Don’t mention the perfect storm

My chief sub-editor says we must stop using the two words that so aptly describe current conditions in which pubs and restaurants are operating in right now. He says if he reads the (now hackneyed) phrase “perfect storm” in any of my copy from now on he will staple a revised editorial-style guide to my forehead. Trouble is there are few other expressions that say it so well. Operators are fighting a tidal wave of across-the-board cost increases, most notably through fuel, energy and food increases (to boot, the minimum wage rises again this October and the number of days holiday for part timers moves up next year from 24 to 28). At the same time the costs that are hurting business are also being felt by consumers, whose confidence is waning. The cost of living is now at its highest since 1990, with food-cost increases responsible for half of the rise in personal inflation. Clearly, pubs seem more exposed. The smoking ban, the poor weather of last year and the alcohol duty increases have not eased the situation. Many operators speak of a trading environment as tough – or tougher – as any they can recall. It’s not all bad. Sales figures from the British Retail Consortium appear robust, if still behind inflation, and some restaurant operators remain very bullish of current trading, testament to the cultural shift in eating habits. But the casual dining market knows it is not immune – people will not stop eating out but they may make fewer visits, and they might rein in their average spend. It is a brave operator that raises retail prices in this market. Robin Rowland of YO! Sushi last week spoke to M&C of the need to maintain volume and to keep customers coming through the door. “Once people get out of the habit, it will be harder to get them back,” he said. Tony Hughes, the former head of Mitchells & Butlers' pub-restaurant arm, told me: “If any companies are going to go bust they should do it with restaurants and bars that are full. At least that way there is a chance of recovery. “We all need to be on the side of our customers – they do not need us to put prices up at the moment.” The City for one certainly thinks the leisure market, and within it the eating and drinking-out market, is in for a rough ride. Stocks in both strains – pubs and restaurants – have been indiscriminately de-rated. Analysts at ABN Amro and Morgan Stanley have been the latest to air their concerns. ABN said that the severe falls in share prices witnessed in the second half of last year and in 2008 were only two-thirds of the way done, and that the reason trading appeared to be holding up was due to a lag effect, while Morgan said it expected to see earnings per share in pub stocks fall by between 20-25%. The market has hammered two of the sectors biggest quoted companies, Mitchells & Butlers and Punch Taverns. It is probably no accident that they are among the most indebted companies in the sector. Indeed, Punch was forced to go to the market early with a trading update following sustained rumours over its debt position in the face of subdued trading. And following assurances from Punch, and a minor recovery in its shares, the price once more started to head south last week, suggesting the market still had its suspicions. Terminology aside, the big question is what will be the size and the scale of the natural disaster that is left in the wake of current market conditions? Much of the terminal damage is self-inflicted. There are a fair few companies out there that are chronically over-leveraged, and that do not possess the quality of offer required to pull them through the current market. A few businesses have already entered administration, and one fears for Food & Drink Group and Regent Inns. To steal an analogy from the Tories – there are lots of businesses that failed to fix the roof while the sun was shining. Will any good businesses, with good offers and good management teams be lost? At the moment it does not feel that way. But groups may be forced to come together to cope. “Why the hell aren’t people talking about merging and collapsing duplicate overheads?” asks Greg Feehely, head of research at Altium. “It has already started in the media sector and it will start to happen in leisure. “Next year will provide enormous opportunities for the survivors. It will take another six months for asset prices to fall properly, and then activity will pick up, whether it’s outright nil-premium mergers, or the strong picking off the weak.” There are plenty of good companies out there that will ride it out – some will positively thrive – but unfortunately not everyone is going to make it.