Pubs and bars find their glass is half-empty

Why we could soon see boarded-up boozers on the high street

The bankers of Yates Group may be feeling less than festive this Christmas. They are owed £72m by the bar operator and the loan is up for renewal by June. But the extension of the unsecured facility might not be as much of a formality as it once was.

The bankers could get the jitters if they look at the woes of some of the company's peers. JD Wetherspoon issued a profits warning late last month, while Old Monk collapsed in October when its banks decided to pull out.

One of the worst cases is SFI, which owns the Slug & Lettuce chain. An over-ambitious expansion programme has left it in breach of its bank lending terms. On top of this, the company recently discovered a £20m black hole in its accounts.

If all this weren't enough, Six Continents and Scottish & Newcastle both reported last week that their pubs had experienced difficult times over the last two months.

In the run-up to what is traditionally the busiest period for the sector, city-centre pubs and bars are having a tough time. Some analysts say we could soon start seeing boarded-up drinking houses on the high street.

There are two big problems. Because of the economic climate, people are drinking less alcohol in pubs and bars. And the companies that own these outlets are nursing a hangover from exuberant expansion in the good times.

In October, the UK's pubs sold less beer than in the same month last year, with the volume down 2.5 per cent to 470 million pints, according to figures from the British Beer and Pub Association (BBPA).

Yates admitted the going had got tough when it reported first-half figures early last month. It warned of the "proliferation of venues on the circuit" and said "cautious consumer spen- ding" had led to flat sales in its bars.

October and November are traditionally slower months in the pub year, as drinkers save their pennies for Christmas. However, the saving has been more drastic than usual.

Instead of going out for a pint or a cocktail, says the BBPA, people are thought to be staying in with discount drinks bought from their local supermarket. The overall volume of alcohol consumed is not changing, just the venues in which it is supped.

"There has been a change in drinking habits from licensed [pub] sales to 'off' [shop] sales," says Mike Coughtrey, a partner specialising in leisure at accountancy firm KPMG. "People are drinking at home more than they used to. Because of the economy, they are being a little more cautious with money – a trend that's going to accelerate in the medium term."

The economic caution has been exacerbated by the effect of pub companies expanding too fast over the past decade. "It is general economic malaise that is leading to a tightening of spending on things like going out drinking," says Mark Jones, the chief executive of Yates. "But this happens to have coincided with a period when there are too many pubs on the high street."

Geof Collyer, a pubs analyst at Deutsche Bank, warns investors to avoid companies that expanded for expansion's sake. "For the time being, the high street looks too crowded. Soon there may well be some boarded-up managed houses in the middle of the circuit; make sure they are not ones that you are invested in."

Certain types of pub company are sailing along regardless, such as Punch Taverns and Enterprise Inns, which are reporting increases in sales. But these own leased and tenanted pubs, where landlords are locked into long-term agreements to pay rent to the companies. "If the pub is on tenancy, the rental is fixed for a period of time, so [a slowdown] won't be apparent until they renegotiate," says Mr Coughtrey at KPMG.

These pubs also tend to be in rural or suburban communities – the Black Bull or the Fox and Hounds – rather than swanky bars in cities.

"The problem with the high street is that people can move from one bar to the other – to whoever is selling the cheapest product," says Nigel Popham, a leisure analyst at stockbroker Teather & Greenwood. "In suburbia you can't do that. To some extent it's a London problem, or within the M25, where the downturn is."

This competition is forcing some companies to discount the price of a pint. "Historically, most firms in the pub sector have argued that beer pricing is in-elastic," says Mr Collyer at Deutsche Bank.

"They have had to, since they have generally raised prices in the pub industry above inflation for some time now and in many cases have done so in order to justify expensive pub makeovers. It may just be that customers are rebelling at this hidden tax on their enjoyment of their local pub."

It could be, too, that the template of the trendy bar has been overused.

"A number of people who have flawed business models are running around saying the market is bad," says Ted Tuppen, chief executive of Enterprise Inns. "I don't think the market is bad. It's tough in London and on the high street, but this Christmas will probably be good."

Anyway, Yates, which is primarily a city centre operation, says it should not have any trouble renegotiating its loan. "We're not rushing," says Yates' Mr Jones. "We're wanting to get the best deal for shareholders.

"We've got banks knocking on our door and saying, 'Can we buy you lunch?'"

No, this is not a generous gesture towards hard-up executives. In fact, Yates says the banks are keen to lend to a company that has reduced its debts recently and has relatively low levels of borrowing compared to some others in the sector.

Pub operators and brewers Wolverhampton & Dudley and Greene King are both reporting financial results next week. Further gloom could just make the bankers reach for a stiff drink.