                          2008
                                                                                                 2009
                                                                                                        2010
                                                                                                               2011
                                                                                                                      2012
                                                                                                                             2013
                                                                                                                                    2014
                                                                                                                                           2015
                                                                                                                                                  2016
                                                                                                                                                         2017

                                         Gross box office (LHS)                                         Admissions (RHS)

                Source: Dodona
                                                                                                                                                                                                           11

Cinema visits per person have fallen very slightly
from 2.7 per year in 2011 to 2.6 in 2016, but this has                                                                                                                                                                      56
been compensated by higher concessional spend as
                                                                                                                                                                                                 Out-of-town leisure park    In-town leisure scheme
operators better align their retail offer with customer                                                                                                                                          Standalone leisure units    Leisure scheme with some retail
demand. Non-ticket expenditure rose from £350 million
                                                                                                                                                                                              Source: Savills, Dodonoa
to £452 million over the five years to 20168. Other
6 Source: Dodonoa
7 Source: Dodonoa
8 Source: Dodonoa

16
2018 The Future of Leisure

New multiplex openings                                 Development on new multiplexes is cyclical and
                                                       mirrors wider property market trends, particularly
 Table 3                                               shopping centre construction. New openings have
                           Sites   Screens             recovered since the Global Financial Crisis (Table 3),
                                                       but remain below the peak of 284 screens opened in
2010                        5        46
                                                       2001.
2011                        7        58
                                                       The occupier base is highly concentrated: the top-
2012                        4        27
                                                       five exhibitors shared a 79% share of gross box office
2013                        8        64                revenues in the UK in 2015, with 69% attributed to the
                                                       top-three exhibitors. Recent consolidation of multiplex
2014                        5        38
                                                       brands and an increase in the boutique offer has
2015                        16      132                resulted in the top three multiplex operators (Odeon/
2016                        14       96                Cineworld/Vue) now operating around 65% of schemes
                                                       in the UK (Table 4).
Source: Savills, Dodonoa

The cinema operator base is highly concentrated
 Table 4
                                          Sites 2009               Sites 2017              % of screens
Odeon                                        116                      110                        26
Cineworld                                    76                        97                        28
Vue                                          68                        85                        24
Picturehouse                                 19                        24                        2
National Amusements                          21                        21                        8
Everyman Media Group                          9                        20                        1
Reel Cinemas                                 17                        15                        2
Merlin Cinemas                               n/a                       14                        1
Curzon                                        5                        14                        1
Empire Cinemas                               17                        13                        4
Omniplex                                     n/a                       13                        3

Source: Savills, Dodonoa

                                                                                                                17
Legal & General Investment Management, Real Assets

Implications for owners                                       Cinema rents have risen to over £14 per
                                                              square foot
Vital statistics
                                                                              Chart 7
•• Average cinema floorplates are around 40,000 –
     45,000 square foot                                                       15

•• Floorplates are slightly smaller in shopping centres
     at around 38,000 square foot

•• Schemes can range in size from as small as 7,700                           14

                                                                £ per sq ft
     square foot up to 120,000 square foot

•• The largest schemes are located out-of-town due to
     cheaper rents                                                            13

Rents
The importance of cinema rental income to leisure
property owners cannot be understated; a cinema can                           12
account for over 80% of contracted cashflow on some                                    2010     2011    2012    2013    2014      2015   2016   2017

schemes!9                                                            Source: Savills

•• Average rents paid by cinema operators on leisure
     schemes increased from £13 per square foot to over       There is significant regional variation
     £14.30 in eight years, an annual increase of 1.3% per    in rents
     annum10 (Chart 7). This just outpaces the increase in
                                                                              Chart 8
     revenues over the same period
                                                                              40

•• The cinema rental tone varies by region, and if                            35
     the cinema is located in- or out-of-town (Chart 8).                      30
     In 2017, there was a difference of around £3.50 in
                                                                              25
     average rents between in-town (£16.83) vs. out-of-
                                                              £ per sq ft

     town locations (£13.27)                                                  20

                                                                              15
••   There is also significant regional variation: over £13
                                                                              10
     per square foot between in-/out-of-town schemes
                                                                               5
     in the East Midlands whilst in Wales and the West
     Midlands cinema rents on leisure parks were higher                        0
     than their in-town comparables. This dynamic
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     illustrates the extent to which a strong out-of-town
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     can dominate a high street offer (and vice versa)
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                                                                                              In-town rent     Out-of-town rent     Max 2017 rent
•• The rental range is wider for in-town locations; from             Source: Savills
     £12.76 up to £24.17 in 2017, compared to £10.63 and
     £15.50 on out-of-town schemes, due to polarisation
     in performance of town centres across the UK

