Despite widespread fears about consumer confidence in the eating and drinking out sector, many of the trading updates coming out of the pub sector are showing strong growth. Colliers’ James Shorthouse examines some of the factors driving the optimism in the sector.
We are well into the reporting season for the major UK brewers and pub companies and despite many previously predicting that traditional pubs were in long-term decline, and for which a failure to introduce food would be disastrous, it is clear that this ‘wet led’ sector has continued the recent trend of outperforming food-led businesses.
Whilst a number of food operators, particularly in the casual dining segment, continue to make the headlines for all the wrong reasons, the major wet-led pubcos are reporting a different picture; Ei Group has reported 0.6% growth in revenues from is leased and tenanted estate; JD Wetherspoon has also witnessed 5.2% like for like increases in sales; and Marston’s saw sales in its leased and tenanted division grow by 2.9%.
So why has the supposedly old fashioned ‘wet-led’ pub industry outperformed its more glamorous food-led cousin? I suspect there is no single answer, but rather a group of factors:
Consumer confidence – despite record high levels of employment and continued low interest rates, there is little doubt that consumers are being more cautious with their discretionary spend, and are more likely to spend £10 on a round of drinks than £20 or £30 on dinner in a restaurant.
Operating costs – the devaluation of Sterling, which occurred after the Brexit referendum, has increased the costs of imported foods, but has had less of an impact on largely UK-sourced ingredients for beer and cider.
Property costs – there has been wide coverage of the increased business rates liabilities which have affected many pubs and restaurants in prime locations, but the typical wet led pub is smaller, and may well have minimal or nil rates liabilities.
Performance related rents – the relationship between landowners and the food-led operators is usually a straightforward “arm’s length” commercial contract, with periodic upwards only rent reviews, based on a rate per square foot. In contrast, the relationship between a brewer / pubco and its tenants is much closer – part of the landlord’s income is directly linked to the volumes of tied drinks sold at the pub, and the landlord is able to help its tenants with direct interventions including marketing support, discounted wholesale prices and, in extreme cases, rebasing of rents.
Other routes to market – the advent of Deliveroo, Just Eat and similar online platforms, has added a third option to the traditional “cook & eat in” vs “dine out” choice. There has undoubtedly been an impact on restaurant sales, whereas the concept of buying and drinking bottled branded beers at home has been around for decades, and there has been no recent or radical change in the way we purchase and consume beer.
Capital Investment – Catering businesses are always at risk from the next trend or fashionable concept, and face a high cost of changing formats to meet changing customer demands. The rebranding of a food-led business will typically be many times the cost of a typical wet-led pub refurbishment.
Operational flexibility – A wet-led pub can swiftly increase or decrease staff numbers, adapt its opening times, introduce or discontinue promotional activities, or change its pricing policies. Such changes are much more of a challenge to a food-led business.
Recent transactions are compelling evidence of the attractiveness of the sector to investors; Punch, Admiral Taverns and most recently Hawthorn Leisure have all been sold in transactions which encompass well over 4,000 pubs, with an aggregate value in excess of £2bn. Wet-led pubs are intrinsically different to their larger, higher profile food-led cousins, and each segment faces its own pressures and challenges, but the performance of the wet-led segment over the last three years should give operators and investors the confidence that this cornerstone of the UK hospitality sector has a long and viable future ahead.
James Shorthouse is Head of Alternative Markets at Colliers International, with over 25 years’ experience advising major operators and investors in the UK pub sector.