One of BDO’s top 10 predictions in December 2013 was that growth in consumer spend in pubs would rise by more than growth in spend in restaurants. Here the advisory firm’s Mark Edwards looks at the reason for this and why he feels the pub sector will continue to provide a real challenge to restaurant operators.
Over the last few years we have been inundated with doom and gloom stories about the pub sector with a record number of closures every week and the BBPA and CAMRA pleading with the government to reduce VAT or duty or preferably, both.
Recently, there is even more gloom as England’s premature departure from the World Cup implies that pub groups could lose 4% of their market value (based on market movements after each of the past 4 world cups and England’s progress).
The reality, though, is that the sector has gone through a metamorphosis, emerging from a drab and dreary cocoon and presenting itself in technicolor, a butterfly ready to challenge the established restaurant sector and fly ahead in terms of growth in market share. This has resulted in the loss of many wet led pubs but also the refocus of the major players on their food offerings, and also the growth in the number of smaller independent chains slowly but surely building their estates.
Fuller’s recent announcement of the acquisition of a controlling stake in The Stable, a six-strong pizza and cider business demonstrates the belief that operators have that they can run successful food led businesses. Fuller’s chief executive, Simon Emeny was quoted as saying “the line between premium pubs and casual restaurants is really blurring”.
In Allegra’s recent “UK Restaurant Market 2014” report, they noted that of the £3.8bn growth in the eating out market over the next three years, 50% will be captured by branded/managed pubs, and, consistent with our projections for 2014 noted in the last issue, we believe that share may well be even more than that.
So, why the change in fortunes for the pub industry? Putting to one side the structure of pub groups and their leverage models, there are some fundamental changes in the eating out market which have meant there is growing belief in the sector.
Firstly, the last 10 years have seen a fundamental change in the attitude to eating in a pub. This goes beyond the quality of the food, as important as that is, and is linked to the smoking ban, the changing format and design of pub interiors, the increased drink offerings (both alcoholic and non-alcoholic) and increasingly, a more family friendly environment.
Eating out has transformed from stuffy dining room to casual dining, from special occasion to frequent norm, from business and adults only to leisure and family. While the biggest brands in the pub food space, in terms of sales and estate size, are Wetherspoon, Hungry Horse and Harvester, the real growth potential in terms of profitability will be where uniformity is not the norm.
As the quality of offering, in terms of food, drink, ambience, décor and service is becoming more consistent across the industry, so the desire by consumers to get away from the same old look, feel and taste of things increases.
The improved quality of food and the pub environment also mean they are now a commonly used and acceptable venue for business meetings, where arranging a lunch in a pub no longer means simply long and liquid, and pubs are now an established alternative to the mainstream restaurant options.
This has all been assisted by the fact that the large pub companies already had estates in prime locations in city and town centres, as well as appealing locations out of town. One of the key challenges for restaurant operators is in finding and developing estate pipelines as they move to expand, but the pub sector has a head start here, and has had its management focus on ensuring its estate is serving its customers with what they want.
Secondly, one of the key challenges faced by restaurateurs is ensuring concepts are proven both in London and outside, not just in city centres but in smaller towns as well. Here, once again, pub estates can often have an advantage. The country pub is an idea engrained in British culture and with garden space, car parking and, generally, larger floor space internally there is a natural appeal.
The ability to ensure no over-reliance on one geographic location for turnover and, more importantly profit, again allows pubs to demonstrate why they are a sound investment.
Thirdly, the food and drink offering from pubs is much better, more consistent and better value than it was a decade ago, across the industry. Clearly there is a broad spectrum of pub food offerings from the carvery and simple classics to the celebrity backed gastro pub, but as expectations of consumers have increased, so have the efforts of the operators. It is not only in terms of the food and drink on offer that pubs have upped their game, but they are also managing costs effectively, and in a lot of cases more effectively than their restaurant competitors.
While some of the food led pubs have built in discounting through 2 for 1 deals, the majority have had to discount far less than mainstream casual dining restaurants.
Finally, we are seeing an increase in the number of pubs who are playing up their community credentials – this could be inviting the community to beer festivals, family days, hosting community meetings or sponsorship of local events, all building increased customer loyalty. If you search on social media for pub reviews, where a pub has established itself as a local favourite then any unfavourable review will have responses not simply by the landlord or staff, but by other patrons who will defend with a passion somewhere they enjoy being in. There is also support growing for the idea that repeat business is higher at a pub restaurant than a casual dining chain.
Clearly, it is not all plain sailing and many pubs still need to ensure they have consistent custom throughout the week without over-reliance on evenings and weekends. Staffing will continue to be an issue in terms of retaining the most able who can ensure strong relationships are built with customers to ensure repeat custom, and innovation will continue to be necessary to ensure pubs can protect against the inevitable increase in competition from the restaurant sector as the economic recovery gathers pace.
But this is a sector which has already shown its capability for change and we anticipate some very strong returns on investment from the sector over the near future.
This article was first published in BDO’s Restaurants and Bars report which is available here http://www.bdo.co.uk/news/restaurant-and-bars-report/_recache