9 Source: LGIM Real Assets
10 Source: Savills

18
2018 The Future of Leisure

Near-term trends
Property                                                              “We aspire to create both a destination
                                                                      and experience, with the installation of
Development hierarchy
                                                                      market-leading reclining seating a key
Focused on three types of cinema:                                     feature. Retail is also being used as part
•• Large-screen, technologically advanced formats                     of a wider strategy to both enhance
•• Family-orientated cinemas in smaller catchment areas               experience and explicitly generate
                                                                      revenue.” ODEON
•• Luxury boutique cinemas aimed at adult consumers
“Cinema operators are improving their retail offer,
speeding up service, targeted offers, refining the
product mix. This helps create segments within the
consumer journey: coffee/film/food.” ODEON

Smaller auditoria
Clear trend towards progressively smaller auditoria.
Between 2010 and 2015 the number of cinema screens
in the UK rose by 10%, but the increase in seat
numbers was less than 1%. Most capital expenditure
continues to be focused upon building new multiplexes
or modernising existing ones.11

                                                           Source: Odeon

                                                          Premium – but no budget
                                                          The premium cinema offer continues to mature, driven
                                                          by boutique operators such as Everyman. Multiplex
                                                          operators are also broadening their proposition to
                                                          encompass the burgeoning premium sector: Odeon
                                                          has launched the “Lounge” brand, whilst Cineworld
                                                          has introduced “Screening Rooms” to some schemes.
                                                          However, there is very little evidence of an emerging
                                                          budget cinema offer.

 Source: Odeon

Multiplex evolution
IMAX technology already seems mainstream!
Operators are now focusing on installing moveable
seats and superior audio systems to maximise the
viewing experience, with greater investment in seats as
it is this that creates the biggest impact for viewers.

11 Source: LGIM Real Assets

                                                                                                                   19
Legal & General Investment Management, Real Assets

Restaurants
The “here and now”
The restaurant sector represents one of the most
dynamic areas of the leisure market today. As mirrored
in other areas of the consumer services market, the
occupier base has segmented into a hierarchy of
budget, midmarket and premium offers, alongside a
burgeoning “fast casual” or grab-and-go market.
                                                                                                               Source: Five Guys

Household spend on eating out is                                                                              •• A polarisation between health-conscious offers vs.
relatively stable                                                                                               “dude/dirty food’

                  Chart 9                                                                                     •• Expansion of coffee shops against the decline of
                  3,100                                                                                         traditional wet-led pubs as lifestyles change
                  2,900

                  2,700                                                                                       •• The rise of third-party delivery services such as
                                                                                                                Deliveroo.
£ per household

                  2,500

                  2,300

                                                                                                                Deliveroo has added
                  2,100

                  1,900

                  1,700

                  1,500
                                                                                                                11% to takings.
                                                                                                                                                        FIVE GUYS
                          2009

                                 2010

                                        2011

                                               2012

                                                      2013

                                                             2014

                                                                    2015

                                                                           2016

                                                                                  2017

                                                                                         2018

                                                                                                2019

                                                                                                       2020

                                               Restaurant spend per household

          Source: Oxford Economics, Pitney Bowes
                                                                                                              Life on the ground
                                                                                                              The number of restaurants has grown by only 0.4%
The amount spent on eating out by households has
                                                                                                              between 2014 and 2016, but this does not reflect
been relatively consistent at around £2,900 per year,
                                                                                                              the change happening on the ground; notably the
which is expected to continue at this level over the
                                                                                                              demise of many owner-occupied operations against
near term (Chart 9). However, these headline numbers
                                                                                                              the rise of corporately-owned brands. The increased
are not representative of the on going change in
                                                                                                              corporatisation and dominance of the “casual dining”
spending patterns. Whilst the absolute amount spent in
                                                                                                              market is reflected in Table 5, which illustrates how
restaurants and cafes has held fairly static, the number
                                                                                                              some of major restaurant brands in the UK have
of transactions has risen by around 3% per annum over
                                                                                                              achieved huge increases in the number of units within
the past three years as prices fall and visits increase to
                                                                                                              the leisure universe since 2009.
lower price-point outlets12. Other recent trends include:
                                                                                                              Restaurants are an integral part of the leisure universe;
•• The growth in “casual dining’, which has                                                                   as much an anchor on schemes as a cinema and an
                  democratised dining – eating out is no longer a treat
                                                                                                              important reason for why people will visit a leisure
                                                                                                              destination. In 2017 there were 71 different brands
•• The globalisation of food offers, with cuisines from                                                       across 945 locations within the leisure universe14.
                  around the world
                                                                                                              As can be seen in Table 6, the large majority of out-of-
                                                                                                              town parks and leisure/retail schemes contain at least
•• Brand agnostic customers: one in two restaurant                                                            one restaurant.
                  visits made by London consumers are to a new
                  restaurant13

