Inside Track by Mark Stretton
The stock market has proved an unforgiving place for consumer-facing businesses in recent times. The majority of quoted companies from the eating and drinking-out market tracked by M&C Report have lost between one third and two thirds of their values, from the highs of last year. The falls are dramatic when compared to the FTSE 100, the index of Britain’s biggest public companies, which is just 9% lower than its May 2007 peak, and even more stark against the FTSE 350, which has fallen only 6.7%. Mitchells & Butlers has lost two-thirds of its value, as has Luminar. Not far behind – having lost more than 60% – is JD Wetherspoon, Marston’s, Punch Taverns and The Restaurant Group. Predictably, the worst performers are those with company-specific issues, such as Food & Drink Group and Regent Inns, which have fallen 89.9% and 84.5% respectively, and both of which are currently up for sale. Not one company has seen its shares trade in positive territory against last year’s values. Simon French, an analyst at investment bank UBS, said that in addition to the purge on consumer-facing businesses by investors, the “props” of anticipated market consolidation, share buyback programmes and the opportunity to convert to real estate investment trusts, which had driven prices higher, have all largely fallen away. He said the caveat to the falls in market capitalisations was that some companies, such as Enterprise Inns, Greene King and Marston’s, had in the past year undertaken significant buyback programmes – buying shares for cancellation – accounting for a minor part of the reduction in values. One of the most resilient stocks is Domino’s Pizza UK & Ireland, which is down 25% and regarded as a relatively defensive stock in tougher consumer times. Executives at the clutch of companies that tried to list last autumn – Gaucho Grill, Pret A Manger and Wagamama – must be thanking their lucky stars. For the decimation of quoted stocks presents a serious boardroom issue. A year ago many senior executives were looking forward to handsome pay days as share schemes matured. But now most face the prospect of worthless options. Mark Brumby, an analyst at Blue Oar Securities, told M&C: “Staff retention is a huge deal and the current share prices make it much more difficult. People are less locked in now than they were and perhaps more inclined to move jobs. Companies are not really recruiting at the moment so it’s not so much of an issue yet – but that will change.” Brumby said companies’ remuneration committees may consider re-basing options to provide executives with greater incentives. He said: “Theoretically, management teams should wear falls because shareholders have to, but investors do recognise that sometimes it is the sensible thing to do.” John Barnes, a serial non-executive director, told M&C Report he advocated the use of long-term incentive plans (LTIPs) over share options. He said: “I am a fan of LTIPs. If executives grow earnings per share by an agreed amount and outperform the peer group, they should receive an agreed amount of stock – not options, but pure stock. “The other thing you do is go back to cash, introducing aggressive bonus schemes, perhaps up to 100% of salary.” Barnes, who chairs Novus Leisure, said executives should recognise the current prices as a buying opportunity. He said: “Now is the time to buy. I don’t think enough executives buy stock – they should have to buy at least a year’s salary if not two years-worth of shares.” Now there’s a challenge to separate the men from the boys. Buying shares in this market is not for the faint hearted. Riding the storm “Excellent standards in all areas, combined with the ability to surprise and delight, is the only way to gain and retain business in the current economic climate,” was how Fuller’s, the London brewer, summed up research carried out in its own pubs through a mystery shopper programme. The group, which has a little over 350 pubs, largely in London and the South East, concluded that “tolerance levels” were getting tighter and tighter, with customers in a paradoxical situation of having less to spend but a greater choice as to where to spend it. The research seemed to capture the current mood pretty well – and pointed to why many bar and restaurant operators that speak to M&C Report are currently resisting the urge to cut, cut, cut. The temptation to trim labour costs, pull back on capex, engage in discounting and perhaps even cut product quality, must be significant. But as Becky Salisbury, co-founder of niche food-led pub group Salisbury Pub Company, puts it: “Now it’s more important than ever to keep those flowers on the bar, to keep investing in training and to maintain our buildings in order to ride the storm.” Senior executives at a range of the big corporates – including Brain’s, Marston’s, M&B, Spirit and Tragus – echo Salisbury’s comments and as my colleague Peter Martin wrote recently the trap awaiting the eating-out market is to cut – to cut quality and to cut prices. The combination of a consumer under pressure and some savage costs increases (ie “the storm”) means it is undoubtedly hard work out there at the moment. With the smoking ban, a tough comparable period (for most people) versus this time last year, and a consumer squeeze, it’s very difficult to understand the underlying trend. It may be September before we get a clear line of sight. Certainly with the Morning Advertiser predicting beer volume declines of up to 15%, things are challenging for wet-led businesses. Perhaps it’s time for everyone to pray for some fair weather – economically, politically and literally.