Opening time for Wetherspoon
Pubs across Britain are closing at a record rate. So how does JD Wetherspoon feel confident enough to promise to open 250 new outlets in the next five years?
Wednesday 02 December 2009
The pubs group JD Wetherspoon has come along way since its current chairman, Tim Martin, opened his first pub in London in 1979. Yesterday, Wetherspoon opened its doors to an accelerated expansion programme that will see it open 250 new pubs over the next five years. Its expansion comes at a time when some of its big rivals, such as Punch Taverns and Enterprise Inns, are burdened by a mountain of debt; and a record 50 pubs a week are closing down, according to the British Beer and Pub Association. Wetherspoon, which has 743 pubs in the UK, said it will invest £250m in the five-year expansion, generating 10,000 new jobs.
While its low-price offer has been suited to the economic downturn and the so-called Aldi effect, Wetherspoon had delivered off its own bat a series of performance-enhancing initiatives long before the credit crunch reared its ugly head. Whether it is the group's squeaky clean toilets, value-for-money food offer, centralised distribution and buying model, or low debt-to-profit ratio, Wetherspoon is admired by many City analysts.
But equally important is that Wetherspoon has been a pioneer in the sector – anticipating seismic changes in consumers' leisure and consumption habits, such as the ritual of visiting coffee shops each day.
Wayne Brown, an analyst at Altium Securities, says: "It is a prime example of a management team that has been able to read where the market is going and meet changing customer demand in the sector. They were the first [pub group] to introduce coffee and breakfasts, extend opening hours, invest in their bathroom and toilets, and provide wi-fi [internet connections]. Wetherspoon introduced non-smoking pubs 18 months before the smoking ban came into place, when many people thought they were mad."
Wetherspoon said it now serves 1.5 million meals a week, including 254,000 breakfasts and 75,000 curries, in addition to half a million cups of coffee.
Mr Martin says: "I think cappuccinos and breakfasts have been very important, as has a big concentration on real ale. Volumes of real ale are up around 17 per cent in the last few months." The operator said it sold nearly 3 million pints during Wetherspoon's 19-day, bi-annual international real ale festival that ended on 15 November. The chairman cited brewer Greene King's Ruddles County Premium Ale as one of the real ales that is selling particularly well. He added: "We are also doing a range of micro-brewers' beers from all over Britain, and also from New Zealand and Canada."
The ability of Wetherspoon's management team to read the market's tea leaves, or beer hops, applies particularly to the timing of its pub expansion unveiled yesterday.
Mr Martin says: "With our expansion, we slowed down when it appeared to us that property prices were unsustainably high. We dramatically cut the number of pubs we opened, and now property prices are at a more reasonable level. So it makes sense to expand now."
City analysts agree. Mr Brown says: "The growth programme is significant. Pubs that could be bought for £1.5m a couple of years ago they can now get for £600,000 to £700,000. They are buying pubs from the distressed operators out there." Previously, Wetherspoon said it would open 40 pubs this financial year.
For the year to 26 July, Wetherspoon toasted a 14 per cent uplift in pre-tax profits, before exceptionals, to £66.2m, and underlying sales up by 1.2 per cent. Over the period, it grew its net cash by 39 per cent to £99.5m, which Mr Martin says is a key part of its expansion.
He says: "If you are opening about 50 pubs a year we will only absorb about half of that from our free cash flow. We are able to fund it from our free cash flow." In other aspects of its longer-term strategy, Wetherspoon also claims to have used its corporate crystal ball wisely.
Mr Martin says: "We realised a long time ago it is not about brands, such as the Irish pubs or a generic name such as Slug & Lettuce, and Harvester. We don't think that's what customers want, they like individuality. We are trying to give pubs individual names, designs and individual local ales wherever possible." In fact, Mr Martin says he took the name of the company from his love of JD "Boss" Hogg from the hit 1980s US TV programme The Dukes of Hazzard, and Mr Wetherspoon, his teacher in New Zealand. "He was a very nice teacher who could not control the class – which is how I felt in my first pub."