12 Source: Global Data
13 Source: CGA
14 Source: Savills

20
2018 The Future of Leisure

Restaurants are an integral component in                           Recent issues
leisure schemes
                                                                   Expansion
   Table 5
                                                                   Table 5 highlights the large increase in the number
                                                                   of units from some of the main restaurant operators
                          2009             2017         % change
                                                                   in the UK. Since 2016 the restaurant sector has come
 Pizza Express             346             450             30.1    under increased scrutiny for the scaling-up of mid-
 Nando’s                   222             378             70.3    market and fast casual brands across the UK. This
                                                                   created a number of issues:
 Frankie &
                           172             262             52.3
 Benny’s                                                           •• Motivation for expansion activity varies. If it
 Prezzo*                   125             258             106.4     is driven by number of units, rather than just
                                                                     profitability, this can lead to a take-up at all odds and
 Pizza Hut                 391             242             -38.1     “pay whatever it takes” mentality
 Zizzi                     107             144             34.6
 Wagamama                   64             124             93.8
                                                                   •• This has driven up rents in some high-demand
                                                                     locations to the point that total occupancy costs
 Bella Italia               83             112             34.9      become unaffordable
 Carluccio’s*               39              94             141.0
                                                                   •• Some businesses becoming loaded with debt to
 Cote                                                                underpin expansion plans
                            10              87             770.0
 Restaurants
 Café Rouge                113              85             -24.8   •• Cannibalisation of sales as markets become
                                                                     saturated, particularly within the mid-market

   Table 6
                                                                   •• High rents and a lack of tested covenants mean
                                         % with restaurants          many restaurateurs were unwilling to sub-let

 Out-of-town leisure park                         85%
                                                                   •• Ultimately: weaker businesses going into a CVA or
 In-town leisure scheme                           67%                administration, or unsupportable “tail end” units
                                                                     closed
 Standalone leisure units                         12%
 Leisure scheme with
                                                  91%              •• Long leases and City/Town focus movement
 some retail
                                                                   In some instances the core business was successful, but
 Source: Savills
                                                                   brands scaled up too quickly and into the wrong locations
                                                                   and often into the wrong properties. Is it very hard to
*Both Prezzo and Carluccio’s have recently entered Company         determine which sites are going to cannibalise others;
Voluntary Agreements whereby they have closed a number of their    it is an art not a science. Some catchments can tolerate
loss making stores.
                                                                   another fascia, some can’t. The average person on the
                                                                   street doesn’t think about this; they just go out to eat.
PIZZA HUT

Restaurant concepts that move out of London need to
allow themselves time to mature in regional markets,
where there is not necessarily the critical mass of local
and transient consumers to visit week after week.

                                                                                                                           21
Legal & General Investment Management, Real Assets

THE RESTAURANT GROUP

Customer numbers haven’t necessarily dropped
but due to competition across the country
profits have fallen. Our main aim is to increase
profits again as turnover remains stable.

Cost headwinds                                            These can be split into fixed and variable costs
                                                          (Table 7), which has resulted in specific issues for
The restaurant sector has not been immune to the
                                                          restaurants:
problems in the wider retail market of the many cost
headwinds placing downward pressure on operating
margins.                                                  •• Units must make a profit on a standalone basis to be
                                                            sustainable; even if revenues are rising this may not
                                                            be enough to offset the increased cost base
Restaurateurs are grappling with a range of
cost headwinds                                            •• 69% of businesses increased their prices during
                                                            201715. When costs rise, the natural instinct is to cut
     Table 7                                                prices, cut portion sizes and cut the hours of staff.
 Fixed costs                 Variable costs                 This makes the unit even less attractive speeding up
                                                            the downward spiral
 Rents: rising around 3%     Food prices: rising, as
 p.a. but higher in high-    seen in supermarket          •• Third party delivery companies, such as Deliveroo,
 demand locations            sector                         are viewed as both a help and a hindrance. They can
 Business rates: have                                       account for 50% of sales in some sites, but at a huge
                             Currency: fall in sterling     cost to operators
 increased significantly
                             pushed up input prices
 in some locations
 Fit-out costs: brand
                                                          •• The greatest immediate concerns for restaurant
                             Staff shortages: vacancy       operators are staff shortages, the increased cost of
 standards and desire                                       imports and rising rents16
                             rates are highest in the
 for experience hiking
                             hospitality sectors
 up costs
                                                          •• There is some variance by size. Operators with
 Payroll costs: increasing                                  smaller portfolios are more concerned with rising
 due to statutory rises,                                    material costs and food prices, presumably because
 pensions, Apprenticeship                                   they cannot buy at scale. Operators with larger
 levy                                                       portfolios are concerned with the rise in business
                                                            rates and the possible impact of terrorism activities
 Source: LGIM Real Assets

