Leading sector analyst Anna Barnfather at Panmure Gordon has said that the outlook for pubs and restaurant sector remains broadly positive with the long-term trends of rising population, rising wealth and our social need for a ‘third space’ driving industry revenue growth.

She said: “However softening consumer confidence and shifting consumer preferences will, we believe, continue to accelerate refresh cycles which, combined with inflationary headwinds, creates some operational challenges and margin pressures for the less fleet of foot. While the political, legal and economic debate over Brexit continues to rage, creating yet more uncertainty, we place more emphasis on management track record and ‘self-help’ potential in assessing each company’s ability to defend top line growth and mitigate cost inflation.”

Barnfather said that the acceleration in wage inflation (from 2.4% to 5.0%) presents an operational headwind in an industry where staff costs account for 27% of sales, on average.

She said: “We believe that The Restaurant Group and JD Wetherspoon are most exposed with the highest wage bill, lowest margins and without any obvious flexibility to push price or drive cost efficiencies.”

Industry trading has softened over the last year with monthly like for like sales growth, as reported by the Coffer Peach Business Tracker (CPBT), decelerating from 1.7% to 0.7% on a rolling twelve-month basis.

Barnfather said: “Although recent patterns have been distorted by bad weather, calendar timing impacts and Brexit, we believe that performance is diverging between the managed pubs which are performing steadily and consistently, and the restaurant operators which are experiencing greater volatility and some monthly declines brought about, we believe, by localised competition/oversupply issues.

“While some of this divergence in performance is down to regional variances and/or company specific trading issues, we believe it is largely due to an imbalance in supply growth with an explosion in the number of casual dining outlets increasing competition in the restaurant (and pub-themed restaurant) space. Meanwhile, pub numbers have gently declined with the continued closure of wet led pubs.

“We believe that monthly trends will start to improve and stabilise as the industry moves ahead against softer comparatives and becomes less disturbed by external one off factors. However only those that remain ‘Welcoming and Comfortable’ - i.e. well invested and well management with a relevant offer - will prosper. This requires on-going development of offer and service levels to reflect changing consumer preferences.

“While wet led pubs appear to have lost out to coffee shops and restaurants over the last decade, the extension into multiple day parts with an improved food and coffee offer has meant that those pubs left standing are well placed to continue to adapt and grow.

“Over the next 12 months, we expect supply growth to trend back down to more moderate levels (ie below 0.5%) with private equity-backed casual dining chains dialling down their roll out ambitions and the larger quoted operators rationalising their existing portfolios. This moderating supply, combined with a still favourable macroeconomic backdrop, should still LFL sales recover to modest and consistent growth of c1.5% over the medium to long term.”