Private equity consumer themes of 2022 and beyond

Dark kitchens

Dark kitchens have surged in popularity, responding to the need for contactless food delivery. Although dark kitchens are still a small part of the restaurant mix – representing 10-15% of total orders – there is “a lot of room to grow”, particularly outside London, a former director at a global QSR said. During a period of squeezed cash flow over the next couple of years, more businesses could turn to the dark kitchen model as a lower CAPEX alternative. Over the past year there has been an increase in the number of start-ups that have launched via a dark kitchen – and have had “real traction” doing so. Many dark kitchen providers are in the technology space, with a sharper focus on packaging, delivery and fulfilment.

There are three main dark kitchen models: the aggregator, with infrastructure and some equipment provided, plus commission; third- party, which charges a deposit, rent, maintenance and commission; and proprietary, requiring GBP 150,000- 300,000 in CAPEX. The latter is expected to represent a smaller slice of growth. Key players include: Deliveroo Editions, FoodStars, Jacuna, Growth Kitchen and City Kitchen Pod, respectively, by footprint.

UK spreads market

Across Europe, butter and margarine costs have been rising, with the latter increasing by 20% over the past two years, a former manager at Upfield Europe BV said. The Interview on Upfield and the UK spreads market also revealed that price increases and lower disposable income is unlikely to impact the butter-margarine share dynamic, but could drive private label share gains, potentially becoming a permanent shift for some consumers. Although costs are beginning to flatten, the specialist said the peak may not have yet been reached.

Price increases are unlikely to influence whether customers choose to purchase butter or margarine, according to the specialist, who believes that such decisions are driven primarily by marketing. Although successful in the Netherlands, effecting a similar change in consumer perception in France, Spain and Eastern Europe would require significant marketing spend.

We also heard that switching from rapeseed oil to coconut skin or bamboo oils could save 300-400 bps of gross margin, but requires CAPEX for extraction and R&D to limit the taste change. Further innovation could stem from paper packaging, which is cheaper vs plastic, as well as removing unnatural ingredients and adding functional health benefits, such as supplements including calcium.

North American car wash industry

Customer experience is becoming increasingly important in the US car wash space, where there is also a shift underway from “do it yourself to do it for me”. The industry is highly fragmented and is experiencing “rapid consolidation”, which a VP at a US car wash platform expects to continue over the next 3-5 years. The ultimate winners will be those with density and the leverage to offer to memberships, they said. The cost of opening a car wash “all in” typically ranges from USD 4-6.5m, with typical maturity in 18-24 months, we were told. Breaking even depends on cost of capital and project costs, but typically margins should be 50-60%

The specialist also sees scope for attractive tie-ups in some regions. “A lot of the larger players are focusing on people that have 10 washes or more, I think they’re very ripe if they’re willing to sell, to get acquired by the larger platforms.”

US out-of-home entertainment

Over the past year there has been a “huge surge” within the US out-of- home entertainment sector thanks to the easing of COVID-19 restrictions and case numbers. An executive at a California-based entertainment company said the industry could reach USD 2.9bn in revenues by 2028, implying a 12.4% CAGR, driven by pent-up demand from lack of in-person socialising during the pandemic. In particular, the expert sees growth coming from group activities, such as bowling and mini golf. They said there is considerable white space for companies to move into and create new concepts, with momentum expected in cinema conversions to include dining and other activities because “they’ve got the real estate”.

However, a recession could result in overall industry revenue declines of 2-5%, and take 1-1.5 years to recover once the government indicates a recession is over. Industry operators may also need to invest in increasing the perceived value of their venues to mitigate the risk of higher gas prices dissuading consumers from driving to them.

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