15 Source: Savills
16 Source: CGA

22
2018 The Future of Leisure

“At the root of the problem is the fundamental             Rents
juxtaposition of the commitment required by A3
                                                           Restaurant rents in the UK have risen by around 3%
occupiers vs. the nature of the casual dining market.
                                                           per annum since 2009 (Chart 10)17. For prime pitches,
High fit-out costs and overheads, long paybacks
                                                           the rental tone has been pushed up by new entrants
and the low liquidity of assets (in poorer markets)
                                                           fighting for space; one of the reasons cited for the
inherently jars with the ever changing demands of
                                                           current distress in the market. Table 8 illustrates the
consumers.” PIZZA HUT
                                                           rental differential by type of scheme, whilst Chart 11
                                                           depicts the range of rents by location and region.
“Since the Referendum vote around £30 million has
been wiped off the bottom line due to exchange
rate movements, business rate increases and wage
                                                           Restaurant rents have risen strongly
inflation.” CASUAL DINING GROUP                                     Chart 10
                                                                         40
Implications for owners
                                                                         35
Vital statistics

•• The expense of fitting out a restaurant is enormous:                  30

  up to a million pounds for some of the higher-end                      25
  London restaurants, but even a mid-market casual
                                                           £ per sq ft

  dining unit can cost over £500,000 to fit out to brand                 20
  standards. This puts significant pressure on revenues
                                                                         15
  to justify costs
                                                                         10
•• Lease lengths have traditionally been long to allow
  for these costs to be amortised. However, lease                         5
  lengths are now coming down as owners include
  longer rent-free periods as market dynamics change                      0
                                                                              2009   2010   2011   2012    2013   2014   2015    2016   2017

•• As consumers and restaurateurs become more                   Source: Savills

  social media aware, there is greater awareness of
  what fixtures and fittings look good in photographs      In-town rents usually higher than out-of-town
  and on websites: better lighting, distinctive features
                                                                    Chart 11
  and attractive crockery
                                                                         40

“We are looking at the opportunities that exist for                      35

Pizza Hut… a smaller, more convenience-driven                            30
offering is where we see an opportunity for our
                                                                         25
brand… it’s also more about “assisted service’, with
                                                           £ per sq ft

                                                                         20
the focus skewed to speed and price.” PIZZA HUT
                                                                         15

                                                                         10

We have trialled one                                                      5

                                                                          0

smaller format store of
                                                                                     n

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                                                                                            In-town rent      Out-of-town rent
NANDO’S
                                                                Source: Savills

17 Source: Savills

                                                                                                                                               23
Legal & General Investment Management, Real Assets

•• The average restaurant rent in 2017 was £35 per         Restaurant rents are higher in-town
     square foot. Rental growth on leisure schemes         and in retail-dominated locations
     has been more modest than in some city centre
     locations, where there are now regular examples of     Table 8
     headlines rents reaching over £50 per square foot                                        2017     2017
                                                                                             average   max
•• Those schemes that are more orientated towards                                              rent    rent
     retail command higher rents, particularly
                                                           Shopping centre                     38      344
     high-footfall in-town locations where max rents in
                                                           Leisure scheme with some retail     29      50
     2017 easily exceed three figures
                                                           Retail park                         26      61
•• The majority of average rents are higher in-town        In-town leisure scheme              26      147
     compared to out-of-town locations. However, there     Out-of-town leisure park            23      43
     are some notable exceptions in the East of England    Standalone leisure units            23      37
     and the North East restaurant rents are higher out-
     of-town                                               Source: Savills

•• The range of average restaurant rents is highest in-
     town at £26 per square foot, led by Greater London.
     The Capital also commands the highest out-of-town
     restaurant rents, although the range is smaller
     across parks at just £7 between the most and least
     expensive regions

 Source: Nando’s

24
2018 The Future of Leisure

 Source: Pizza Hut

Near-term trends
Property                                                   Eating experience
                                                           Creating a convivial dining experience is incredibly
Dynamic dining
                                                           important for restaurateurs, particularly to ensure
Consumer appetite for experience has translated            repeat business. This encompasses a number of
over into the food market. This has driven the strong      factors: the quality of the food, the fit-out and the
growth in food markets (also leveraging off demand         quality of the service.
for “localism”), dining concepts such as supper clubs
and pop up restaurants, and restaurants with a strong      Experience can also go beyond service to using food
“omni-channel” offer i.e., are active on social media      as an educational tool or medium for demonstrations
platforms.                                                 and workshops. This expands your market, changes
                                                           demand patterns around time of day and diversifies
British Street Food, run by Richard Johnson ex-            your offer. It also helps foster repeat visits if managed
journalist for the Independent was inspired by the food    correctly and embeds the restaurant backstory with
markets of New York where you can “eat the world”.         consumers.
The company liaises with small-scale, but successful
restaurants in London to take temporary sites in           “A new Pay on Entry concept is being trailed across a
regional markets. Strategic use of social media, apps      number of units. Customers want to be in control of
and a website promotes the backstory of each vendor,       their time and experience is increasingly where this
with particularly successful ventures taking leases in     market is going – I can’t see any change in this course.
local units. The long-term view is that more brands will   This is an important change in the service model,
transfer between temporary food venues and bricks          which appeals to customers because they are in charge
and mortar units as operational strategies evolve and      of the pace of their meal… It works for us because it is
new markets open up.                                       more efficient and reduces costs.” PIZZA HUT

