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Fri 12th Apr 2013 - Friday Opinion
Subjects: Branded offers, variable weather, the new public health movement and the London pub market
Authors: Wayne Brown, Paul Charity, Paul Chase, James Grimes

It’s a branded future by Wayne Brown

The eating out sector, despite volatile trading patterns in 2012, is in growth whether it be like-for-like sales or new openings. We expect this trend to continue in 2013 with consumers maintaining their habitual inclination to dine out. The Coffer Peach tracker highlights like-for-like sales have grown +1.2% in the first two months of 2013. This follows a rather “flat” performance in 2012. Whilst aggregated data provides a useful tool over the long term, over a short period of time, this data can be misleading. Trading updates have continued to show an improving trend across the sector in Q1 2013. However, we note that the listed companies, have in the main, out-performed the Tracker. Restaurant Group is achieving sector leading like-for-likes by some distance with growth in Q4 2012 of +9.3% up from +3.9% in Q3 and +3.25% at the half-year stage. This is an exceptionally strong result and highlights the material out-performance to the Tracker. This momentum is likely to have carried into Q1 2013 (first 14 weeks of the year), supported by two dynamics: 1) The UK weekend box office data from points to a 16% increase in box office revenues over Q1 2012 and 2) data from the Coffer Peach highlights restaurants achieving +9% like-for-like sales over Easter.

What is also important to note is that restaurants are out-performing pubs. Marston’s like-for-like sales grew +1.2% over the 16-week period ending 19 January. The one week of snow took a full percentage point off this average highlighting the greater resilience of an estate located on leisure and retail parks versus destination pubs. Greene King achieved like-for-like sales of +2.8% in the last six weeks up to 14 January 2013. Pubs only grew their LFL sales by 6% according to Coffer Peach Tracker over Easter, a full 3ppts below restaurants.

The UK eating out market is worth £70bn but the growing branded casual dining segment accounts for less than £4bn, only 5.7% of the market. The overall market is large and highly fragmented: there are circa 23,000 restaurants in the UK with Gondola the largest operator by number of sites with circa 690 followed by Restaurant Group with circa 410 units. The third largest is Pizza Hut with 350 sites, then Tragus with 300, Nando’s with circa 260 and Prezzo completes the ‘Top Six’ with 210 restaurants. Even the largest pub groups have just a circa 3% share of the overall eating out market.

However, with eating out a major component of the pub group’s strategy and the rate of openings amongst the branded chains rising, we see continued market share gains at the expense of the free-trade restaurants. This dynamic is further highlighted by the fact that the eating out sector grew by 670 branded food pubs and restaurants in the UK in 2012. In contrast, there were 370 fewer independent outlets, according to CGA Strategy. The research found that 40% of independent free trade restaurants now have a branded food outlet within one mile, an increase of 26% in just the last five years.

We expect the growing dominance of the branded outlets to continue to play an increasing role in the sector to the detriment of the free trade channel. With consumers more risk averse in the current environment, brands are taking share. As the trading backdrop remains inconsistent, we think those operators firmly positioned in the value-for-money segment augmented by strong brands are better positioned.

It is the branded segment that continues to achieve strong structural growth and has proved to be resilient to economic conditions. The casual dining market is forecast to grow strongly and is expected to be worth circa £4bn by 2015, driven by: continued structural shift towards eating out more regularly; further growth in like-for-like sales; an increasing rate of new openings by the branded operators; and increasing market share at the expense of independent operators. The recession has accelerated the structural change away from wet led pubs to food driven and with the high level of discounting in the restaurant sector we see continued gains for the branded sector versus the independent trade. However, even within the branded segment, there are meaningful structural changes. Those brands that resonate with consumers through strong communication and offer positive dynamics such as value, provenance and quality are out-performing. We also see the continued decline in footfall on the high street as a key structural change that will favour The Restaurant Group over the high street operators. Prezzo’s estate is orientated towards affluent secondary towns and, whilst it does have city centre exposure, it will be less exposed than those operators. One cannot ignore the differential in the level of debt between some of the brands owned under private equity, particularly Gondola and Tragus, (in some cases >5x EBITDA) against the strength of the balance sheets of other operators. By way of example, Prezzo is virtually cash neutral and Restaurant Group should be cash neutral/positive by December 2013. As a consequence, one cannot help but question if this is hampering the level of innovation and refurbishment cycle in some of the debt-laden businesses.
Wayne Brown is leisure analyst with Canaccord Genuity

