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The Market

The external landscape

The environment in which we operate remains competitive and dynamic. New supply into the market has been widely reported, consumer trends are evolving and becoming ever more demanding, and we are facing a dramatically changing cost landscape with the introduction of the National Living Wage in 2015. However, such challenges are not new to the industry or the group, and we will respond with energy and urgency to each.

Market supply

In recent years the UK eating and drinking out market has changed significantly. We have seen the number of restaurants increase, with net new openings increasing despite a high level of closures, as well as many pub closures. This highlights the ongoing structural change in the market and the competitive environment in which we are all operating.

The composition of the market has changed: independent restaurants and tenanted pubs have reduced, with growth coming from the branded sector and casual dining. Much of the new competition in the sector is 'fast-casual', with operators often single-brand focused, with a relatively small number of outlets and flexibility to keep offers fresh and up-to-date.

In several of our outlets we have seen the direct impact of competition opening in close proximity. More than half of our Harvester and Toby Carvery sites have been impacted by direct competitors opening in their immediate catchment, with several of those seeing multiple new openings nearby. This clearly has an impact on short-term trading, and presents a challenge for us to meet. However, we recognise the strength of our brands and that these new entrants have the effect of growing the market over time, and present an opportunity for the strongest and best executed offers to grow.

Consumers

The changing competitive landscape is a direct response to a more demanding consumer. Expectations are rising on quality, environment, value and the range of offers available. Value continues to be important, although crucially this does not just equal low price. Consumers are now increasingly looking to explore and broaden their horizons for eating and drinking out. There is also a greater demand for personalisation – the mindset of having "what I want and when I want it" continues to strengthen.

Consumers' lifestyles are also changing. Alcohol consumption is reducing, and there is a broad trend towards health consciousness, although very much still retaining a willingness for the occasional indulgence in 'guilty pleasures'.

Finally, the impact of technology is ubiquitous. Consumers are increasingly digitally connected in all aspects of life, with implications for how we communicate with and serve them.

National Living Wage

The introduction of the National Living Wage is highly significant for our industry due to the relatively high proportion of employees paid at or close to the minimum wage, with earnings supported by gratuities. As a large employer, with more than 44,000 employees, we need to respond to what will be an impactful cost headwind. With consumers as focused as ever on value and service, we do not believe it will be possible for companies in our sector to simply 'control' their way out of the National Living Wage.

Our approach must therefore be rounded and must consider the long-term horizon: we recognise that it is a cost headwind but also that it potentially presents some consumers with higher incomes. We continue to consider productivity and efficiency opportunities, including technology and reviewing brand service models. We will also continue to look at opportunities to increase guest spend per head. This may mean tactical price opportunities to the extent we feel it is appropriate for certain brands, but also offering our guests the opportunity to trade-up the menu. Finally, we must respond to changes in consumer demand that arise, and therefore must continue to monitor the relevance of our offers. These processes will remain iterative throughout the coming years.

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at 16:46 on 01 October 2016

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A photograph of Tim Jones
Tim Jones Finance DirectorCarlie WakefieldPA to Finance Director +44 (0) 121 498 6112
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Denise Burton Deputy Company Secretary +44 (0) 121 498 6514
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James Cooper Head of Investor Relations +44 (0) 121 498 6514