“There is no going back for the street food trend. It      “I see a fine balance between “customer control” and
is part of the British disinvestment from formality to     “offering an experience” – getting this right is key to
acceptance that we no longer need a knife and fork to      the future of casual dining.” PIZZA HUT
eat food.” BRITISH STREET FOOD

                                                                                                                   25
Legal & General Investment Management, Real Assets

The future is efficient                                    “Delivery is only a small part of our business, but we
                                                           ensure new units are future-proofed by embedding
Consumers are demanding a change in the model
                                                           separate entrances and bike parks for delivery drivers
towards self-service, but it has important implications
                                                           so the dining out experience isn’t eroded for other
for operators too. It can save on labour, service times
                                                           diners.” NANDO’S
and make a huge difference in underperforming
stores (because you are making the customer do the
                                                           “We sometimes take out tables to maximise the
work!). This can help combat cost and payroll inflation.
                                                           customer experience, which can seem counterintuitive
The success of self-service drinks in some concepts
                                                           but works for us.” NANDO’S
suggests this will work in the UK.

An established model in retail, Click & Collect, is        Operations
increasingly being used by restaurant operators.
                                                           More administrations
Click & Collect is an extension of takeaway and online
ordering, offering the benefits of delivery (more          The trading environment of the UK restaurant market
customers and more revenue), with less operational         is going to continue to be challenging in the near
and margin impact. Taking third party distributors out     term, particularly for casual dining operators and
of the equation means commission chargers are lower;       independent operators with no point of difference. The
the restaurant can collect data and build on customer      market has moved on from the 1990s model where
relationships. This channel grew by 16% between June       location, range and price was enough to underpin a
2016 and June 2017 compared to 8.9% for delivery.          successful business.

                                                           Sector growth will be subdued but will not decline;
     “Units are being forced to work harder, such          many casual dining operators still have good concepts
     as our new Pay on Entry offer and other               and pricing, just too many sites.
     P&L savings. Reduction in kitchen size is
     something that needs to feed through to               Whilst CVAs only add further negative sentiment into
     other restaurant concepts.” PIZZA HUT                 the market, there are many successful examples e.g.,
                                                           Azzurri (who own Zizzi’s). Problem assets are often
                                                           removed from portfolios through this process, which
                                                           can bolster stability and strengthen balance sheets.

                                                           “Apollo [backers of Casual Dining Group] fully back
                                                           the existing core business and want to see continual
                                                           investment into the existing portfolio.” CASUAL
                                                           DINING GROUP

                                                           “It is the operators who cannot respond and change,
                                                           or reinvigorate their offering quickly enough that have
                                                           suffered and will continue to do so. Underpinning this,
                                                           if brands expand too quickly into unfamiliar territory,
                                                           taking large units on long-term financial commitments,
                                                           they are exposing themselves to far greater degree of
                                                           risk and inflexibility.” PIZZA HUT

 Source: Pizza Hut

26
2018 The Future of Leisure

 Source: Nando’s

Growth hotspots                                          “We believe there is still plenty of room for growth in
                                                         the casual dining market. The best operators are aware
•• There is always going to be a place for chains        of the demand ceiling within a micro-location – where
  in the market. Those that get it right with timing,    if you add just one more restaurant then it will start to
  marketing, fit-out, price and offer will continue to   cannibalise sales from other units.” NANDO’S
  be successful
                                                         “We are planning another 20 openings in the UK this
•• Smaller, branded groups are anticipated to be the     year.” FIVE GUYS
  most expansionary; brands such as Turtle Bay,
  Honest Burger and Franco Manca                         “We have a very strong country pub business that we
                                                         are looking to expand and are still acquiring for our
•• Further expansion of the “grab and go” market,        core brands.” THE RESTAURANT GROUP
  particularly in high street locations where
  convenience is key                                     “There is a lot of R&D going into developing meat-free
                                                         options, which speaks to both the healthy lifestyle and
•• A resurgence of the pub sector, led by those with     environmental consumers agendas – these options
  strong food offers, strong brands and a distinctive    complement the existing core menu. No move away
  fit out (New World Trade, Living Ventures, Brewhouse   from chicken being planned!” NANDO’S
  and Kitchen etc.)