Whither the weather by Paul Charity

There are commentators who blithely dismiss the importance of weather on the month-by-month fortunes of pub and restaurant operators. The argument goes that, over time, weather more-or-less evens itself out and those who blame meteorological conditions for dips in relative performance are grasping at fig leaves. But it seems to me that there’s never been a time when the weather has been so capricious and had such an acute affect on companies’ performance. This is a year, after all, that has provided the extremes of a potential hosepipe ban, some of the wettest months ever recorded and the second coldest March on record.

Right now, there will be a host of pub operators who are looking forward to the coming months in the belief that the weather, by the law of averages, can only be better than the comparable months last year, making like-for-like improvements so much easier to obtain. The relative out-performance of The Restaurant Group over the winter months has been driven in good measure by consumers attracted by a decent crop of new movie releases and the relative comfort of moving short distances around leisure parks in very cold weather. By contrast, Mitchells & Butlers executives will have been staring gloomily at sales charts as consumers avoided trekking to its 300 or so rural destination pubs – Vintage Inns, Village Pub and Kitchen and Premium Country Dining Group will all have been badly affected. Easter saw good trading for both pub and restaurant multi-site operators. But it was cold enough (Easter Sunday was the coldest on record with temperatures as low as -12.5C) to skew out-performance in favour of restaurant operators and away from those hoping to fill their large external areas, which mostly fall in the pub camp. Similarly, the good weather forecast this weekend will tip the balance back towards multi-site pub operators in terms of out-performance by dint of the external trading capacities. TLC Inns, the award-winning pub operator with large garden space, believes that every extra one degree centigrade of temperature achieved on a weekend is measurable in increased sales performance.

Patterns of consumer spend are also ranging in a way that’s unprecedented. The decline of habitual pub attendance has been accelerated by the smoking ban of 2007 and consumers are stepping up their brand promiscuity. Weather is again playing a large role, with particular out-of-home decisions often driven by a direct response to climatic conditions. Some companies are better placed than others, by design or good fortune, to have estates that are better hedged against the volatile and, at times, extreme weather of the past couple of years. Fuller’s for example, has a fairly even combination of rural pubs with good-sized beer gardens and city pubs.

Another key area where our current contrary weather will have a significant granular influence is on food choices. This is the time of year when Spring menus are launched, traditionally offering lighter dishes. There will be a few operators who may have held back as winter’s icy grip has held firm. Supermarkets have certainly seen unexpected levels of demand for winter comfort food such as soups and stews in recent weeks. Morrisons reported that sales of its pies were up by 246% in the week leading up to the Easter weekend. Similarly, the supermarket sold 80% more cans and cartons of soup than the comparable period the year before. A Morrisons spokesman said: “The demand for traditional winter meals and ingredients, such as pie and mash and one pot stews, is unseasonably high for this time of year.” Simon Emeny, chief executive-elect of Fuller’s, tells me: “We don’t like to use the weather as an excuse or explanation. But the smoking ban was catalyst in our estate changing the profile of pub-goers. The habitual pub-goer has been replaced with customers – we are seeing a lot more families using our pubs - who are fair weather. We have 15 Ale and Pie pubs that don’t have gardens - they trade their socks off when the weather is indifferent. For the last six weeks, pies have been our big-selling dish. In March, last year we were selling an awful lot of salad.”

All in all, it means that pub and restaurant operators will be paying very close attention to the weather forecast.
Paul Charity is managing director of Propel Info

The new public health movement and the radical Left by Paul Chase

The 1st April 2013 saw the official launch of Public Health England (PHE) - a new quango from the Department of Health. On PHE’s website Duncan Selbie, dubbed the “Public Health Czar” by the media, welcomes the government’s decision to bring non-medical public health consultants into the same statutory framework as their medical colleagues - in order to reflect the “wide diversity of those now entering the profession.” I thought this would be a good moment to reflect on the development of the New Public Health Movement (NPHM), its ideological underpinnings, and how all this impacts on the policy debate about alcohol.

