Inside Track by Mark Stretton
It seems fitting that as one of the market’s truly outstanding operators, and a massive proponent of food, contemplates hanging up his boots, this week we consider sweeping changes that will further drive eating out. Tony Hughes, managing director of Mitchells & Butlers restaurant division, has spearheaded the company’s, and arguably the pub industry’s, move into casual dining. Now the process that has been underway for some time – casual dining across the UK pub population – will gather pace will the advent of England’s smoking ban. The appetite for food is also driving deals in the pub market. As M&A practitioner Jim Fallon writes in the latest issue of the M&C Report – out later this week – pub groups are reducing their exposure to the declining market of alcohol and buying a bigger bite of a growth market. As well as developing better food offers organically, pub groups are taking a foothold in eating out by targeting restaurant groups. Many pub groups have the sites but not necessarily the brands or the expertise to leverage the 5% compound growth rate of eating out in the last five years. It is forecast to grow a further 5% each year for the next five. Laurel Pub Company has taken out La Tasca Group, Regent Inns has acquired Old Orleans and last week Ultimate Leisure put the finishing touches on its £28m purchase of Living Room. Laurel has been busy converting its ailing wet-led brands such as Casa, Hog’s Head and Litten Tree to its stronger food concepts such as Ha Ha Bar & Canteen, Slug & Lettuce and now La Tasca. The group plans to spin off Laurel Restaurant Company – I hear supposedly through an IPO – in about six months’ time. Regent and Ultimate both needed to reduce their exposure to high-energy, wet-led offers. Whether Old Orleans is the answer for Regent remains to be seen but certainly Bel and the Dragon and Living Room would seem promising additions to Ultimate. Food-led businesses now account for the biggest part of the group and surely a new name will replace the outdated Ultimate moniker shortly. Food pubs used to be a specialist niche operation in this market – pubs that served alcohol in a convivial setting were the staple diet of the industry. Now is to be flipped on its head – pure alcohol-only operations could become the specialist niche offer, whether it be retailers of well-kept ales and craft beers, thriving community pubs with an ardent following, or late-night operations, such as those managed by Luminar. One thing is certain – as a result of the smoking ban alcohol sales will fall and food sales and soft drinks sales will rise, at least in the short-to-medium term. Its impact on UK pub sales and profitability is expected to be mixed. Groups with well-invested houses, the ability to grow food sales and comfortable outside areas to accommodate smokers, such as the large managed-house specialists like JD Wetherspoon, M&B and Spirit Group, are expected to deliver flat to marginally positive sales, and flat to marginally negative profits, given the lower margins of food. At the other end of the spectrum, smaller tenanted houses, run by operators with limited access to development capital, are likely to experience significant falls in sales and profits. The legislation is expected to reduce the number of smokers in the UK, which currently stands at just above 25% of the adult population. It will also almost certainly reduce the number of UK pubs. The impact on restaurant and foodservice operators is expected to be flat to significantly positive, clearly dependent on market positioning. The ban represents another seismic shift for the pub and bar industry, comparable with the Beer Orders that heralded a revolution in pub ownership in the 1990s, and substantially more significant than Britain’s new licensing laws that were ushered in almost two years ago. The notion of smoking in enclosed public places will quickly become a thing of the past. For pubs, it means more coffee, more soft drinks, more breakfasts, more lunches and dinners, more wine, and it means less beer and spirits for UK pubs. It requires a sharper focus on females and families. It will require a greater emphasis on retailing, service standards and execution. Presumably Tony Hughes - for one – approves.