•• Local talent; regional owner-occupiers with a
  unique or high-quality offer that know their local
  market. These can often be more nimble than larger
  operators, making quicker decisions

                                                                                                                27
Legal & General Investment Management, Real Assets

Health and fitness
The “here and now”                                                       The economic recession of 2007-2010 was the catalyst
                                                                         for the polarisation of a number of consumer markets,
The health and fitness market has experienced strong                     including health and fitness. Budget operators started
growth in demand. This is illustrated by the number                      to offer low-cost membership with minimal or no
of gym memberships in the UK; having held relatively                     joining fees, 24-hour access or drop-in sessions.
static at around seven million people from 2007 to 2012,                 This format has been scaled up across the country,
membership rates started to rise sharply from 2013                       particularly in high-footfall locations.
onwards (Chart 12). This translates to a penetration rate
of around 15% for the UK, of which 10% is private club                   Four of the top ten operators in 2017 are a budget
membership18. Between the top ten private operators                      format. This compares to only three small-scale
there are 3.6 million members, an increase of just under                 operations in 2009. Pure Gym, with 176 sites across
20% on the previous years’ top 1019.                                     the UK, is the top private operator. The total number of
                                                                         budget gyms is expected to pass the 1,000 mark over
The rise in gym membership and participation in                          the next 12 months as their success brings more people
exercise classes has been attributed to:                                 into the market.

•• Greater levels of disposable income                                   At the other end of the spectrum is the premium, full-
                                                                         service offer (mostly in London or large city centres).
•• Promotion of benefits of healthy lifestyle by public                  These operators must provide a level of service and
           sector bodies                                                 experience to justify the high fees, often focusing on
                                                                         just one type of activity such as cycling or yoga. The
•• Increasing variety of clubs and concepts, in                          polarisation has led to a squeezed mid-market, with
           convenient locations                                          previously dominant operators such as Fitness First
                                                                         being acquired by DW Fitness alongside the disposal
•• Popularity of low-cost models with 24/7 access                        of sites to other operators, whilst Virgin Active has
                                                                         disposed of sites around the country.
•• Greater uptake of premium “lifestyle” offers             20

                                                                         Life on the ground
UK gym membership has risen strongly
                                                                         In 2017 there were thought to be around 62 gym brands
since 2013
                                                                         operating across 4,430 locations in the UK, a significant
           Chart 12                                                      increase from the 33 brands across 1,100 sites recorded
                                                                         in 2009. If smaller, independent units are included this
           12
                                                                         rises to around 6,70021.
           10
                                                                         In 2009, the sector was dominated by Fitness First with
           8                                                             a tail of other brands owning fewer than 70 sites (Table
Millions

                                                                         9). In 2017, the composition of the market has changed
           6                                                             dramatically: six of the top ten operators are relatively
                                                                         recent entrants to the market, with the top four
           4
                                                                         operators managing over 100 sites. The top 10 account
                                                                         for just under a quarter of private gyms, but have over
           2
                                                                         half of total membership and generate 60% of market
           0                                                             value. This compares to 22% of the market and 56% of
                2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
                                                                         market value a year ago, suggesting that the strong are
     Source: LeisureDB                                                   getting stronger and dominating the market22.

18 Source: LeisureDB
19 Source: Savills                                                       21 Source: Savills
20 Source: LGIM Real Assets                                              22 Source: Savills

28
2018 The Future of Leisure

Gyms on leisure-specific schemes account for only                           Gym operators are an important occupier
around 8% of the national supply, but are the location                      on leisure schemes
for around 20% - 50% of the sites of the top-ten
operators. Around half of in and out-of-town leisure                                            Chart 13
specific schemes include a gym or health club, which                                                70
rises to around two thirds of locations that contain
a mix of retail and leisure units (Chart 13). A large                                               60
number of gyms can also be found on the high street,
                                                                                                    50
outside of the leisure investable universe.

                                                                            % of schemes with gym
                                                                                                    40
The composition of the gym market has
                                                                                                    30
changed dramatically in eight years
   Table 9                                                                                          20

                           Clubs                                    Clubs                           10
 Brand                                 Brand
                           2009                                     2017
                                                                                                     0
 Fitness First               153       Pure Gym                      176                                 Leisure scheme In-town leisure   Out-of-town     Standalone
                                                                                                         with some retail   scheme        leisure park   leisure units
 Virgin Active               69        DW Fitness*                  133
                                                                                       Source: Savills

 LA Fitness                  65        Anytime Fitness               111

 David Lloyd                 64        Nuffield Fitness              111
                                                                            Implications for owners
 Bannatyne                   54        The Gym Group                 91     Vital statistics

 Esporta                     50        David Lloyd                   83     •• The average size of a gym in the investable universe
                                                                                                    is around 28,000 square foot
 Marriott                    45        Energie Fitness               74

 Livingwell                  38        Bannatyne                     67
                                                                            •• There are distinct size requirements by location
                                                                                                    and format of operator (Table 10). Larger clubs are
                                                                                                    situated out-of-town, ranging from 25,000 square
 Energie Fitness             23        Virgin Active                 61
                                                                                                    foot up to 40,000 square foot
 Total Fitness               18        Xercise4Less                  47
                                                                            •• Gyms in more urban locations can be a quarter to a
 *Includes Fitness Firsts acquired by DW Sports but still trading                                   tenth of the size, down to just 2,000 square foot on
 as Fitness Firsts.
                                                                                                    some high streets
 Source: Savills

