The next 12 months is likely to see significant M&A activity in the brewing sector, as well as a “wave of consolidation” in the managed pub arena, according to advisory firm BDO.
In its Restaurants and Bars Report BDO highlights a “clear difference” between pubs and casual dining in terms of the broad and varied trade buyer pool, providing for a number of M&A strategies.
It highlights the appetite by brewers such as Fuller’s, Young’s and BrewDog for acquisitions and suggests that overt the next 12-18 months, a number of fast-growing managed pub and bar groups are likely to be on investors’ radars.
The report suggests ETM, Drake & Morgan, New World Trading Company, The Alchemist and Brewhouse & Kitchen are all likely to peak investors’ interest, while White Brasserie, Peach, Upham, Oakman and Seafood pub companies are also possible targets.
Similarly, BDO expects well-capitalised groups such as City Pub Group, Stonegate and Punch backers Patron Capital to continue their acquisition sprees.
In his market overview, entitled ‘The return of the pubs, BDO director Tom Barnard, said: “The last 12 months has seen pubs and wet-led concepts playing a more prominent role in sector M&A following a numbers of years playing second fiddle to casual dining brands.
“Following a decade coping with a plethora of legislative, economic and competitive issues such as the smoking ban, cheap supermarket alternatives and the subsequent credit crunch, substantial capacity has exited the market.
“Pub numbers have been steadily decreasing from around 60,000 in the early noughties to around 40,000 today. With numbers forecast to remain relatively stable over the coming few years, demand looks to have met supply. Within the market, growth in managed pubs is forecast to continue however as the structural decline in tenanted/leased operations continues.
“LFL growth has been difficult to come by over the last 6-12 months for many operators in the sector, with trading conditions across February & March in particular, impacted by the ‘Beast from the East’. No one likes to blame the weather, but there is no doubt that the snow hurt many operators and the operational gearing of leased pubs/restaurants in particular can cause real pain to the bottom line when sales drop. A warm period across May was a welcome boost, with CGA Peach noting managed pubs delivered collective LFL growth of 3.5%.
“Further reasons to be positive are that unlike the boom in capacity experienced in the casual dining market, the wet-led pub sector has not witnessed such recent oversupply, presenting an opportunity for differentiated operators to deliver LFL growth. A number of wet-led managed operators such as Young’s, Fullers and City Pub Co are doing just that and have continued to deliver impressive strong LFL growth in what are still challenging conditions for the sector.
“These wet-led pubs have demonstrated a resilience compared to their casual dining and food led pub peers, benefitting from less competition, higher margin premium products and craft beer, the luxury of having a more flexible operating model without the need for chefs and suffering less impact from food cost inflation.
“Similarly, the wet-led concepts do not require expensive kitchens, driving down the day one fit-out cost and boosting return on capital, a key metric for investors who have started to take note of the attractive returns available in the sector.”
Barnard identified several themes shaping conversations around pubs with investors, including:
THE RETURN OF THE LOCAL
Operators are increasingly taking a hyper-local approach to site design, tailoring sites to meet the needs of local communities. Operators such as City Pub Company and Laine’s focus successfully on creating valued connections with the local community.
AUTHENTICITY & PROVENANCE
There appears to be an ongoing consumer shift from branded operators towards a preference for “independent pubs”, with consumers demanding authentic pub experiences. Pub groups able to demonstrate the agility to flex and tailor their offering to deliver authentic guest experiences will have an edge over less nimble competitors.
EXPERIENTIAL PROPOSITIONS
Increasingly millennials are showing a preference for experiences over material goods as the search for “instagrammable moments” continues. Brewhouse & Kitchen’s increasingly popular beer masterclasses and NWTC newest spectacular concept ‘The Florist’, demonstrate the continued innovation going on in the sector.
PREMIUMISATION
Increasingly pub groups are differentiating themselves with premium drinks offerings. Liquor sales such as craft beers, craft spirits and independent coffee brands can provide higher growth potential and higher margins than traditional beers and spirits.
ACCOMMODATION
The opportunity available for pub groups to sweat their assets fully and take advantage of the boom in accommodation sales is not going unnoticed. In an environment where growth is hard to come by, a number of operators are exploring converting unused “upper parts” into accommodation space and over the next 12 months, I expect this to continue.
