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The Peel Hunt Travel & Leisure analysts believe the key to investing in Leisure is finding the cost mitigation, LFL sales potential (through market positioning, pricing power, scope to innovate or refurbish) and acquisition firepower to offset rising labour costs. The best sub-sectors can grow and embrace technology without attracting over-supply.

The historically neglected sub-sectors of bowling and low-cost gyms are generating the highest levels of innovation, returns and growth, through embracing technology and assisted by higher barriers to successful entry. We believe the opposite is true of the restaurant sub-sector.

Bowling market demand has increased at a 5.5% CAGR over the last five years even though there has been minimal change in the number of bowling centres.

Gym market. Almost all the gym market’s demand growth is being driven by two low-cost operators that are making health and fitness clubs affordable to a large share of the population for the first time. We forecast that their strong growth can continue for at least another six years without requiring much growth in market penetration (due to population growth and taking share from traditional/public gyms).

Pub market. The supply/demand dynamics of the pub market are more attractive than that of the restaurant sector. Drink-led pubs are less affected by restaurant over-supply and are benefiting from increased demand for events and experiences (live music, sport broadcasting, quiz nights, dart/pool competitions etc), which are helping to drive growth in numerous premium drink categories.

       -   Pub drink price increases are correlated to the current price level, implying that premium priced venues have less price-sensitive customers.
       -   Tenanted pubs are performing at least as well as managed pubs. Managed pub LFL sales rose by 1.3% on average (2.5% in London; 0.9% outside) in 2018 (Coffer Peach Business Tracker). In comparison, the quoted tenanted operators generated average LFL net income growth of 1.5% last year.

Restaurant market
demand is flat (including the ‘benefit’ of delivery growth), whereas supply has finally started to fall. The two largest costs are labour and food, and Brexit could exacerbate the upward pressure on both. Falling LFL sales have increased the average labour ratio to c35%, a level from which many restaurants may fail to recover.

       -    Overall, managed restaurant LFL sales fell by 1.2% (-0.6% in London; -1.4% outside) in 2018 (Coffer Peach Business Tracker).
       -    We believe this included 3-4% growth from delivery, which means average in-store LFL sales volumes were c-7% vs c+5% growth in the NLW.
        -   These trends, and limited pricing power, should result in restaurant supply falling. In our view, much cost and hardship will be endured in this sub-sector before supply and demand is rebalanced.

Food delivery market
demand is growing at 9% pa, albeit with non-pizza cuisines outperforming from a lower base.

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