The names of its pubs range from The Drabbet Smock, Suffolk, to The Knights Templar, Holborn, central London. A Wetherspoon spokesman says: "When we open a pub there are always around half-a-dozen names from local historians and research companies at our disposal."
Behind the individuality of its pubs, however, lies a firmly controlled centralised operating model that spans areas from buying to cleanliness standards in pubs.
Paul Hickman, an analyst at KBC Peel Hunt, says: "They are absolutely obsessive about operating standards. I see Wetherspoon as an operator of retailing systems rather than just another pub company. It has more in common with Tesco and Domino's Pizza, in terms of having a well-defined and coherent set of systems."
He adds: "It is the only pub company that it wholly managed and wholly branded. Some of the units are signed as Lloyds Bars rather than Wetherspoon, and every house has a different name over the door. But it is just so recognisably a brand." Mr Hickman says that its centralised buying model enables it to select and strike deals with suppliers, such as for Eastern European beer, and offer value-for-money to customers.
The pervasiveness of Wetherspoon's operating model feeds down to all its pubs' amenities and service standards. For example, Wetherspoon regularly tops industry awards for the cleanliness of its toilets. Mr Hickman says: "In particular, it has been found that women value the quality of the loos above everything else they find in pubs."
But there are elements of Wetherspoon's strategy that are not entirely as smooth as one of its real ales. For the 13 weeks to 25 October, Wetherspoon's underlying sales growth slowed, to be up by just 0.3 per cent, although it blamed this on a higher level of marketing spend for the same period last year. Furthermore, Wetherspoon did not pay a final dividend for its last financial year, in order to redirect its cash flow towards debt reduction. And Wetherspoon, which had net debt of £426m on 26 July, has to refinance £435m of its revolving facility by December 2010, although it plans to commence formal discussions imminently. But in contrast to its debt-laden rivals, such as Punch Taverns and Enterprise Inns, Wetherspoon has a significantly lower debt-to-profit ratio.
Mr Martin says: "Our debt levels compared to our profits are probably the lowest of any pub company by any conceivable measure."
Certainly, the City interpreted yesterday's expansion salvo as a sign of Wetherspoon's overriding confidence in the refinancing. Mr Hickman said: "This is a statement of intent that they are committed to this sort of expansion."
As for Wetherspoon's founder, he is keen to emphasise the chain's "broad appeal". Given that Wetherspoon now has 743 pubs, he says it is well represented from the former mining towns in the Welsh valleys to the more affluent areas of London.
Of course, Wetherspoon has occasionally attracted controversy over the years. For instance, this year it temporarily cut the prices on certain beers and premium lagers to 99p, which drew the ire of the anti-binge drinking campaigners. But such occasional promotions are just a tiny element of a sophisticated business model. As Mr Martin says: "This has been our third recession and... we have refined our business in lots of small ways over the years."
Winners and losers
There is no doubt that many pubs have struggled during the recession but, as in many industries, it has also led to a polarisation between the winners and losers. According to City analysts, the winners have been those big pub groups that do not have huge millstones of debt around their necks and largely operate estates of managed pubs.
Pubs operators that have delivered robust trading during the recession include Wetherspoon, Mitchells & Butlers, Marston's, Greene King and Fullers. These operators have also focused heavily on sales of food or real ale, and have been able to invest in their property estates. The likes of Wetherspoon and Greene King have been able to take advantage of a soft property market to snap up new sites on the cheap. But it has been a different story for many small, tenant-owned pubs, typically in rural areas, which have found life tough. These pubs are often among the 50 sites closing a week, according to the British Beer and Pub Association. Wayne Brown, an analyst at Altium Securities, said: "Tenanted and wet-led boozers are the ones that have fallen away."
Enterprise Inns and Punch Taverns, which both have tenanted pubs and have net debts of £3.56bn and £3.9bn respectively, have seen their profits tumble after writing down the value of their sprawling estates. Both Enterprise and Punch are reducing the size of their estates as a result of their debt burdens at a time when their nimbler rivals – who are less highly geared, such as Wetherspoon – are able to press the expansion button. Paul Hickman, an analyst at KBC Peel Hunt, said: "I think there has been a sense that tenancy has been uncompetitive."
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