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MARKET COMMENT
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We all need to eat. And it is a need for hassle-free food that is the rationale behind all restaurant operations. The types of eating-houses can vary from the no-frills cafes, complete with plastic tablecloths and bottle of red sauce, to the more sophisticated up-market bistros where ketchup is a complete no-no. Somewhere in between those extremes lie a whole host of eating establishments that cover the traditional fish-and-chip shops, burger bars, Chinese takeaways, curry houses and many, many more. This is fantastic news for consumers, who benefit from greater competition and lower prices. However, this should also be a siren call for investors who might be eyeing up the restaurant sector as a potential investment. This is not to say that there is no money to be made from running restaurants. Today's interim numbers from Ask Central (LSE: AKC) show that the catering trade can be quite lucrative. Half-time pre-tax profits at the pizza restaurant operator improved 28% to £7.6m on turnover that rose 25% to £45m. Eleven new ASK restaurants were opened in the six months, taking the total number of outlets to 137. Three more restaurants have opened since the end of the half-year and more are scheduled to open imminently. Earnings are expected to grow at 22% and on the face of it, a forward price to earnings ratio of 14 does not look that expensive. However, we consumers are a fickle lot when it comes to dining out. What is in vogue today can be very passé tomorrow. Going for a curry used to be the order of the day, but a recent survey for SAGA suggested that Chinese and Italian cuisines have overhauled Indian food, relegating the curry to third place. Spanish, French, Thai and Mexican foods are also growing in popularity but fish-and-chips didn't even warrant a mention. This does not augur well for Harry Ramsden's, which is now owned by Compass Group (LSE: CPG). It might even go some way to explain the demise of Fish (LSE: FIH) and the need for the company to place some of its restaurants into administration. The restaurant trade suffers, from an investor's perspective, from very low barriers to entry. This means that the capital needed to start a restaurant is not that high. It is also relatively easy to gain access to the customers. A good reputation and branding by existing operators might prove to be a good barrier to new entrants. However, this is certainly not guaranteed. On the whole then, restaurants are great places to eat in, but perhaps not that good as an investment. That could go some way to explain their low valuations.