                                                                                                                                                                         29
Legal & General Investment Management, Real Assets

There is a variety of size requirements across the health & fitness market
     Table 10
                                Brands                        Typical size requirement          Location type
                                                                                                Out-of-town parks, single
 Health & fitness clubs         David Lloyd/Virgin Active     25-40k sq ft
                                                                                                units
                                                              10-18k
 Budget gyms – larger          EasyGym/Pure Gym                                                 Retail parks, town centres
                                                              (but also 6-8k) sq ft
 Budget gyms – smaller         Anytime Fitness                4-5k sq ft                        High streets
 Boutique fitness clubs        F45/Psycle                     2-4k sq ft                        High streets

 Source: Savills

Rent                                                             (Franchised) fitness for all

The rental tone for gym or health clubs within the               The franchise model has allowed operators to scale up
leisure investable universe has remained static at               quickly. Gym groups continue to expand strongly in the
£10 per square foot since 2009. This is not reflective           regions; growth has not just been London-centric.
of trends within the wider market where gym rents
increased to £11 – £12 per square foot in 2017 on                Squeezed mid-market
regional retail schemes. Anecdotally, rents have                 Budget operators are expected to expand rapidly
reached £50 per square foot on prime London high                 alongside the boutiques, which means the pressure on
streets for smaller floorplates23.                               the middle market is not going to ease soon.

Near-term trends
Property
Smaller formats
New budget/super-premium brands are expanding but
taking smaller units. The focus of the latter is on shorter
classes rather than the provision of large gym floors.

 Source: LGIM Real Assets

23 Source: LGIM Real Assets

30
2018 The Future of Leisure

Operations
International target
Many of the newer brands opening in the UK are
international; Barry’s Bootcamp, Psycle, F45.

There are some commonalities:

•• Flexible use: pay-as-you-go model allowing urban
  consumers to be flexible and avoid annual fees

•• Sense of community: positioned not only as places
  to work out, but hubs to socialise with like-minded
  people

•• Strong lifestyle message: marketed as physically
  effective and socially desirable                      Price ceiling
                                                        Whilst super/premium brands have relatively small
                                                        estates in the UK at the moment, the number of units
                                                        in the US suggests there is substantial headroom in
                                                        the UK. The challenge will be to provide an overall
                                                        quality of experience that is considerably superior to
                                                        that offered by low-cost rivals (and justifies their fees).

Budget bubble
Low barriers to entry mean that the expansion of
budget brands has been rapid. Whilst budget business
plans may include strong expansion plans, some
locations are now becoming saturated. Areas of the
mid and even premium market have already been
cannibalised, with budget operators now fighting for
the same customers on the same sites.

                                                                                                                 31
Legal & General Investment Management, Real Assets

Traditional “big box” leisure
The “here and now”
Falling under the D2 planning use classification, these       per head of population are also low, suggesting there
operators are long-standing legacy occupiers; family-         could be significant room for growth if operators are
orientated social pastimes such as bowling, bingo             able to attract more customers through the door.
and gambling that have a sustained history in British
culture. Whilst many thought that the smoking ban             “Customers are generally brand agnostic when it
would pose a huge threat to these types of operators,         comes to bowling, so it’s important that a USP is
the opening of new leisure parks and shopping                 created with a modern fit-out, investment in team
schemes, extensive capital expenditure on existing            training and additional services. Wifi is also critical.”
schemes and an increased focus on the consumer                HOLLYWOOD BOWL GROUP
experience has resulted in many original names still
present in the UK today.                                      These types of operators are also an important occupier
                                                              group within the leisure universe. Whilst the cinema
Activity pricing is often very competitive, relative to       operators and restaurants may attract the headlines
other leisure experiences. However, these activities are      and headline rents, Table 11 illustrates how prevalent
often low frequency; almost 70% of consumers have not         these operators are across leisure schemes and thus
participated in ten-pin bowling over the past 12 months,      are still important footfall drivers – particularly bowling
compared to 32% for cinemas24. The penetration rates          operators.

Traditional operators can be found across all types of scheme
     Table 11
                                                % schemes                 % schemes                 % schemes
                                               with bowling               with bingo                with casinos
Out-of-town leisure park                            49%                      32%                          6%
In-town leisure scheme                              16%                       6%                         17%
Standalone leisure units                            5%                        8%                          2%
Leisure scheme with some retail                     28%                      16%                         16%

