Pubs’ poor prospects are turning the corner - FT.com

There are, of course, cyclical factors. My local’s takings started to fall off a year ago, getting worse from the midyear as the economy stalled. But it is on the fringes of the City and its customers are financial folk, lawyers and staff from the nearby teaching hospital. If they are short of the price of a pint, then we are all in trouble.

The real malaise is deeper. Aside from one-off shocks such as the smoking ban, it comes down to two factors: the price gap between the pub and the supermarket, and the malign structure of the pub industry. In both respects, there are glimmers of hope. The price gap mainly reflects a hard economic fact. Productivity gains are a lot easier to come by in manufacturing – brewing, in this case – than in a labour-intensive service industry such as the pub trade.

In 2010, the price of beer in UK supermarkets and off-licences was lower than it had been in 1998. Over that time the pub price rose by almost half.

That gulf has had a predictably dire effect on some pubs’ marketing strategies. If they invest in live TV coverage of the big matches, the young target customers increasingly respond with so-called “pre-lashing” – knocking back an advance dose of cheap supermarket drink at home, then nursing a single pub pint through the match itself.

There is more. A village I know in rural Shropshire has two pubs, one owned by the landlord and the other by franchisees of a big pub chain, or pubco. The first prospers, while the latter has had three landlords in the past decade, at least one of whom went bust.

The landlord of the first pub tells me why. As a sole trader, he can buy his beer for much less than the pubco charges the franchisee.

This is economic nonsense. Pubs are not standardised outlets like McDonald’s but quirky one-offs. The main thing a multiple owner can contribute is lower inputs through centralised buying. The pubcos do the reverse. Why? Because of leverage. The sad history of the industry has left almost all the pubcos with balance sheet gearing much higher than real estate developers or cyclical retailers, the two industries they most resemble.

Observe the results. A decade ago Whitbread, a big, old established brewer and pub operator, switched its entire business into hotels and restaurants. Its pub chain was bought by a pubco, Enterprise Inns. Today Whitbread has a market value of £3bn, book equity of £1.2bn and net debt of £500m. Enterprise stands that on its head: net debt £3.1bn, equity £1.4bn and market value £175m.

To put that in perspective, more than a fifth of the UK’s 51,000-odd pubs are owned by two companies, Enterprise and Punch Taverns. Their combined debt is £5.4bn and their market value £250m. In other words, a large chunk of the nation’s pub estate is a commercial disaster area.

In a fast-changing market, this is bad news. A company preoccupied with juggling billions of debt is unlikely to respond well to events on the ground. That was supposed to be the job of the franchisees and lessees. But they are crippled by the costs resulting from that debt.

Let us now turn to the good news. Last year, for the first time in at least two decades, off-sale beer prices rose in line with pub prices. By the year end, they were rising faster.

Also last year, pub beer volumes fell less than off-trade sales for the first time since 1996. And last year’s pub closures, while still high, were less than 2 per cent of the total compared with a peak of 4 per cent in 2009.

Meanwhile, some of the biggest pubcos are distressed sellers of their pub estates. So smaller, more agile operators with fresh ideas are starting to take their place.

There is also a resurgence in local microbreweries. In the Shropshire case, a new locally produced cider has driven the leading national brand off pub counters. And crucially, such products are turned out in volumes too small to be of use to the supermarkets.

In other words, market forces are finally starting to reassert themselves. The British pub is changing, in ways an old codger like myself might not appreciate. It may be turning the corner just the same.

via ft.com

Posted via email from UK Pubs For Sale And Development