Inside Track by Mark Stretton
“The business has recently become tougher than a woodpecker’s lips,” was how US restaurant chain expert Jim Sullivan recently put it. It’s a sentiment that translates across the Atlantic for most consumer-facing businesses, including the UK pub and restaurant market. We all know it’s tough – every day the FT teems with economic gloom and stories of companies in distress. This morning we wake to the extraordinary collapse of Lehman Brothers, while last week tour operator XL was placed with administrators and there were more downbeat figures from the retail sector. So what are some of the key things to say about how the current climate is impacting the eating and drinking out market? 1) The industry is reeling 2) More companies will go bust 3) Value is king 4) Deals and consolidation will come back 5) For now, innovation is the “killer app” 1) Excuse the sweeping statement – and ‘reeling’ might sound dramatic – but relative to the good old days, it IS as tough as a woodpecker’s lips: footfall is down; spend per head is under pressure; operators report that Monday to Wednesday is exceptionally challenging; drink volumes are bleak. As one pub group senior executive said to me last week: “I’m expecting a plague of locusts any day now. We’re going to have to endure a very challenging 12 months.” 2) Clearly there are some chronically over-leveraged businesses out there that do not have good enough propositions to pull them through the current climate. They will inevitably collapse. Unfortunately most of these failures are yet to happen. There is also a real sense that some fundamentally good businesses that were sold at crazy multiples between 2005 and the summer of 2007 will also require restructuring. There are management teams out there running private equity-backed groups that will not make anywhere near the personal returns they may have once hoped for. 3) As my colleague Paul Charity wrote in this column last week, a greater desire for value – the so-called “Aldi effect” – is clearly playing to some operators’ strengths in the eating and drinking out space, with the likes of JD Wetherspoon and The Restaurant Group benefiting from consumers’ tightened purse strings. 4) Deals will return – but not yet. Sources close to the Prezzo situation insist the deal is still rumbling along. With no major debt and the Kaye family holding a majority stake, if a deal is to go through in the current climate, Prezzo is probably it. But for other deal situations, such as D&D London and EAT, the silence is deafening. The pub M&A market is completely dead. It seems that at the moment, if it isn’t in distress, the transaction isn’t going to happen. Sellers still want too much money – buyers don’t believe any forecasts. More importantly, they can’t raise the finance. Last week Imperial Tobacco – about as safe a company as there is in the stock market’s eyes – agreed a new debt package at 350 basis points above LIBOR. It tells you everything about the debt markets. Analysts suggest that while the economic picture will remain tough for at least 12 months and there are more profit warnings to come, the situation in financial markets should ease within the next six to nine months. Given events on Wall Street this weekend, this may seem optimistic. But when would-be acquirers can once more raise the required financing, the action promises to be frenetic. Practically all public groups are trading on trough multiples – there appear to be many, many opportunities out there. If values remain where they are, one can envisage a situation whereby there is not a single restaurant group trading on the stock market within 18 to 24 months. 5) Innovation is easily forgotten in these times but those that are coming to the market with fresh, appealing formats are proving that it is possible to persuade customers to leave the sanctity of their homes. Taybarns – Whitbread’s take on the US all-you-can-eat giant Golden Corral ( – most readily springs to mind as an example, also tapping into the growing desire for value. As Peter Hansen and David Kellett of Sapient Corporate Finance write in the latest issue of M&C Report, three of the four main propellers of growth and value creation in the pub market (capital expenditure, financial engineering, and M&A) have been eroded. They conclude that the current conditions dictate that it’s time for operators to go back to basics, concentrating on the fourth propeller of operational improvement. It’s official (and music to the ears of the purists): for the moment it’s time to ditch the deals, forget the elaborate financing, and for everyone to return to operating.