 Source: Savills

Life on the ground                                            reduced as other ancillary activities increased. Despite
                                                              recent corporate activity, it remains a fragmented
BOWLING: ten-pin bowling is estimated to account              market broken into four types of operator:
for less than 1% of leisure market share by value,
but grew by 6.7% in 2016 – the fourth consecutive             •• Major multiples (c71% market share): five or more
year of growth25. The sector has enjoyed a recent               schemes, with the top three controlling 50% of all lanes
resurgence due to corporate consolidation, significant
refurbishment activity and the opening of new schemes.        •• Other multiples (c5% market share): fewer than five
Branded operators such as Hollywood Bowl Group have             centres
also focused on greater consumer engagement and
re-orientating its proposition towards being a family         •• Urban bowling operators (c7% market share):
activity. Ten-pin bowling has also benefited from being         catering primarily for professionals in city centre
a highly-accessible form of family entertainment, with          locations, with an emphasis on food and beverage
little reliance on alcohol sales.
                                                              •• Independent operators (c17% market share): single
The number of centres has remained relatively static            centres that are typically smaller and in tertiary
over the past decade, whilst the number of lanes has            locations

          24 Source: Hollywood Bowl Group
32
          25 Source: Hollywood Bowl Group
2018 The Future of Leisure

  “We have an intentionally
  family-focused offer; household
  expenditure on bowling has
  proven to be more resilient
  during economic downturns.
  We represent good value
  for money, with the average
  adult game only £6.00 and
  people prioritise family time”
  HOLLYWOOD BOWL GROUP

The bowling market is comprised of 145 branded             The casino industry has consolidated
locations within the leisure universe, up from 122 in
2009. It is led by Hollywood Bowl Group. In 2017 the          Table 13
Group operated 319 schemes across the UK, of which                                             2009            2017
43 are within the leisure universe (Table 12).
                                                            Rank Group                           32             63
                                                            Genting UK                           45             41
The bowling market is led by
Hollywood Bowl and Tenpin                                   Others                               28             33

  Table 12                                                  Caesars                              11             9
                                                            Gala Coral Group                     27             0
            Schemes in investable universe 2017
                                                            Total                               143            146
Hollywood Bowl                           43
Tenpin                                   40                  Source: The Gambling Commission

MFA Bowl                                 28                BINGO: “In-person” participation in bingo increased
AMF Bowling                               11               by 2% between 2013 and 201626, but growth has been
                                                           driven by use of machines rather than hall-based
Namco Futurescape                         8
                                                           games. There are thought to be 583 bingo halls in the
Superbowl                                 6                UK. It is a fragmented market outside of the main
                                                           brands, with approximately 365 operators in places
All Star Lanes                            5
                                                           such as working men’s clubs and holiday parks27. There
Bowlplex                                  4                are thought to be only 99 bingo halls located within the
                                                           leisure universe.
 Source: Savills

CASINOS: there are thought to be 146 casinos in Great
Britain, 22 of which 45 are within the leisure universe.
The number of casinos has held relatively static since
2009, dominated by Rank Group and Genting UK
(Table 13). The casino market is heavily regulated and
gambling rates in the UK are falling. If the National
Lottery is excluded, only around a third of the adult
population gamble on a regular basis.

                                                           26 Source: Gambling Commission
                                                           27 Source: Gambling Commission

                                                                                                                      33
Legal & General Investment Management, Real Assets

Implications for owners
Vital statistics
•• Bowling operators require units sized between
     15,000 – 30,000 square feet

•• The more “traditional” operators are usually located
     within leisure schemes and shopping centres
                                                            Source: Hollywood Bowl Group
•• Urban operators require units in prime shopping
     centres and high streets, with character buildings    Operations
     preferred
                                                           Online threat
                                                           Participation rates for bingo and gambling are rising in
Rents                                                      aggregate – but this is due to the increased popularity
•• Bowling rents within leisure schemes average            of online platforms.
     around £8 – £9 per square foot and have been
     consistent since 2009                                 Ancillary income
                                                           There is a greater focus on catering, retail and
                                                           amusement arcades from operators; all forms
Near-term trends                                           of ancillary income. This is important if all the lanes/
                                                           tables are full; it keeps people spending!
Property
Experience                                                 Operational efficiencies
                                                           As the development of new schemes slows,
Like other leisure operators, bowling operators are
                                                           operational strategy is focused on increasing visit
attuned to consumer demand for experience and are
                                                           frequency (which can be very low when compared to
segmenting their offer to make it more relevant to
                                                           eg. the cinema) and spend per visit.
distinct groups and wide market appeal.
                                                           Value for money
“We believe there is room for growth in the bowling
                                                           Many operators are positioning themselves as “value
market from those operators able to capitalise on
                                                           for money” rather than “value’, arguably making them
the consumer preference for experience. We enhance
                                                           more defensive against economic instability.
experience through upgraded seating, bars, a great
food offer and VIP areas. We are also focusing more
on leveraging social media to promote our product
eg. people can directly upload photos and scores onto
their social media pages.” HOLLYWOOD BOWL GROUP

Service on demand
Cashless payment systems can speed up transactions
and eventually allow for loyalty-driven variable pricing
or customer loyalty incentives.

                                                            Source: Hollywood Bowl Group

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