In the UK public education, the Welfare State and the NHS were set up after the end of WWII with the aim of ending ignorance, absolute poverty and disease. On the health-front, the new wonder drugs - antibiotics, combined with mass vaccination programmes - had, by the 1960s, hugely reduced the incidence of mass-society diseases like TB, measles, mumps, rubella, polio myelitis and diphtheria, at least in Western countries.

But by the 1970s a group of radical intellectuals in the Nordic countries set out to create a new public health movement that would take the concept of ‘public health’ beyond an understanding of biology by recognising the importance of those social aspects of health problems that are caused by lifestyles. One of the pioneers of this NPHM was Kettil Bruun, a Finnish historian-turned-sociologist who is regarded as the ‘father’ of the ‘whole population’ approach to alcohol-harm reduction, and whose research is now the basis of the World Health Organisations approach to alcohol use.

By the 1970s ‘welfarism’ and the NHS had grown like Topsy, and along with this growth came the development of a plethora of ‘troubled persons’ professions, whose members became increasingly frustrated by the medical professions’ inability to find cures for invented diseases like alcoholism. The concern of people involved in such professions, and those whose research sustains them, is the way of life of social groups or a whole people, as well as their social, physical and psychological environment. The NPHM provided a focus for this constituency of non-medical public health professionals, and the creation of Public Health England represents the apotheosis of their influence.

But the NPHM is profoundly ideological. In the post-war world the demise of communism as a viable alternative to capitalism created a dilemma for the Radical Left. They still knew what they were against, but were increasingly unsure of what they were in favour of. This is exemplified by the recent emergence of anti-capitalist and anti-globalisation street-protestors – a lumpen, incoherent and irrelevant mass of idealogues in search of an ideology. But, meanwhile the Intellectual Left has submerged itself into radical ‘movement politics’. And the New Public Health Movement is one of them.

Christopher Tigerstedt is one of the NPHM’s intellectuals. In a monogram about the late Kettil Bruun he wrote: “The linkages between epidemiological evidence and practical policy is rarely spelled out. If this is done however, we may end up with a specific discourse that treats public health as a way to govern society rather than as a field devoted to promote gradual health progression” (my bolding). The NPHM sees it as its duty to let the rest of us know just what a risky endeavour human existence really is. Tigerstedt writes: “(Public health) dangers are everywhere, and they concern all; they are external to and outside the control of the individual. This is the environmental or macro-social level of the new risk concept that emerges within the new public health movement.” The vaulting political ambition of a NPHM that sees itself as providing nothing less than a “way to govern society” is thus plain for all to see. This is not to deny that there are real risks related to the abuse of alcohol in respect of health and other harms. But what ‘movement politics’ does is take the legitimate concerns of moderate-minded people and co-opt them for ideological purposes. Promoting “gradual health progression” is a legitimate concern and can be progressed pragmatically; but a “way to govern society” is where it becomes ideological and extreme.

What is clear is that the NPHM sees its role as holding Big Alcohol to account. This was Kettil Bruun’s vision when he wrote Alcohol Policy and Public Health, otherwise known as the ‘Purple Book’. In short, their mission is to agitate for a regulated, planned, constrained capitalism. The methodology is simple: epidemiology will quantify the ‘risk factors’ for disease that are attached to various lifestyle choices, such as drinking alcohol or eating the ‘wrong foods’; advocacy groups like Alcohol Concern will take this epidemiology, energetically engage in problem inflation in order to create headline grabbing stories designed to alarm public opinion; this in turn will influence politicians to respond to the cry “something must be done” by introducing ever-more restrictive regulation. Take a look at the UK government’s current Alcohol Strategy and you can see just how far this approach has succeeded.

It has been suggested to me that we should work with the ‘health lobby’ and try to find common ground. But the NPHM has rejected this proposition. In a summary of the second edition of ‘Alcohol: No Ordinary Commodity’ by Thomas Babor (which is the WHO’s bible on alcohol), published in the journal Addiction, it states that: “Experience suggests that working in partnership with the alcohol industry is likely to lead to ineffective or compromised policy and is best avoided by governments, the scientific community and NGOs.”

