Pubs serve up success story on a plate
Food is one of the 'Five Fs' that pumped up the profits for a trade that many said was sunk
Wednesday 24 November 2010
"Pubs close at record rate of 52 a week" and "Death of the boozer" were just some of the grim headlines during the credit crisis. A lethal cocktail of consumers cutting spending, rises in alcohol duties and the supermarket parking their low-price booze tanks outside the local Red Lion left scores of publicans with little option but to call it a day.
Since the recession ended though – and whisper it quietly – some big pub companies appear to be thriving and have recently posted rising profits and robust trading figures. Mitchells & Butlers, the operator of the Toby Carvery and Harvester pub restaurants, yesterday became the latest when it toasted pre-tax profits up by 26.1 per cent to £169m for the year to 25 September.
This followed Fuller Smith and Turner, the London-centric pub and brewing group, which last week posted half-year profits up by 11 per cent to £16.8m. Alongside JD Wetherspoon, Marston's and Greene King, M&B and Fullers have been largely lauded by City analysts for their focus on the five Fs: food, family, females, those aged in their forties and fifties, or "fogies". Free from the shackles of a debt mountain, companies such as Fullers have also been able to invest in their estate and acquire the best sites as they come on to the market.
However, not all pub sector operators are toasting a recovery. The UK's two biggest pub groups, Enterprise Inns and Punch Taverns, which have net debt of £3.3bn and £3.1bn respectively, have both posted a fall in profits recently. Punch and Enterprise have made substantial progress either in offloading weaker units and paying down debt, but their remaining drink-focused boozers continue to be a drag on performance.
Given the huge scale of Punch and Enterprise – which both have nearly 7,000 pubs each – it will also take them longer to modernise their entire estate around a key driver of growth in the sector – food. Certainly M&B seems to have hit the sweet spot with food. Adam Fowle, the chief executive of M&B, which also owns the All Bar One chain, said food now accounts for 47 per cent of the group's sales, compared to 31 per cent in 2005.
Furthermore, he points out that the pub and restaurant group has plenty of sales to shoot at, given that M&B's food and drink sales of £1.7bn form a tiny part of the £70bn wider eating-out market in the UK.
"It is a very big market and we have a very small share. We have grown share every year through the recession and we see no reason why that should not continue," says Mr Fowle. While he stressed that consumers are still "cautious" about spending, its average meal costs less than £8, which customers consider a "family treat". In fact, M&B sold a mouth-watering 41 million roast dinners last year, followed by other traditional dishes, including fish and chips, and gammon, eggs and chips.
The importance of food to M&B can be seen in its full-year results. The group's total sales actually fell by 1.1 per cent to £1.98bn. But food was up 4.5 per cent – helped by it passing on price rises to customers, while drink was lower by 0.7 per cent.
The fall in drink sales was largely the result of M&B disposing of its drinks-led pubs over the period, as it focuses on six core brands, including Harvester, Toby Carvery and Vintage Inns. In a further nod to its food ambitions, M&B agreed to acquire Ha Ha Bar & Grill chain for £19.5m in September, although it will convert the 22 sites to its own brands.
Paul Hickman, an analyst at KBC Peel Hunt, says the while operators such M&B have benefited from customers trading up on its food menu over the past year, pubs have the advantage of being able to offer flexible food prices that most restaurants cannot match. For instance, JD Wetherspoon currently offers in most of its pubs Lincolnshire sausages in a caramelised onion and ale gravy with mash and peas for £4.99 or vegetarian sweet chilli noodles for just £2.99. "The public's perception is that they will get good value for money at a pub serving food," says Mr Hickman.
It is not just with food, however, that the pub operators have upped their game since the smoking ban was introduced in 2007 amid fears it would signal the beginning of the end for the traditional boozer.
To entice non-smokers back into their pubs, operators have also spruced up their interiors and exteriors, notably with outside dining facilities and screens for sporting events.
Mr Hickman said: "The smoking ban has helped them along the way to modernise the pub market and pub experience to make it more relevant to the modern world and for women and families." The other big feature that will separate the winners and losers in the pub sector over the coming years is likely to be how quickly and cost efficiently operators can reshape their estate.
One analyst, who did not want to be named, said comparing the likes of Enterprise Inns, which has 6,820 leased and tenanted pubs, with M&B's 1,823 managed pubs and just 86 leased or franchised businesses was like comparing "apples with oranges". But the reality of life for debt-laden Enterprise and Punch is that they will have to continue disposing of their worst-performing pubs to pay down debt. In contrast, less debt-burdened players will be able to pick the best sites in affluent areas or high-footfall high streets and retail parks. Together with an ongoing focus on food and value, these factors will shape the market over what is likely to be a challenging year with VAT rising to 20 per cent on 4 January and unemployment set to rise in the public sector.
Mark Brumby, an analyst at Langton Capital, says: "It will be almost impossible for them to stay clear of the downturn in consumer spending but the better operators will hold on to business more effectively." However, he says that pubs in the UK have been in existence for 1,200 years and will be around for the same period to come. "It is a question of evolving as opposed to standing still."
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