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UK pub companies feel high street chill

Source: FT

June 3, 2018

The UK high street has had a bumpy start to the year, with many retailers blaming very cold weather and heavy snow at the start of March for worse than expected sales.

Pubs were no exception, and many said the chilling effect on profits of the “Beast from the East” weather front was compounded by rising labour, food and energy costs. Earlier this month, rating agency Fitch said the UK pub sector was “highly exposed” to these macroeconomic trends, as well as to changes in consumer sentiment and strong competition.

Adding to this, UK beer sales fell 1.7 per cent in the first quarter of 2018 compared with the same period a year before; they fell by nearly a quarter between 2000 and 2016.

Helping to steady investor nerves though, Fitch said it expected the UK’s “strong pub culture” to persist, boosted in the short term by this summer’s football World Cup and that the sector’s sustainability was “mid-range”.

Founded in 1991, Ei Group expanded rapidly in just over a decade to become one of the UK’s biggest “pubcos” – pub owners and operators.

Like many high street retailers, Ei, formerly known as Enterprise Inns, lamented the impact of poor weather in March: pubs in the north of England and the Midlands in particular suffered “significant weather-related disruption”, the company said in its six-month results to March 31. This pushed like-for-like net income down 0.5 per cent in these two areas combined.

Snowstorms aside, the group reported profit before tax of £57m, the same as last year, and said it had maintained growth despite “challenging trading conditions.”

A strategy to convert tenanted pubs- the bulk of its estate, where landlords rent premises from the pubco – to free-of-tie pubs, where landlords have the right to pay market prices for beer rather than buying it from the pubco, and managed pubs, those fully owned and operated by the group, is accelerating, it said. The change was in response to reforms that removed what was know as the “beer tie”.

Although the conversion plan appears “solid”, said Mark Brumby, analyst at Langton Capital, “execution remains a challenge”, while Brexit remains an ongoing concern.

The group’s shares fell to their lowest point since 2012 after the Brexit vote in June 2016. However, they have since rallied, and are up 2 per cent so far this year.

The 186-year old group that runs 255 pubs in London and south-east England reported strong sales for the year to April 2, with revenue up 3.9 per cent and operating profit up 1.9 per cent “despite a challenging market backdrop”.

Analysts at Panmure Gordon said they expected the company to generate £43m in pre tax profit in the year to March 2019, up from £41m this year.

A wider range of craft beers pushed up revenue from draught beer by 28 per cent, while gin sales rose by more than a fifth and cocktail sales jumped 46 per cent – albeit from a low starting point. Food sales also rose 4.9 per cent, thanks to the popularity of brunch.

“These are extremely good numbers but they will have been helped by the warm spells in April and by the warm Bank Holiday,” said Mr Brumby.

However, the group was not immune to cost increases, and said rises in the minimum wage, property taxes and a new tax to fund apprenticeships had created about £4m in extra costs.

Looking ahead, chief executive Patrick Dardis was confident: “I am a firm believer that the traditional British pub will never go out of fashion.”

Shares in Young & Co have climbed consistently since 2008, and are up 26 per cent already this year.

Marston’s dropped out of the FTSE 250 in a quarterly index reshuffle on Thursday, a day after shares hit a five-year low.

Shares in the company are down 12 per cent so far this year.

In the six months to March 31, the 180-year old pub and brewery reported a 7.7 per cent rise in pre tax profit and a 20 per cent rise in revenue, but conceded that adverse weather conditions had hit sales at the “premium” pubs that make up about a quarter of its estate.

Earlier in the year, snow and ice also caused “unavoidable disruption to the business,” pushing down like-for-like sales by 0.9 per cent.

In challenging circumstances, the fact that only the premium pubs – upmarket pub-restaurants that are often out of town – reported a fall in profits was a positive result, said analysts at Peel Hunt.

Fitch was less upbeat: “We believe that long-term profit levels remain uncertain given weak industry fundamentals.”

However, Marston’s said it expected to deliver revenue and underlying profit growth for the full year. The group also said cost expectations had remained steady, in contrast with rivals that felt.