Jeremy Warner's Outlook: As Wetherspoon shows, good citizenry costs money, but it may be worth it in the end

Online gamers seek consolidation; Compulsion won't work for pensions
Click to follow
The Independent Online

To counter the various brickbats that are thrown at it, Wetherspoon has been a first mover in banning smoking in its pubs. It has also attempted to address binge drinking accusations by promoting food, soft drinks and coffee, and by banning two-for-one drink deals and the discounting of double spirit measures.

None of these initiatives wholly explains the downturn in profits and sales, which the company attributes mainly to increased competition from the supermarkets and the possibility that some people may have been turned against pub going by media reports of excessive, city-centre drinking. However, they can't have helped.

Tim Martin, the founder and chairman, reckons that the initial impact of introducing a smoking ban into a pub is to hit turnover by about 7 per cent. Margins also suffer, as there is a significant swing from bar sales to food, which doesn't make as much money and incurs greater labour costs. The withdrawal of two-for-one drink promotions has resulted in the percentage of double measures reducing from 90 per cent of all spirits sold to just 50 per cent, with a consequent hit to both turnover and profitability.

So if there's no money in ethics, why do it? Mr Martin's view is a pragmatic one. Smoking bans are coming anyway, so it's best to be ahead of the game, learn as much as possible about the impact of non-smoking policies on the business, and find ways of minimising the negative effect.

As for the removal of price promotions, that too is a self-interested initiative, for it may persuade local authorities to be more gentle on the group in responding to calls for a crackdown on binge drinking dives. If it is true that excessive drinking is starting to deter many pub goers, then it obviously makes sense to curtail it.

It is this sort of logic which underpins nearly all initiatives in good corporate citizenry. British Airways and the airports authority BAA support the inclusion of aviation in emission trading arrangements not primarily because they want to save the planet, but because they fear the politicians might eventually impose something much worse if they don't give ground off their own back.

Likewise, Centrica's British Gas offshoot is highly active in promoting energy efficiency in the home, despite the adverse consequences for sales, because it knows the Government will eventually impose its own rules and regulations to achieve its domestic emissions targets anyway. It's best to pre-empt, and possibly gain some customer kudos for doing so, than sit around and wait for the inevitable.

Even so, it seems faintly farcical for a company whose raison d'être is to sell as much energy as possible to also be actively promoting measures to curtail its use. Does Centrica really want us to use, say, half as much gas as we do at the moment? Well no of course it doesn't, but if that's what the Government is going to try to achieve anyway, then it plainly makes sense to be in the energy conservation business too.

Online gamers seek consolidation

Online gaming is still less than a year old as a stock market sector, yet already it is in consolidation mode. As the latest online gaming site - 888.com - announces plans to float, Empire Online, which IPOed only three months ago, has revealed a £790m takeover approach.

There's always room for surprises, but the suitor is almost certain to be one of two companies - PartyGaming, the big daddy of the online gaming industry and the market leader in online poker, or Sportingbet, a medium-sized online betting and gaming group. If the City is right in thinking Sportingbet the mystery suitor, then PartyGaming would almost certainly mount a counter-bid.

The present plethora of online betting flotations is one of the strangest stock market phenomenons since the dot.com boom, when almost any Tom, Dick or Harry with an online presence could float his company on a crazy valuation. The difference is that the online gaming companies make huge amounts of money - more than 50 per cent of sales in some cases - whereas most of the dot.coms didn't make any and were never likely to.

On the other hand, online gaming is almost certainly illegal in its largest market, the US, even if the authorities have so far proved reluctant to test the issue in the Supreme Court. As with alcohol in the days of Prohibition, the trade is largely tolerated.

So long as this legal fog persists, the offshore bootleggers grow rich. Few established US players would dare enter the market while its legal status remains so questionable, so it is left to the Gibraltar-based upstarts to clean up, and for London to carve out a whole new stock market sector.

Empire is the creation of a clever Israeli named Noam Lanir. The business model he's dreamed up is almost unique to the sector in that he largely piggie backs off the other online gaming sites. He's highly effective in finding new customers and opening up new markets, but the technology and payment systems is delegated to others. All he provides is a "skin", or wrapper that goes round the back-office services of his rivals. In return, he pays them a fair old slug of the revenue, but it is he who has the customer relationship.

Empire's biggest partner by far is PartyGaming, hence the view that PartyGaming must be interested. According to a recent research note from Citigroup, PartyGaming would lose about 5 per cent of its earnings if the contract with Empire were cancelled. However, there would be a correspondingly much bigger boost to earnings if the contract was renegotiated on more favourable terms, or Empire was acquired outright. According to Citigroup, PartyGaming could afford to pay a 30 per cent premium for Empire and still suffer no dilution in earnings.

Sportingbet's reasons for wanting the company would be a little different. As things stand, it's got very little direct marketing firepower. Empire might provide it. Still, either way, £790m seems an awful lot of money to pay for Mr Lanir's ability to win customers, marketing genius though he is said to be. The online gaming market still has huge growth potential, but it's hard to believe that either the returns it generates or valuations it commands can persist. Mesdames et messieurs, faites vos jeux.

Compulsion won't work for pensions

The Engineering Employers' Federation this week broke ranks with other employer groups to propose in a submission to Adair Turner's Pensions Commission that compulsion be introduced into pension saving. The EEF suggests that initially employees be forced to save 2 per cent of their salaries into a pension, with matching contributions from employers, rising eventually to a combined total of 8 per cent.

It is easy to see why most employers would be so much against such an approach. Any such enforced contribution from employers would be tantamount to another tax on employment, and it is fair to assume that employers would eventually end up paying even the employee's contributions through enhanced wage claims. For these reasons, it is hard to see the proposal becoming public policy.

One midway approach which may find support is so called "auto-enrollment", where employees are automatically required to contribute to a state sponsored scheme unless they decide to opt out. This allows for the possibility of individual employers providing something better while at the same time neatly avoiding the charge of compulsion. Looks like the way to go to me.

j.warner@independent.co.uk

Comments