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NEWS
4 | MORNING ADVERTISER | 6 DECEMBER 2007
WWW.MORNINGADVERTISER.CO.UK
Food: not
a panacea
Peter Hansen – a partner at PC Hansen, a corporate finance firm
specialising in the leisure sector – discusses his concerns about the
pub sector’s infatuation with food as market saturation approaches
At the Association of Licensed Multiple
Retailers’ (ALMR) autumn debate in October
I proposed the motion: “If you want to make a
profit, forget food”.
Given current trends relating to the UK eating-out market (real growth of the UK eatingout market between 1982 and 2006 was 3.9%
versus 0.1% for alcoholic drinks) the prospects
for winning this debate did not look good.
Indeed, the increasing focus on food from
the listed pubcos has helped them continue
improving their like-for-like sales and earnings per share. However, this growth only
comes with significant capital investment
– and the growth in profitability should be
assessed against the cost of achieving it.
We believe food is not a panacea – our concern is that over-investment could create levels of over-capacity similar to those seen on
the high street at the start of the decade.
Most wounds in life tend to be self-inflicted
– and the warning signs are starting to appear.
In its 2000 annual report, the chairman of
Yates’s Wine Lodges stated: “I am pleased to be
able to report further substantial progress for
the group during the year. A record number of
new branches have been opened, including
the 100th Yates’s Wine Lodge.”
Twelve months later, the message in the
2001 annual report was very different: “Over
the past two years trading conditions have
become more competitive, due to proliferation of similar venues... Whilst the market is
still growing, the level of new capital investment from existing players and new entrants
has produced over-capacity in a number of
major towns and cities.”
investment programme... We have seen food
sales grow by more than 30% this year and
aim to... ensure that Slug & Lettuce becomes a
leading option in the casual-dining market.”
What happened on the high street – and why
is it relevant? Between 1994 and 2004, four
companies – JD Wetherspoon (JDW), Regent
Inns, Yates and SFI – spent £1.7 bn, increasing
the number of pubs in their combined estates
from fewer than 200 to more than 1,000.
SFI collapsed in 2003 and Yates was taken
private by GI Partners as its share price suffered the impact of over-capacity – they were
too highly geared to ride out over-supply.
Even JDW, the largest and least financially
geared of the high-street players, suffered
from much lower growth rates and profits,
and its share price fell accordingly. Now the
same high levels of investment can be seen in
the eating-out market. The chart below illustrates the £5bn capital investment from the
seven major public companies – Enterprise,
Greene King, JDW, Marston’s, M&B, Punch
and Whitbread (the “Big Seven”) – since 2000.
A lot of this – though not all – has been on
food, and will undoubtedly continue to be so.
Capital expenditure for
the Big 7: 2000-2007
£m
■ Tenanted
■ Managed
750
500
250
0
2000
We estimate that these seven companies,
which own 24,000 pubs between them, are
refurbishing managed pubs every five years
and tenanted and leased pubs every eight.
Assuming typical refurbishment costs for
managed and tenanted pubs, the cost equates
to £735m per annum, in line with 2006 levels. Given the 20,000 licensed restaurants in
the UK, the Big Seven alone could double the
supply of eating-out venues over a seven year
period – a growth rate of 12% per annum.
Required returns are unlikely
1,000
Reading between the lines
So should we read anything more into recent
bullish statements from pub and restaurant
companies regarding food?
“People may be reluctant to buy a new TV
or football shirt, but they’re very reluctant to
give up going out,” said The Restaurant Group
CEO Andrew Page in the Financial Times in
September.
Laurel’s Suzanne Baker was quoted in the
MA in the same month: “The acceleration of
the brand has been fuelled by a significant
Unsustainable: Peter Hansen, inset, claims current investment in food has the potential to create over-capacity
2001
2002
2003
2004
2005
2006
Source: Annual Reports, PC Hansen & Co. analysis
2007
And it isn’t just the Big Seven. Fullers is investing aggressively in food pubs in its London
and south-east estate, post the Gales acquisition. Does the 4% (real) market growth rate
look as favourable when viewed against these
capacity additions? Will the expenditure produce the required returns? We think this is
unlikely when viewed over the next five years.
We are perhaps starting to witness this with
Mitchells & Butlers’ recent annual results,
where both increased competition and falling
disposable income were cited as reasons for
its currently falling like-for-like food sales.
It has been long noted that the UK lags
behind the US eating-out market. The reason
for this is not just the more developed status
of the US branded dining market, but also
the greater strength of UK supermarkets and
their superior own-label food offering.
In the food profitability debate, we forget
Tesco at our peril. It won’t stand idly by while
customers eat more meals at the pub.
Further, the Financial Times’ Lex column
noted in November that the US casual-dining market is suffering from over-capacity and
valuations of US casual-dining stocks have
dropped by more than 10% this year. What
does all this mean for food within the pub sector as we approach market saturation?
For smaller operators, history provides us
with key survival lessons: remember SFI – be
prepared for turbulence and keep financial
gearing low; don’t match the spending of the
Big Seven – returns are unlikely to stack up;
and focus on the part of the market you know
well. Smaller operators such as Geronimo
and Peach Pub Company thrive because they
“stick to their knitting”.
Finally, is there more to come in the mergers and acquisitions market for pub food?
Brunning & Price, with its premium pub restaurant offering, provided an attractive acquisition for The Restaurant Group – a trend we
believe is likely to continue. Any slip in operational performance could result in consolidation aided by synergies that could act as the
cure for over-capacity. Either that or we will
all need to “binge eat” to keep all the new pubs
and restaurants full!
Flush of success for 80
award-winning JDW toilets
Worthy winner: sparkling toilets at the Bishop’s Mill, in Durham, demonstrate JDW’s commitment to quality
JD Wetherspoon ( JDW ) is
flushed with success – after
being recognised for providing the best loos in the
business.
The company has won the
2007 Loo of the Year Awards
pub/wine-bar category.
JDW’s Bishop’s Mill, in
Durham, the Blacksmith’s
Forge, in Dalkeith, Yr Hen
Orsaf, in Aberystwyth, and
the Old Court House, in
Coleraine, were named as
individual award-winners for
pubs and wine bars.
Eighty JDW pubs were recognised for their excellent
standards by awards inspectors, who visited hundreds of
outlets unannounced over a
three-month period.
Awards director Richard
Chisnell said: “The toilets are
judged against more than 100
inspection criteria, including décor and maintenance,
cleanliness, accessibility,
hygiene equipment and overall management.
“JDW is a worthy winner
of the four main individual
pub awards and the company
continues to be the best pub
toilet provider in the UK.”
JDW chief executive John
Hutson said: “We are delighted with our awards.
“Winning these awards
highlights our commitment
to providing quality toilets at
all of our pubs.”