The NPHM wants to save us from ourselves whether we like it or not. They’re on a mission that brooks no compromise. The permeation of this ideology into the heart of government represents a ‘new paternalism’ that seeks to raise public health to a set of governing principles for society that should trump every other consideration. One can only hope that the recent doubts expressed by some members of the cabinet, about social engineering, will grow into a broader appreciation of the ideology the government is implicitly buying into when it uncritically embraces the policy prescriptions of the New Public Health Movement.
Paul Chase is director of CPL Training and a leading commentator on on-trade alcohol policy

The London pub market is bucking trends by James Grimes

My firm AG&G founded some 13 years ago have been deeply involved in London pub deals in recent years. Indeed, during the last three years alone we have brokered over 110 London freehold deals where the value of the pub has exceeded £1m; hardly recessionary statistics and ones that we are justifiably proud of.

London is a very special place in the world stage right now. The Olympics last year, thankfully, went off extremely well, which only enhanced the appeal of our capital as being “THE” place to be. Whilst the global economic downturn continues, London has most definitely bucked the trend of most of its western world rivals. International investment is attracted by the perceived stability of the country, the weakness of Sterling, the time zone position of the UK and the risk and lack of opportunity elsewhere. The effect this has had on the pub sector has been twofold: in line with bricks and mortar values across central London, the demand and thus values of freehold pubs has increased; and the business undertaken within the said buildings has also bucked the national trend – takings within central London pubs are generally booming. During the heady days of the last economic boom, pubs were fairly regularly coming to the market individually or in small groups with many sold off for alternative use. In the main these pubs were sold by large pub companies and deemed surplus to requirements, especially in comparison with their alternative use value. But whilst such pubs still offer development opportunities, the returns they are making for their current owners are high also. The result is that fewer and fewer of the large companies wish to sell their central London stock, further pushing up prices.

The ripple effect that this increased freehold demand and reduced supply has had on leasehold values is noticeable also. Whereas the market for leasehold pubs throughout the majority of the rest of the country has been exceptionally poor, prices exceeding £500,000 have recently been achieved for tied leases within the area bordered by the Circle tube line. This not only reflects the secure business in the capital but also the shortage of availability and the requirement to pay a significant premium to achieve a sought after site in Central London.

A few trends in recent months are worthy of note. Strong bidding for pubs we are openly marketing has led to boom type situations arising such as gazumping, prices exceeding asking prices and incredibly speedy legal conveyancing following acceptance of offers. I sold two London freehold pubs this year where it took a matter of a few hours from legal packs being sent out by vendor’s solicitors to contracts being exchanged. In both cases the asking prices were vastly exceeded. We do not believe we initially priced these pubs too low, but there is nothing better than extreme levels of interest to competitively drive up prices paid, not dissimilar to the principal auction theory.

Those operators, particularly the small guys, less able to match the central London pub prices are being forced to look to pastures new. One current hot-spot is the East End. This area once saw pubs on virtually every street corner. But changing social and economic trends in the area, over the latter part of the last century, led to many of these pubs being sold off and converted or developed. It could be argued that there is now a real shortage in supply of pubs in the area. This in turn has led to a few former pubs being converted back into their original use – unheard of in most of the rest of the UK.

Meanwhile a pub operator recently purchased the Railway, Forest Gate through AG&G having outbid developers and other retail users. The pub has survived not for restrictive planning reasons but market reasons - because the buyer recognised the long term trading potential of being located opposite a future Crossrail station.

Planners did, however, intervene on another pub, the Phene in Chelsea, a pub we sold over ten years ago to a private investor. Having been refused planning to convert the pub into residential accommodation, the owner decided to sell and we very recently acted for the fast growing City Pub Company in securing its swift purchase for just over £4m.

The thing I love most about my job is being involved with is the constant change in the sector and the way in which the market reacts. Despite such strong demand and hefty prices paid, new concepts and operators continue to emerge with the current vogue being for craft beer. With such strong competition, only the best can survive which, for the London customer means that quality of product and service has to result.
James Grimes is a partner at property transfer agency AG&G

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